Appendix: Letter from EFRA Committee
Letter to the Chair of the Business, Innovation
and Skills Committee from Miss Anne McIntosh MP, Chair of the
Environment, Food and Rural Affairs Committee
22 June 2011
Pre-legislative scrutiny of the Draft Groceries
Code Adjudicator Bill
On 24 May 2011, the Environment, Food and Rural
Affairs Committee published a call for evidence on the draft Groceries
Code Adjudicator Bill. On 14 June we took oral evidence from the
National Farmers' Union (NFU) and Processed Vegetable Growers'
Association (PVGA). Our principal interest in the draft legislation
is its potential impact on farmers and food producers; the written
oral evidence we received reflected that interest. We placed that
evidence on our web pages and made it available to the Business,
Innovation and Skills Committee. This letter, which has been agreed
by the Committee, sets out our views on the draft Bill, and includes
recommendations for the BIS Committee to consider in its pre-legislative
scrutiny.
In 2008 the Competition Commission recommended the
establishment of a body to monitor and enforce the new Groceries
Supply Code of Practice (GSCOP), which replaced the existing Supplier
Code of Practice. The Groceries Code Adjudicator Bill would establish
a Groceries Code Adjudicator, whose role would include:
- arbitrating disputes between large retailers
and their direct suppliers;
- investigating possible breaches of the Groceries
Code by large retailers;
- where an investigation finds that a large retailer
has breached the Groceries Code, deciding whether to make recommendations
to the retailer, require it to publish information about the investigation
or (if the Secretary of State adds a power to do so) impose a
financial penalty on the retailer;
- publishing guidance on when and how investigations
will proceed and how these enforcement powers will be used.
The explanatory notes to the draft Bill make clear
that the Government's intention is that the Adjudicator's investigations
should "consider a pattern of behaviour by one or more retailers",
rather than "to decide whether to uphold a particular complaint".[155]
We received evidence from Sainsbury's Supermarkets
Ltd and Asda Stores Ltd, both of which are 'large retailers' covered
by the GSCOP. Sainsbury's argued that the GSCOP's provisions provided
"suppliers with an effective route to resolve complaints",
and that there had been few complaints made under the Code.[156]
The company concluded that "the right approach would be to
refrain from establishing an Adjudicator until the need for further
enforcement mechanisms can be properly assessed using the reporting
methods already in place under the Code".[157]
Similarly, Asda Stores Ltd argued that, in proposing the establishment
of an adjudicator, the Government was "acting prematurely
as it has not had the opportunity to adequately assess the effectiveness
of the GSCOP".[158]
Asda's written evidence concluded that "A new regulatory
body, of the type proposed by the Bill, acting outside of the
OFT would add nothing meaningful to the GSCOP regime and could
be counterproductive to the existing work undertaken by the OFT".[159]
Both supermarkets echoed statements made by the British
Retail Consortium after the draft Bill's publication that the
low number of complaints made under the GSCOP meant an adjudicator
was not necessary.[160]
Few organisations we approached felt able to put
evidence about their members' concerns about relations with retailers
into the public domain. Several submissions referred to the 'climate
of fear' referred to by the Competition Commission as deterring
complainants. The Food and Drink Federation argued that the low
number of complaints demonstrated that "the GSCOP will only
work fully if there is a proactive Adjudicator in place to police
it".[161] The
NFU made a similar point and explained that complaints would only
come forward if an Adjudicator could guarantee the complainants
anonymity. The British Brands Group's (BBG) submission argued
that "...suppliers are extremely unlikely to bring disputes,
invoke their contract rights or complain, yet without their participation
practices that act to the detriment of consumers are nigh impossible
to detect, let alone prevent", and expressed their conviction
that an Adjudicator able to receive complaints anonymously would
overcome that obstacle.[162]
The BBG helpfully provided the Committee with evidence of continuing
difficulties in relations between suppliers and retailers in the
form of a confidential survey of suppliers that showed that "practices
that transfer risks and costs to suppliers persist".[163]
The PVGA emphasised that within the horticultural
sector the GSCOP had had a beneficial impact relations between
growers and retailers. However they supported the establishment
of an Adjudicator and protecting the anonymity of complainants;
Richard Hurst, Chairman of the PVGA told us that "...unless
there is an Adjudicator, in some ways GSCOP will lose its teeth".[164]
We have concluded that an Adjudicator should be
established. However, we recognise that
the value of an Adjudicator depends on the willingness of suppliers
to come forward with allegations of breaches of the GSCOP. This
depends in turn on them having the confidence that they will not
damage their existing or future commercial relationships.
Complaints and anonymity
Clause 4 of the draft Bill provides that an investigation
may be carried out if the Adjudicator has "reasonable grounds
to suspect that a large retailer has broken the Groceries Code
[GSCOP]".[165]
In determining whether to carry out an investigation the Adjudicator
may only consider information provided by a supplier or that is
publicly available. The explanatory notes to Clause 4 make clear
that the Adjudicator "has no power to require people to provide
information for the purpose of deciding whether to commence an
investigation".[166]
The effect of these provisions is that the Adjudicator
will only be able to launch an investigation if a direct or indirect
supplier to a large retailer makes a complaint relating to a breach
of the GSCOP and that complaint is backed up by evidence which
has been provided by the complainant or that is in the public
domain. Sainsbury's Stores Ltd argued that the adjudicator should
focus "on complaints from smaller suppliers, rather than
larger suppliers many of whom are multinational businesses that
are larger than the retailers they supply".[167]
The draft Bill would allow either direct or indirect
suppliers to make a complaint. According to Defra's written submission:
Even though farmers and other suppliers who don't
supply supermarkets directly fell outside the terms of reference
of the Competition Commission's investigation, to increase transparency
in supply chain practices the Commission suggested that primary
producers and other suppliers to intermediaries and processors
should be permitted to make complaints about alleged breaches
of the GSCOP where that breach is believed to have had a direct
or indirect effect on them. This proposal has been included in
the draft Bill so that the Adjudicator will be able to start an
investigation based on complaints from either direct or indirect
suppliers, including those based overseas. This provides indirect
suppliers with the same route to investigation as those that supply
the retailers direct. It should be noted however, that whilst
any supplier can complain, the Adjudicator will not be obliged
to respond to each complaint.
Sainsbury's Supermarkets Ltd accepted that "the
Adjudicator should be able to consider representations from indirect
suppliers [...]but for information-gathering purposes only";
and added that to avoid spurious investigations, "the original
complaint from an indirect supplier must be accompanied by evidence
relating to a specific breach of the Code".[168]
In contrast Asda Stores Ltd resisted allowing indirect suppliers
to make a complaint; the company's written evidence states that
it "...cannot understand how an indirect supplier not covered
by the GSCOP and with no contractual relationship with a retailer
can allege a breach of the GSCOP in relation to its dealings".[169]
Peter Kendall, President of the NFU told us that:
What I think is always the case is that, where
there is undue influence or bad practice, it finds its way down
to the primary producer. I think it is important to say that
although a farmer might not directly supply a retailer, the fact
is that, if he is supplying a processor in the middle who is only
one personprocessors are often working on very small marginsany
retrospective claims or additional costs find their way back to
the primary producer. There will be a significant number of our
members who fall into that category.[170]
The extent to which farmers and primary food producers
have a direct supply relationship with retailers varies across
agricultural and horticultural sectors. Our witnesses from the
PVGA told us that the majority of their members would have a direct
relationship with a retailer.[171]
In contrast the evidence from the National Pig Association made
clear that in their sector such direct relationships were rare.[172]
We support the Adjudicator having the power to accept complaints
from indirect, as well as direct, suppliers. However, such
complaints are likely to be rare under the draft bill's current
provisions as indirect suppliers would have to make a complaint
related to a breach of the GSCOP, which is limited to the relationship
between large retailers and their direct suppliers.
Our evidence from supplier organisations highlighted
the central importance of complainants being able to remain anonymous.
Clause 19 of the draft Bill concerns confidentiality. The Clause
prohibits the Adjudicator from disclosing the identity of a direct
or indirect supplier who has made a complaint. The explanatory
notes state that:
Protecting the identity of complainants was considered
by the Competition Commission to be important in order to reduce
the threat of retaliatory treatment by a large retailer if the
retailer found out that a particular supplier had raised a complaint.[173]
The NFU told us that they did not consider the provisions
relating to confidentiality to be sufficient.[174]
Their written evidence states that some suppliers would be unwilling
to pass information to the Adjudicator "in spite of their
identities being kept confidential" because:
... other information (for instance their product
sector if they are one of a small number of suppliers of a specific
product) may make identification easy. Given that the only basis
for the investigation would have been a supplier complaint (knowing
that no such information is in the public domain), it would be
clear which supplier (or at least that one of a small number of
suppliers) has complained.[175]
Sainsbury's Supermarkets Ltd argued that large suppliers
should not be permitted to make anonymous complaints and that,
if anonymous complaints were permitted, retailers should have
a right to be involved before an investigation were launched .[176]
The evidence from Asda Stores Ltd stated that:
Fundamental rules of natural justice require
that defendants know the allegations against them (including the
identity of the claimant), so they can investigate the allegation
and prepare a defence. The prospect of anonymous complaints which
could be outside the scope of the GSCOP could prejudice retailers'
rights of defence.[177]
Asda's concerns about the rights of a defendant are
referred to in the explanatory notes to the draft Bill. In relation
to the anonymity of complainants, the explanatory notes dealing
with compatibility with the European Convention on Human Rights
(ECHR) state:
The protection raises issues under ECHR Article
6 because the normal presumption in a process such as an investigation
would be that the person under investigation should be entitled
to know the identity of persons making allegations against them.[178]
However, while the explanatory notes acknowledges
that the draft Bill engages a number of Articles of the Convention,
it concludes that it "is not incompatible with them".[179]
We have not taken evidence on application of the
European Convention on Human Rights to the draft legislation:
this is matter that will be considered by other committees in
Parliament. We conclude that the ability of suppliers to make
anonymous complaints is fundamental to the success of the Groceries
Code Adjudicator and would wish to see the current provisions
retained in the legislation.
Proactive investigations
Several witnesses argued that the Adjudicator should
be able to make proactive investigations. The Agricultural and
Horticultural Board's evidence argued that the Adjudicator should
have powers to implement proactive compliance audits/investigations
within supply chains in order to "...both discourage and
help reveal malpractice in terms of the Groceries Code and also
help to bring greater transparency and understanding to the whole
supply chain to the benefit of all parties".[180]
Laurence Olins, Chairman of British Summer Fruits,
speaking for the PVGA, told us that the Adjudicator needed to
be proactive rather than reactive and added that such an approach
would enable the Adjudicator to look at generic issues that "might
affect every crop and every sort of supplier".[181]
The NFU also referred to the need for the Adjudicator to investigate
general issues such as haulage that might have an impact on suppliers
across a range of products. Peter Kendall, President of the NFU
told us that adjudicator must have the ability to proactively
investigate.[182]
The British Brands Group highlighted the fact that
the Competition Commission had recommended the adjudicator have
the ability to undertake proactive investigations in its 2008
report.
We were persuaded by the arguments in favour of
the Adjudicator having the power to undertake proactive investigations.
Such an approach might be of particular benefit when considering
generic issues in the supply chain rather the relationship between
a retailer and an individual supplier.
'Third party' complaints
To address the problem of suppliers being reluctant
to make complaints the NFU and other supplier and grower bodies
proposed that the legislation be amended to enable third parties
to make a complaint on supplier's behalf. The NFU argue that:
... third parties, such as the NFU, can play
a vital role in assisting the work of the Adjudicator. For instance,
by allowing third parties to collate and present evidence on behalf
of suppliers, important resource efficiencies can be achieved,
and they can act as important conduits for identifying systemic
breaches of the code of which individual suppliers would be unaware,
and which otherwise might not come to the attention of the Adjudicator.
Similarly, the Food and Drink Federation argue that,
when considering whether to carry out an investigation, in addition
to information provided by a supplier or in the public domain,
the Adjudicator should be able to consider information from a
trade association representing suppliers.
In oral evidence the PVGA accepted the general principle
of third parties collating and presenting evidence on behalf of
suppliers. However, they noted that such a system may create additional
costs for the third party organisation.[183]
The evidence from both Sainsbury's and Asda argued
against allowing third parties to make complaints. The submission
from Asda Stores Ltd stated that:
We cannot see any evidence to support that an
Adjudicator should be able to act on anonymous or third party
complaints. The Adjudicator's primary function relates to compliance
with the GSCOP and therefore should only receive complaints from
direct suppliers covered by the GSCOP that are particularised,
clearly set out and relate to a specific breach of GSCOP.[184]
The British Brands Group noted that the Competition
Commission had recommended that the Adjudicator should "consider
complaints from any other person, to the extent that it relates
to a breach of the Code". The BBG stated that:
In contrast, the Draft Bill ignores this recommendation,
making the evidence threshold extremely high, being information
from a supplier or in the public domain only. This is perverse,
in light of the years of experience that suppliers do not inform,
that practices are not discussed publicly (hence the dearth of
published evidence) and that investigations are crucial to preventing
the most significant breaches of the GSCOP.[185]
The Committee was persuaded by the arguments in favour
of third parties, such as trade organisations, making complaints
on behalf of suppliers. The Government's stated intention is for
the Adjudicator to investigate systemic breaches of the GSCOP.
A third party may be in a better position to collate evidence
of such systemic breaches than individual suppliers. The Committee
is conscious that such provisions would need to be carefully crafted
to ensure that sufficient evidence was collected and to limit
the third parties to suitable organisations. We consider that
enabling appropriate third parties to make complaints to the Adjudicator
is necessary. We therefore urge the Business, Innovation and Skills
Committee to recommend that the legislation be amended to provide
for third parties to make complaints to the Adjudicator on behalf
of direct or indirect suppliers. The Government will need
to set out provisions that ensure such third parties are appropriate
bodies to take on this role and that make clear the mechanism
and evidential requirements of such a complaint.
Recovery of investigation costs
Under Clause 11 the Adjudicator may require a supplier
to pay some or all of the costs of an investigation if the Adjudicator
carried out the investigation as a result of a complaint by the
supplier which, the Adjudicator is satisfied, was vexatious or
wholly without merit. Our witnesses accepted the need for a mechanism
to limit vexatious complaints. We considered the draft legislation's
provisions relating to the recovery of investigation costs were
appropriate.
Adjudicator's forms of enforcement
Clause 7 of the draft Bill sets out the enforcement
measures available to the adjudicator if an investigation finds
that a large retailer has broken the Groceries Code. They are
one or more of:
- make recommendations;
- require information to be published;
- impose financial penalties.
Clauses 8, 9, and 10 set out provisions in relation
to recommendations, publishing information and financial penalties
respectively. Clause 10 sets out the provisions relating to financial
penalties. The Adjudicator would only have recourse to financial
penalties following secondary legislation made under Clause 10.
The explanatory notes state that:
Financial penalties are the most severe of the
enforcement powers available to the Adjudicator following an investigation.
They may not be necessary in order to secure a high level of compliance.
This power therefore applies only if the Secretary of State has
authorised the Adjudicator to impose financial penalties.
The NFU argue that the Adjudicator's enforcement
powers are inadequate:
Firstly, we believe the ability to impose financial
penalties should be available to the Adjudicator from the outset,
and not following the passing of further legislation, as is currently
the case.
We note that the Competition Commission recommended
that financial penalties should be available the Adjudicator if
large retailers were found to be breach of the Code. Sainsbury's
argue in its submission that levying financial penalties "would
be disproportionate and would risk undermining the dispute resolution
process already available".[186]
Asda argued that the draft bill should "prescribe the maximum
level of financial penalty that the Secretary of State can order".[187]
We see no reason for the Adjudicator's powers
to levy fines on retailers found to be in breach of the GSCOP
to be delayed by the requirement for the Secretary of State to
make an order. We therefore consider it appropriate for the legislation
to be amended to provide the necessary powers from commencement
of the Act.
Conclusions
The Committee's conclusions in relation to the draft
Bill were:
- that an Adjudicator should be established;
- that the Adjudicator should have the power
to accept complaints from indirect, as well as direct, suppliers;
- that the ability of suppliers to make anonymous
complaints is fundamental to the success of the Groceries Code
Adjudicator;
- that the Adjudicator should have the power
to launch proactive investigations;
- that third parties, such as trade organisations,
should be able to make complaints to the adjudicator on behalf
of suppliers, but that appropriate restrictions would need to
be included in those provisions;
- the provisions relating to the recovery of
investigation costs are appropriate; and
- that the Adjudicator should have the power
to levy financial penalties without the need for an order by the
Secretary of State.
We are grateful to all those who provided written
and oral evidence and trust that the BIS select committee will
reflect that evidence and our conclusions in its report to the
House.
Miss Anne McIntosh MP
Chair
155 Draft Groceries Code Adjudicator Bill Back
156
GCA 09 Back
157
GCA 09 Back
158
GCA 08 Back
159
GCA 08 Back
160
British Retail Consortium press notice Back
161
GCA 04 Back
162
GCA 10 Back
163
GCA 10 Back
164
Evidence to the EFRA committee, 14 June 2011, Q 93 Back
165
Draft Groceries Code Adjudicator Bill, Cm 8080, page 15 Back
166
Draft Groceries Code Adjudicator Bill, Cm 8080, page 14 Back
167
GCA 09 Back
168
GCA 09 Back
169
GCA 08 Back
170
Evidence to the EFRA committee, 14 June 2011, Q 3 Back
171
Evidence to the EFRA committee, 14 June 2011, Q 50 Back
172
GCA 02 Back
173
Draft Groceries Code Adjudicator Bill, Cm 8080, page 24 Back
174
Evidence to the EFRA committee, 14 June 2011, Q 9 Back
175
GCA 07 Back
176
GCA 09 Back
177
GCA 08 Back
178
Draft Groceries Code Adjudicator Bill, Cm 8080, page 44 Back
179
Draft Groceries Code Adjudicator Bill, Cm 8080, page 44 Back
180
GCA 03 Back
181
Evidence to the EFRA committee, 14 June 2011, Q 73 Back
182
Q 4 Back
183
Evidence to the EFRA committee, 14 June 2011, Q 75 Back
184
GCA 08 Back
185
GCA 10 Back
186
GCA 09 Back
187
GCA 08 Back
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