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.
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