Time to bring on the referee? The Government's proposed Adjudicator for the Groceries Code - Business, Innovation and Skills Committee Contents


Written evidence submitted by Dairy UK

SUMMARY

  Dairy UK supports the creation of a Groceries Code Adjudicator as it will help to create a common understanding on acceptable contractual practices and minimise unexpected transfers of risk.

  The Adjudicator should operate under a clearly defined remit.

  The Adjudicator should take the utmost care to ensure commercial confidentiality.

  The Adjudicator should seek to expedite its investigations as rapidly and efficiently as possible.

  The scope of the Adjudicator should not be extended to include indirect suppliers until an investigation by the competition authorities (OFT or Competition Commission) concludes that it is necessary.

DAIRY UK

1.  Dairy UK represents the interests of dairy farmers, producer co-operatives, manufacturers of dairy products, and processors and distributors of liquid milk throughout the United Kingdom. Between them Dairy UK's members collect and process about 85% of UK milk production.

BIS QUESTIONS

The need for the Groceries Code Adjudicator

2.  Dairy UK broadly welcomes the Government's proposals to set up an Adjudicator to oversee the Groceries Supply Code of Practice. The creation of an Adjudicator will help to ensure the enforcement of the Code and create a common understanding on acceptable commercial practices between retailers and their direct suppliers. This should help to create a more predictable market place with suppliers being less exposed to unexpected transfers of risk.

3.  There is widespread misunderstanding over the potential impact of an Adjudicator. The same market challenges will remain, and it is in addressing those challenges that food processors become more competitive and profitable. Complaining to an Adjudicator will not be viewed as a sustainable route to success.

4.  It could be presumed that the Adjudicator will help to ensure greater adherence to the Code because it will create a formal route to arbitration and lift the onus from suppliers to initiate complaints. The more substantive change brought about by the advent of an Adjudicator may be the powers conferred on it to undertake investigations. This means that suppliers will not themselves have to take action under the Code to seek redress.

Compliance with the Groceries Code to date

5.  The code has helped to create a closer consensus on acceptable contractual practices which has helped to generate a more predictable commercial environment. Consequently the lack of complaints under the Code does not demonstrate that it is of limited value.

The specific provisions of the Bill

6.  Dairy UK's comments on the specific provisions of the bill are covered in the answers to succeeding questions.

The functions and powers appropriate for any Code Adjudicator

7.  It is important the Adjudicator operates within a clear remit and that its operating principles are closely aligned with other bodies enforcing competition law such as the OFT and the Competition Commission. The new body will inevitably come under pressure from a range of interest groups seeking to change retailer behaviour. The new organisation may try to meet these expectations or make efforts to change its remit. Overall this would introduce an element of unpredictability in the application and evolution of the competition policy framework governing the food industry.

8.  Further, whilst the Adjudicator should be able to initiate any type of investigation that it considers appropriate, it should not do so without substantive evidence from a variety of sources that an issue needed addressing. Dairy UK does not want to see a situation where competing companies can seek to embarrass each other by asking for an investigation because they lost out on certain contracts, or suppliers of one company likewise seeking to make life awkward for a company they do not supply. This would threaten to politicize commercial relationships in the supply chain. It would also expose companies to tremendous cost and mis-direction of managerial resources if they were constantly being drawn into inquiries.

9.  However, we would caution that the Adjudicator should use its powers judiciously. Suppliers should also not be subject to indiscriminate requests for data. Data requests should be justified by some sort of cost/benefit analysis to ensure that they are properly targeted and justified.

10.  The Adjudicator should set itself a clear timetable for the completion of investigations to ensure they are expedited as quickly and as efficiently as possible.

11.  Commercial confidentiality must be protected at all times. The greater the information collected the greater the chance that commercial confidentiality will be violated. The Adjudicator must have in place robust procedures to ensure that the confidentiality of any data obtained is rigorously protected.

12.  In publishing the results of those investigations, there should be a general presumption against the disclosure of information by the Adjudicator unless it is absolutely necessary for the Adjudicator to carry out its function of communicating judgements and decisions. The Adjudicator should not do anything that would prejudice the commercial interests of companies that did not wish to support the complaint being made against any particular retailer. As such suppliers should not be under an obligation to provide information if they did not wish to do so, but if they are to be compelled, then that information should not be divulged without the consent of the supplier.

13.  It is therefore important that the Adjudicator should operate:

(a)  under a tightly defined remit and institutional safeguards to prevent mission creep;

(b)  with clearly defined obligations of confidentiality and a duty to protect the interests of companies not wishing to disclose their participation in any investigation; and

(c)  with operational procedures designed to produce rapid and timely outcomes to investigations.

The appropriate location for the Adjudicator

14.  The Adjudicator could usefully be located in the OFT. The OFT is the appropriate government body for regulating markets, implementing competition law and scrutinising commercial relationships between large retailers and suppliers in the UK.

15.  Utilising the existing expertise of the OFT would ensure that the relationships between retailers and their suppliers are assessed using the same criteria and intellectual rigor used for all other industries.

Enforcement powers, penalties, appeals, and funding

16.  There is a case for arguing that reputational damage will act as a sufficient penalty to ensure enforcement. If this is considered insufficient and a penalties regime adopted then it should be borne in mind that there is a risk that any penalties will simply be transferred down the supply chain. Arrangements need to be put in place to ensure that this is not the case.

Coverage of indirect suppliers

17.  There is some debate as to whether the functions of the Adjudicator should be widened beyond those proposed in the Bill to include relations between food processors and their supplying farmers. We would argue that this is not warranted by the conclusions of the Competition Commission inquiry which undertook a protracted and exhaustive investigation of supply chain relationships.

18.  The Commission concluded that only specific action was required in respect of restricting certain practices by retailers that transferred risk to direct suppliers and this would be achieved through strengthening the implementation of the GSCOP. The investigation did not conclude that further action was required in respect of other segments of the supply chain, ie; food processors and their primary product suppliers.

19.  The Competition Commission investigation included a detailed look at the milk sector,[19] and concluded that regulation further down the supply chain was not necessary.

20.  Extension of the scope of the Code to include indirect suppliers could only reasonably be justified if the OFT or Competition Commission undertook a further investigation which concluded it was desirable. Whilst clearly there is some concern amongst certain parties over the operation of the dairy market, Dairy UK would argue strongly that the market is operating correctly and that further regulation is not required.

21.  The types of practices excluded by the Code are not used by milk buyers in their relations with dairy farmers. The only practice that is similar to those banned by the Code is retrospective price adjustments. Dairy UK is strongly opposed to the use of retrospective price changes. Fortunately their use by milk buyers is exceptionally rare because of the inevitable reputational damage they cause to the buyer. In fact, in the last major instance when a retrospective price change was made, it hastened the collapse of the milk buyer due to the resulting resignation of farmers. This demonstrates that the market provides a strong safeguard against the use of retrospective price changes.

Powers to investigate anonymous reports

22.  The Adjudicator should not be under an obligation to accept complaints that remain anonymous to it. To prevent spurious or unmeritorious complaints any complainant should make itself known to the Adjudicator.

23.  In respect of complaints from third parties (entities not directly involved in the commercial relations in question) if the Adjudicator feels an investigation following a single third party complaint is warranted then it should only be with the express consent of the supplier mentioned by the complainant. It should not be possible to compel a supplier to provide information or to be involved in an investigation where a complaint has been submitted by a third party. Anything less could enable a third party potentially hostile to the interests of the supplier to interfere in its commercial relationships with its customers.

24.  If the Adjudicator decides to investigate on the basis of a single complaint then in many situations it would be difficult to ensure the anonymity of the supplier referred to by the complainant. This could damage the commercial relationship between the supplier and the retailer.

25.  On this basis the Adjudicator should only investigate third party complaints if a retailer has demonstrated a pattern of behaviour affecting a sufficient number of suppliers to ensure the protection of anonymity for the suppliers concerned.

26.  In making these observations Dairy UK is seeking to ensure that the Adjudicator can operate effectively to enforce the Groceries Code to reduce unexpected transfers of risk, whilst at the same time meeting the concerns of suppliers over commercial confidentiality.

17 June 2011


19   www.competitioncommission.org.uk/inquiries/ref2006/grocery/pdf/emerging_thinking_supply_chain_practices.pdf Back


 
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Prepared 28 July 2011