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 Wm Morrison Supermarkets plc

1.  INTRODUCTION

1.1  Morrisons is the fourth largest food retailer in the UK with more than 450 stores and an annual turnover in excess of £16 billion. We are closer to source than any other major food retailer, sourcing 100% British fresh meat and buying direct from farmers and growers. We have a unique "vertically integrated" model, operating our own abattoirs, food manufacturing facilities and pack houses. As a result we are not just one of the UK's major food retailers, but food manufacturers as well.

1.2  Since 2009, we have operated the Morrisons Farm at Dumfries House, Ayrshire. The Morrisons Farm is designed to provide the company first-hand experience of the challenges that farmers face, and is part of our UK-wide farm research programme aimed at helping to build a sustainable British farming industry.

1.3  Morrisons understands the pressures facing small suppliers and the concerns over the perceived power of supermarkets. We rely on a secure supply base to help us deliver a diverse range of quality, affordable products to our customers. It is therefore in our interests to uphold fair and stable supply chain relationships.

2.  NEED FOR THE GROCERIES CODE ADJUDICATOR

2.1  We are proud of the strong relationships we have with our direct suppliers (thousands of whom are farmers and growers, owing to our unique model) and have invested in extensive training of our buying teams to ensure compliance with the Groceries Supply Code of Practice (GSCOP). Since the code came into force in February 2010, a very small number of alleged breaches have been brought to our attention. These cases have all been resolved to the satisfaction of suppliers without recourse to independent arbitration (which we offer to suppliers as required by GSCOP).

2.2  Our position, informed by recent experience, remains that the consumer interest would be better served by allowing the GSCOP to become properly established before creating a new body to oversee it. However, we recognise the cross-party support that exists for an Adjudicator. This submission therefore focuses on operational aspects of the GCA, and in particular:

  the need for clear and early guidance on the threshold for GCA investigations; and

  concerns surrounding the power of the GCA to accept complaints from indirect suppliers; and to deal with complaints anonymously.

3.  THE FUNCTIONS AND POWERS OF THE ADJUDICATOR

3.1  It is difficult to properly assess the impact of the Adjudicator under the current terms of the Bill. Clause 13 provides that, within six months of being established, the Adjudicator must publish guidance on (1) the criteria for deciding whether to carry out investigations, (2) the practices and procedures for investigations and (3) the criteria for using enforcement powers. This guidance is fundamental to the scope and operation of the GCA. It will help to determine the Adjudicator's workload, and consequently, the financial and regulatory burden for retailers.

3.2  We believe it is imperative that this guidance is published before the GCA comes into operation, to allow for proper scrutiny of the threshold for investigations and to enable all parties to understand how the GCA will operate.

4.  THE APPROPRIATE LOCATION FOR THE ADJUDICATOR

4.1  The OFT already has a number of obligations to monitor and enforce compliance with GSCOP. Morrisons is of the view that to support the aims of better regulation, the Adjudicator should be integrated into the OFT initially, and then the proposed Competition and Markets Authority.

5.  ENFORCEMENT POWERS, PENALTIES, APPEALS, AND FUNDING

5.1  Morrisons does not oppose the Adjudicator's enforcement powers in so far as it can make a recommendation or require information to be published. We welcome both that the Government has taken a cautious view of the Adjudicator's right to levy financial penalties, which would add delay and complexity to dispute resolution, and that the Secretary of State is obliged to consult broadly before making an order to grant such a power.

5.2  One of Morrisons' main concerns about the GCA is the potential for the office to grow out of control at the expense of grocery retailers, and ultimately to the detriment of consumers. Not only is clear guidance important. We believe the Adjudicator should focus its resources on small suppliers who may be less well equipped to resolve disputes falling within the GSCOP. Encouraging complaints from multinational suppliers about their competitors' conduct is unlikely to benefit the consumer interest.

5.3  If full cost recovery is the preferred mechanism for funding the GCA, then we support the "broad intention" of Clause 20 (Levy funding) to require large retailers to pay sums relative to the proportion of complaints upheld against each one. We believe that those retailers with the best record should contribute the least.

5.4  We support the principle outlined in Clause 11 (Recovery of investigation costs) that where a supplier has made a complaint which was found to be vexatious or wholly without merit, the Adjudicator may require that supplier to pay some or all of the costs of a resulting investigation. However, we note that "this is intended to be a high threshold" and are concerned that the cost of the majority of complaints will fall on large retailers, regardless of whether or not they are upheld.

5.5  If the cost of a vexatious complaint is not passed on to the complainant, it would be borne by all retailers regardless of their record or behaviour. This pooled risk underlines the importance both of clear and early guidance on the trigger points for investigations, and tight budgetary control.

5.6  Given that it is the large retailers who will be funding the GCA, we are disappointed in the lack of consultation with retailers on the Adjudicator's budget. Appropriate scrutiny and annual review of the GCA budget should be enshrined in the legislation to ensure that costs are reasonable and proportionate, and to prevent unnecessary costs being passed to the retailer and, ultimately, the consumer. Governance in all respects must be clear and transparent.

6.  COVERAGE OF INDIRECT SUPPLIERS

6.1  There are potentially thousands of indirect suppliers who may wish to make complaints to the GCA, which will each need to be checked and answered. This will push up the cost of the GCA, which will be met by all retailers, regardless of whether there has been any breach.

6.2  The GSCOP is concerned only with certain aspects of the bilateral relationship between suppliers and designated retailers. Given that a breach of the GSCOP will directly affect the parties to a contract, it is difficult to see how an indirect supplier could be better placed to identify any infringement if neither party of the original contract adjudges an infringement to have taken (or potentially to have taken) place.

7.  POWERS TO INVESTIGATE ANONYMOUS REPORTS

7.1  Notwithstanding questions of due process, granting the GCA the power to investigate anonymous reports compromises the checks and balances which might otherwise ensure that the Adjudicator is not conducting enquiries based on an incorrect or misleading basis.

7.2  Clause 19 (Confidentiality) prohibits the Adjudicator from disclosing information about an arbitration if this would identify a party, either directly or by deduction. However, the Explanatory Notes for Clause 5 (Investigations: information) state that: "It is unlikely that the sources specified in Clause 4 [information provided by the supplier…or that which is publicly available] would be sufficient in themselves to make findings at the conclusion of an investigation. In particular, the Adjudicator is likely to need to obtain information from the relevant large retailers." It is unclear how these two statements can be reconciled.

7.3  Any request for information would have to be so broad as to multiply greatly the volume of information required from the retailer in order to protect a complainant's identity. This would impose a significant bureaucratic burden on retailers and greatly delay the resolution procedure, which could prove to the detriment of the complainant.

17 June 2011


 
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Prepared 28 July 2011