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 the NFU

The NFU represents more than 55,000 farming members in England and Wales. In addition we have 41,000 countryside members with an interest in farming and the country. The NFU welcomes the opportunity to make a submission to the Business, Innovation and Skills (BIS) Select Committee's inquiry into the draft Groceries Code Adjudicator Bill.

INTRODUCTORY COMMENTS

1.  The NFU has welcomed the publication of the draft Groceries Code Adjudicator Bill—an important event in our long-running campaign for a fairer functioning groceries supply chain. It is three years since the Competition Commission recommended the establishment of an Ombudsman in its 2008 report on the supply of groceries in the UK market, and well over a year since the Groceries Supply Code of Practice (GSCOP) came into force. For some time there has been cross-party consensus that, as the Competition Commission concluded, an Adjudicator or similar body is necessary for the effective monitoring and enforcement of the GSCOP. We now hope that those same parties will work together in ensuring that the final Bill enables the new body to do that job effectively and remedy the adverse effect on competition identified by the Competition Commission.

2.  We believe there are now two priorities in completing this process. Firstly, Parliament must act speedily in scrutinising the text so that the formal Bill itself can be brought forward without further delay, and we welcome the fact that the BIS Committee has wasted no time in taking evidence for its inquiry. Secondly, aspects of the draft Bill must be amended, in particular so that the final Bill provides (i) an effective framework in which the Adjudicator can carry out investigations in all instances where there is evidence of a breach of the GSCOP, protecting the anonymity of those wishing to complain, and (ii) an appropriate and effective enforcement mechanism, including fines from the outset.

THE NEED FOR THE GROCERIES CODE ADJUDICATOR

3.  The Competition Commission's 2008 report, recommended that "a GSCOP Ombudsman should be established to monitor and enforce the GSCOP, and to resolve disputes between retailers and suppliers under the GSCOP." This recommendation was made, in part, on the basis that the existing mechanisms for enforcing the GSCOP's predecessor, the SCOP, involving the OFT were inadequate. Indeed the OFT itself has recognised the benefits of establishing a new body to enforce the GSCOP.

4.  We believe that our members, who are both direct and indirect suppliers, suffer from continued unfair commercial practices by retailers, and that breaches of the GSCOP have continued to occur since its inception in February 2010. Such evidence remains anecdotal and/or confidential, as suppliers and primary producers are unwilling to make public their concerns for fear of reprisals by retailers, for instance through the loss of future business. The establishment of an Adjudicator who is able to investigate evidence of breaches of the code, and maintain the anonymity of the suppliers and primary producers involved, is the only way that GSCOP can be effective.

5.  Currently, in the absence of an Adjudicator, if a supplier has cause to complain about an alleged breach of the GSCOP, there are only two possible courses of action. Firstly, he can use the dispute resolution procedure set out in the Order establishing the GSCOP. This requires him to raise the potential breach with the retailer concerned. This is an unattractive course of action for many suppliers, who are understandably reluctant to complain if their identities are not protected for fear of reprisals. Secondly, a supplier can (on the basis that the GSCOP has been incorporated into any supply agreements as required under the Order) bring a legal action for breach of contract. Litigation is, understandably, also an unattractive option, leading to lengthy, stressful and sometimes costly actions which again do not protect the anonymity of parties.

6.  It has been stated by some that as no claims of a breach of the GSCOP have been made since its commencement over a year ago, the system must be working well in the absence of a body to enforce it. Such arguments, if indeed they are accurate, are plainly misleading—one of the clearest benefits the Adjudicator will bring, if established correctly, is the protection of the anonymity of complainants; a feature wholly absent from current arrangements for the GSCOP. The system can only work if complainants have the confidence to come forward.

COMPLIANCE WITH THE GROCERIES CODE TO DATE

7.  Unfortunately, in the absence of an Adjudicator, it is exceedingly difficult to make any accurate assessment of current compliance with the code. As mentioned in paragraph 4 above, we do not believe that retailers are consistently complying with the code. It has been argued by some that retailers have reduced their tendency to unfair commercial practices with their suppliers since GSCOP came into force, but we are in no doubt that such practices continue, and they may well become more widespread again in the future in the absence of effective monitoring of, and sanctions for, breaches of the code. The establishment of an Adjudicator which can monitor and enforce the GSCOP is central to ensuring the code's effectiveness.

THE ABILITY OF THE ADJUDICATOR TO EFFECTIVELY CARRY OUT INVESTIGATIONS

8.  It is intended that the Adjudicator will carry out two main functions: arbitrating disputes over a breach of GSCOP between a retailer and a supplier, and carrying out wider investigations into more widespread breaches of code, whether by a single retailer or more, and whether against a single retailer or more. We believe that this investigative power is crucial to the effectiveness of GSCOP in eliminating the adverse effects on competition identified by the Competition Commission as existing in the groceries supply sector.

9.  Unfortunately, the draft Bill does not provide adequate powers to the Adjudicator to be able to carry out effective investigations. Specifically, Clause 4(2) of the Bill imposes unnecessary and restrictive qualifications on the Adjudicator before he is able to launch an investigation, even if he otherwise has reasonable grounds. These are that information leading him to launch an investigation must either have come directly from a supplier (direct or indirect), or it must be publicly available. We believe these restrictions will lead to two detrimental outcomes: firstly, it will prove impossible to protect the anonymity of complainants in many instances, preventing the Adjudicator from launching an investigation or suppliers from having the confidence to make complaints; and secondly it will make some information inadmissible in launching an investigation simply because of its source, notwithstanding that it might be extremely persuasive evidence of a breach of the code.

10.  Turning to the first issue, that of anonymity, the narrow bases on which investigations can be launched will make it obvious in many cases where a complaint of a breach of the code has come from. Even if a complainant's identity is kept confidential, other information (for instance their product sector if they are one of a small number of suppliers of a specific product) can 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. Examples illustrating this point are made in Appendix 1 to this submission.

11.  Clause 4 therefore weakens the anonymity provisions, rendering them useless in some instances. As the Adjudicator is bound to protect complainants' anonymity (under Clause 19), he will be prevented from undertaking investigations even if he has been provided with evidence of a breach by a supplier. Furthermore, this obvious weakness will discourage suppliers from providing information to the Adjudicator, for fear their identity will become apparent.

12.  Turning to the second issue, the qualifications in Clause 4 will simply prevent some information from being used to launch an investigation, even if it provides strong evidence of a breach of the code. For instance, a whistle-blower within a retailer may be aware of breaches of the code by his employer. However, any evidence he supplies to the Adjudicator confidentially will be inadmissible as grounds for launching an investigation, as he is not a supplier. Furthermore, he would probably be unwilling to make such information publicly available in case it identified him to his employer. Therefore, no investigation can be launched.

13.  Similarly, suppliers who are unwilling to provide information to the Adjudicator and risk their identities becoming known, may instead be happy to pass information to trade associations, who they trust to anonymise the evidence and provide it to the Adjudicator on their behalf. In such an event, the Adjudicator would not be able to launch an investigation under the provisions in the draft Bill. We believe 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 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.

14.  To overcome these two issues, the bases on which investigations can be undertaken must be broadened. The Adjudicator must be allowed to initiate an investigation on any evidence, regardless of its source, as long as he can satisfy himself that it is credible. The anonymity provisions in the Bill will then be adequate to protect complainants' identities, and the Adjudicator will not be prevented from launching investigations into breaches of the code even when he has persuasive evidence, simply because of its source.

15.  This can be achieved in two ways. Firstly by simply removing Clause 4(2), the Adjudicator will be able to launch an investigation under the existing Clause 4(1) if he has "reasonable grounds" to do so. This is consistent with the powers granted to the Director General of Fair Trading under the Competition Act 1998 when launching an investigation into abuse of a dominant position or into anti-competitive agreements. Secondly, a third ground could be added to Clause 4(2) allowing the Adjudicator to launch an investigation where he has "credible evidence" of a breach of the code, regardless of source. What is meant by "credible evidence" could then be included in the Adjudicator's guidance obligations under Clause 13.

16.  In either case, amending the Bill in this way merely brings the Adjudicator into line with the Competition Commission's 2008 report, which stated, when recommending the establishment of an Ombudsman to monitor and enforce the GSCOP, the following:

11.350 In our view, the effective monitoring and enforcing of the GSCOP requires both the resolution of disputes and proactive investigation of retailers' behaviour in respect of particular practices, sectors or types of supplier in order to identify whether breaches of the GSCOP have occurred. We think it is appropriate for individual suppliers to be able to use the GSCOP as a means of ensuring that specific disputes are resolved. However, we also believe that relying on such disputes as the basis for the monitoring and enforcement of the GSCOP would undermine its effectiveness as a remedy. This is because in order to resolve a dispute, the grocery retailer would need to be told the identity of the supplier bringing the dispute. We therefore believe that proactive investigation of practices by the body responsible for monitoring and enforcement will be critical to the success of the GSCOP. Such investigations will provide a basis for breaches of the GSCOP to be identified without revealing the identity of particular suppliers, and without the implication that any particular supplier has complained. (NFU emphasis)

17.  The suggested amendments to the Bill would allow the Adjudicator to carry out, in the words of the Competition Commission, "proactive investigations", and so bring the Adjudicator's powers into line with those envisaged as being necessary to remedy the adverse effects on competition identified.

THE ENFORCEMENT POWERS OF THE ADJUDICATOR

18.  We do not believe the enforcement powers available to the Adjudicator are adequate. In particular, 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. The current powers to "name and shame" transgressors are unlikely to garner media interest in the absence of corresponding fines, and so will remain largely unnoticed by customers. Furthermore, only a significant financial penalty can be guaranteed to act as a deterrent to retailer behaviour that breaches the code.

19.  In its 2008 report, the Competition Commission clearly stated that financial penalties should be made available to the Ombudsman if it was to effectively enforce the GSCOP:

11.272 In addition, we recommend to BERR that if we do not obtain satisfactory undertakings from the retailers creating the GSCOP Ombudsman within a reasonable period, it should take such steps as are necessary to establish the Ombudsman. We further recommend that, if this is the case, BERR take steps to give the Ombudsman the power to levy significant monetary penalties on retailers for non-compliance with the GSCOP.

20.  Clause 10(1) of the Bill should be amended to remove the requirement allowing the Adjudicator to impose financial penalties on those found to have breached the code only once secondary legislation has been brought forward.

OTHER AREAS OF CONCERN

21.  Under Schedule 1 of the draft Bill, the only provision for staffing to support the Adjudicator and/or Deputy Adjudicator is through secondments from BIS and the OFT. We are concerned that this will undermine the ability of the Adjudicator to fulfil his duties properly, as qualified staff may not be available from this restricted pool, and they may not be willing to give their full commitment to the role if it is, by its nature, a temporary one. We believe the Adjudicator should be given much more freedom in recruiting full-time, permanent staff to support him in his work.

22.  We are aware that some within the retail sector have warned that the cost of the Adjudicator will lead to higher food prices in shops. Given that for a retailer to be covered by GSCOP it must have a turnover of in excess of £1 billion, the comparatively modest costs of funding the Adjudicator represent a tiny proportion of retailers' income. The impact assessment accompanying the draft Bill estimates costs per retailer per year of £120,000, which amounts to around 0.01% of the turnover of the smallest GSCOP retailers. It is hard to see how this could lead to anything but a negligible impact on in-store food prices, especially given the tendency of retailers to pass costs down the supply chain to suppliers, rather than along to consumers. Furthermore, it is clear that the Competition Commission's recommendations of a GSCOP, effectively monitored and enforced by the Adjudicator, will ultimately benefit consumers, not harm them.

CONCLUSIONS

23.  Much of the content of the draft Bill is to be welcomed. However, we do believe that two issues in particular—the ability of the Adjudicator to launch investigations and his ability to impose financial penalties—are not appropriately dealt with by the Bill. We believe that the Bill should reflect the recommendations of the Competition Commission, and it is not clear to us why the government has chosen not to include these seemingly crucial aspects of the Adjudicator's powers. Accepting the Competition Commission's recommendations means establishing an Adjudicator who is able to launch an investigation proactively on the basis of credible evidence, or where it has "reasonable grounds", ensuring it protects the identity of complainants adequately and effectively monitors GSCOP compliance. It also means that the Adjudicator should be able to impose significant fines in cases of serious breach, to ensure GSCOP compliance is taken seriously by retailers.

16 June 2011

APPENDIX 1

ILLUSTRATIONS OF PROBLEMS WITH ANONYMITY IN CLAUSE 4 OF THE DRAFT BILL

(1)  As the Bill stands:

(a)  The Adjudicator launches an investigation concerning a specific product line following a supplier complaint.

(b)  It is clear that there is no information in the public domain that could have led to this investigation.

(c)  A retailer can then assume, with a high degree of plausibility, that one of a limited number of suppliers in this product area has complained—the investigation could not have been launched for any other reason.

(d)  The retailer therefore is able, with a high degree of confidence, to predict who has complained.

(e)  Knowing this to be the case, the supplier is unlikely to make the complaint in the first place, as any ensuing investigation would reveal his identity, and he is fearful of retaliatory action from the retailer.

(f)  Moreover, as revealing the complainant's identity is more or less inevitable, the Adjudicator cannot, in fact, launch the investigation, as it would be in conflict with his obligations on anonymity under Clause 19.

(2)  Amended Bill to broaden grounds for investigation:

(a)  The Adjudicator launches an investigation concerning a specific product line following a supplier complaint.

(b)  It is clear that there is no information in the public domain that could have led to this investigation.

(c)  It remains plausible that evidence presented by a third party—for instance a whistle-blower or a trade association—led to the investigation.

(d)  A retailer cannot, then, assume that one of a limited number of suppliers in this product area has complained, as an investigation could have been launched in the absence of such a complaint (notwithstanding that there indeed was such a complaint in this instance).

(e)  The complainant's identity is protected.

(f)  The investigation can proceed.

(g)  Suppliers recognise that they are able to complain without their identity being obvious.


 
previous page contents next page


© Parliamentary copyright 2011
Prepared 28 July 2011