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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1224-iv

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

Draft Groceries Code Adjudicator Bill

Tuesday 5 July 2011

mr Edward Davey MP, Christopher Hopkins and Richard Lewis

Evidence heard in Public Questions 272 - 346

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 5 July 2011

Members present:

Mr Adrian Bailey (Chair)

Katy Clark

Dan Jarvis

Simon Kirby

Ian Murray

Mr David Ward

________________

Examination of Witnesses

Witnesses: Mr Edward Davey MP, Minister for Employment Relations, Consumer and Postal Affairs, Christopher Hopkins, Competition Policy Adviser, and Richard Lewis, Legal Adviser, Department for Business, Innovation and Skills, gave evidence.

Q272 Chair: Good morning and welcome. Thank you for agreeing to speak to the Committee. Could you introduce yourselves for voice transcription purposes? Richard, we will start with you.

Richard Lewis: I am Richard Lewis and I am from the Legal Group at the Department for Business.

Mr Davey: I am Edward Davey. In this respect, I am Minister for Competition.

Christopher Hopkins: I am Chris Hopkins. I am a policy official from the Department for Business.

Q273 Chair: Thank you very much. It is 10.30, so I will start by saying what I say whenever we have a panel in front of us. Try to avoid duplication in responses. I think, given the panel we have, the risk of that is fairly minimal anyway, but I will repeat it for brevity’s sake. I do understand the Minister has another debate he has to attend at the conclusion of this meeting. I will start, Minister, with a very general question. What do you think are the main advantages of introducing an Adjudicator to administer GSCOP?

Mr Davey: Chair, as the Committee will be aware from its previous hearings, this policy has its genesis in the inquiry by the Competition Commission between 2006 and 2008. That identified a problem in the supply chain that could potentially lead to consumer detriment, namely that there was evidence of excessive risk transfer from retailers to their suppliers, unexpected costs and retrospective renegotiation of supply agreements, and that that was leading to uncertainty and instability for producers and suppliers, and that therefore if we had the GSCOP with the Adjudicator-then called the Ombudsman-hopefully we could stamp out such practices. That would lead to greater certainty for suppliers who would therefore be more likely to invest and therefore be more likely to produce innovation and that that would improve the quality of goods and potentially the prices of goods to consumers. I am sorry that is a long answer, but the benefits have been identified by the Competition Commission and they are ultimately benefits for consumers, although hopefully suppliers who have been victims of such practices would also see those removed.

Q274 Chair: There do not seem to have been many infringements of GSCOP, and organisations that claim that there are infringements seem very reluctant to give details of the numbers of infringements. Why do you think that is, and why, if this is the case, do you think we need an Adjudicator?

Mr Davey: Of course we do not have the Adjudicator now and that is the issue, because the GSCOP first of all is only arbitrated by someone appointed by the Chartered Institute of Arbitrators and while they may be very professional people, the GCA would be a specialist arbitrator, specialised in the industry. But far more important is the fact that there is evidence-the Competition Commission found this very clearly-that some suppliers do not want to come forward; they are worried that there could be retribution, a socalled climate of fear. Therefore, until this process of investigation through the GCA is there, where complaints can be made anonymously in confidence, we cannot be sure that all the complaints are being properly dealt with and that the current process is uncovering all the complaints. I think that is the big difference with bringing forward the Adjudicator, which, let’s remember, was part of a package that the Competition Commission recommended.

Q275 Chair: How do you think the Adjudicator will improve compliance with GSCOP? There is a second part to my question. There is always a danger when you appoint somebody to do a job that in order to justify their existence, they start developing a role for themselves that may go beyond the problem that the Bill is designed to address. How do you think you will deal with that?

Mr Davey: We have been conscious of the danger of regulatory creep, which is why the Bill is drafted in the way it is. It is focused on arbitrations and investigations of breaches of the code-nothing else. So it is focused on that. This gives me an opportunity to make it clear what the GCA is not. It is not going to be a price regulator; it is not going to be a supermarket regulator in some people’s understanding of that word; it is an adjudicator on breaches of the code.

To come back to your question, Chair, I think that would prevent the dangers of regulatory creep, because it will, I hope and believe, encourage those suppliers who at the moment feel unable to come forward to come forward, and we will see greater adherence to the code by the major retailers. There is a big deterrent effect in this.

Q276 Chair: Your response is interesting because there is a view that the Adjudicator will have the right to investigate a pattern of behaviour, which implies to me that it will not be investigating a specific breach but evidence that is given to him or her that there is secondary evidence that breaches are taking place, not hard evidence. That rather goes beyond what you have just said. Could you clarify whether this is true?

Mr Davey: Let me try to clarify. It is quite important, when one thinks about the Groceries Code Adjudicator, to see that it has got two main functions. One is to adjudicate on complaints that are brought forward by retailers who are making them in a public way; it is the adjudication role. But then there is the investigation role, which is separate and therefore has separate arrangements. You are absolutely right to say that, again following the suggestions from the Competition Commission, we believe that the Groceries Code Adjudicator, to initiate investigations, cannot really do that on the basis of one complaint. It is very unlikely that would happen. It is much more likely that there will be a pattern of behaviour and a number of complaints; the Competition Commission suggested between 10 and 15 complaints. But we have also set out in the draft Bill that the Adjudicator can look at information in the public domain as part of deciding whether he or she wants to initiate an investigation. I think that investigatory role, which may well be triggered by a number of anonymous complaints, is quite different from the adjudicator role.

Q277 Chair: We will come to anonymous complaints in a moment. But it does appear from what you have said that the Adjudicator does not just act on a specific complaint-that it has a more proactive role and there could potentially be an inclination to carry out investigations that may be regarded by the retailers as having insufficient evidence and being potentially vexatious.

Mr Davey: Let’s be clear: the Adjudicator must have reasonable grounds to suspect there has been a breach of the code. That is why it is slightly more demanding in the sense that there needs to be a pattern of behaviour; it is unlikely to do it on the basis of one complaint. It is not just a pattern; there must be some substance. They cannot just go on a fishing trip.

Q278 Chair: Obviously there would have to be a degree of proportionality in the way that the Adjudicator carries out these investigations. What mechanisms do you think can ensure that that proportionality exists?

Mr Davey: Effectively, the Bill. If I could refer you to clause 4 of the Bill, entitled "Investigations": "If the Adjudicator has reasonable grounds to suspect that a large retailer has broken the Groceries Code, the Adjudicator may carry out an investigation." Then it talks about what it has to consider before it carries out an investigation, namely "information provided by a supplier" or "information…publicly available". The law that we are proposing will direct it in these matters.

Q279 Chair: Several large retailers have told us that GSCOP in itself has improved supplier relations over the position under the old code-the SCOP. What is your view on that?

Mr Davey: I think there is some evidence, but let’s remember-I keep repeating this and I apologise-that the Competition Commission’s proposal was for a package, which included the Adjudicator. So while there may well have been some improvement for some suppliers-I am not sure whether the evidence is completely overwhelming; there may have been some improvement and to the extent there is, one would welcome it-that certainly does not negate the need for pressing ahead with the Adjudicator. Far from it.

Q280 Simon Kirby: Assuming that there is an improvement in compliance, what is the economic effect likely to be on both suppliers and consumers?

Mr Davey: The whole purpose of the Code Adjudicator is to improve compliance and that goes back to the benefits that I talked about in answer to the Chair’s original question. If there is greater compliance, one would hope that suppliers would not see risks transferred and excessive and unexpected costs, therefore they would be able to plan their investments with greater certainty and one would hope that would lead to innovation and ultimately better produce for consumers.

Q281 Simon Kirby: Does it not mean that if suppliers end up with a better deal, consumers must ultimately be paying for it?

Mr Davey: I do not think so. If you look at the Competition Commission, it was very clear that, in many regards, the competitive nature of the relationship between retailers and their suppliers is to be welcomed and is in consumers’ interests. The importance of getting good prices is not negated by the Groceries Code Adjudicator; in no way, as I made very clear, is this going to interfere with the contractual negotiations in the sense of the prices that are agreed. Ultimately, I think this is in the retailers’ best interests. What it is doing is setting minimum standards that all retailers would adhere to, so some retailers are not trying to get a competitive advantage by abusing their suppliers. That is why a number of retailers, particularly Waitrose, very much welcome this.

Q282 Simon Kirby: Let me put it like this. A number of supermarkets have quite publicly said that they will match others’ prices. If we have a scenario where there is less wriggle room with the suppliers, surely they will not be able to do that.

Mr Davey: I would have thought, Mr Kirby, you would not want wriggle room in the sense of practices that would breach the code.

Simon Kirby: I am not sure I said that.

Mr Davey: But it is my response to you. I think the code, which forms part of the contract between suppliers and the retailer, sets out practices that we would all think would be sensible and ethical practices, but in no way do they get in the way of the normal process of competition.

Q283 Simon Kirby: I apologise, Minister, if I am putting words in your mouth. Do you think it is possible to square the circle and to provide better terms for both the suppliers and ultimately the shoppers who in my constituency of Brighton, Kemptown spend their hard-earned money and are keen to get the cheapest possible prices? You think it is possible to do both?

Mr Davey: I do, because this approach is quite targeted. The Competition Commission, when it looked into the grocery industry, did not say it was uncompetitive, monopolistic and so on; it did not give us that sort of analysis. It actually said that we do have quite a competitive retail sector and if you look at a number of our big retailers, they are global leaders in some areas. You are seeing an organisation like Tesco export and set up networks of chains in places like Hungary and Korea. This is not an uncompetitive industry. The Competition Commission was very focused on particular poor practices, which I think we would all wish to see go.

Let’s be clear: the costs of setting this up and running it are very minimal. If you look at the turnover of the grocery sector, the annual running costs would be 0.001% of turnover; if you look at the supermarket sector as a whole, the annual running costs would be 0.0006% of turnover. So I think we should see the costs in that light. I was particularly interested to see the evidence of the retailers to this Committee, when they made it very clear that GSCOP and their adherence to that-setting up the process of compliance officers and so on-had not led to increases in prices on the shelves, which suggests that a certain Sunday newspaper got it wrong at the weekend.

Q284 Simon Kirby: Is it still your intention to implement the Bill by April 2013?

Mr Davey: Yes. The Government said in the first Queen’s Speech that we would publish a draft Bill in the first Session. We have published a draft Bill and we very much hope that we will be able to bring it to the House after the prelegislative scrutiny in the second Session of Parliament. I would not want to raise expectations too much, but I still have a glimmer of hope that if the business managers find a little slot in the remaining months of the first Session, we could get it before the House in this first Session. I am told the timetable is pretty full up at the moment so I really would not want to raise expectations. But the fact that we have published it now and the fact that you are undertaking prelegislative scrutiny-I am very grateful for the work of the Committee-puts us in a very good position to proceed as quickly as we hope.

Q285 Simon Kirby: Is there a potential problem with that delay in implementation? Is there an advantage that could be had by the supermarkets in the interim period?

Mr Davey: There is the potential that some of the big grocery retailers are continuing to abuse their market power. If it is happening, that would be particularly felt by the small suppliers. It is possible that it is happening. I hope it is not. I hope the fact that the GSCOP has been published and that the supermarkets involved see our intention means that they are cleaning up their act. My view is the sooner we get on with this the better. I have heard some people criticise us for not going quicker. Well I think we have gone pretty quickly. We have certainly done what we wanted to do. Ideally we would have published the draft a few months before we did, but Parliamentary Counsel has been pretty busy in this first Session of Parliament. There is no desire at all on my behalf or on the Government’s behalf to slow the implementation process down at all.

Q286 Chair: Before I bring in Ian Murray, I just have one question to follow up on the potential cost implications. This Bill has been introduced to try to alter the balance of power between the retailers and the suppliers, which is perceived as being unfair. Is there not a danger that where you have a strict code and a contract that is enforceable, in certain circumstances the supplier may be in a monopoly position and seek to drive up the price that they are getting from the supermarket and hence the prices that the retailer would then have to charge in the store? Has this been looked at?

Mr Davey: Certainly the Competition Commission did not publish any warnings that they feared that, and I am sure the Competition Commission, given its role as an independent competition authority, would not want to make recommendations that it thought would have such anti-competitive results. I have certainly seen no evidence to that effect. Let’s remember, though, that the Bill does allow a retailer to bring a complaint to the GCA, so in a way we have covered that off.

Chair: That is a good point.

Q287 Ian Murray: Good morning Minister. I would like to follow up Simon Kirby’s questioning, because if you look at the time scale up to 2013, does that give a little bit of breathing space to do some more research into the anonymous complaints that may be forthcoming? The Food and Drink Federation did a lot of work on this. The hidden complaints are perhaps the issue here. Some of our other witnesses have suggested that that may be a good idea. What is your view?

Mr Davey: You want more reviews and more research?

Q288 Ian Murray: In terms of what is happening with the anonymous complaints. Suppliers are concerned and frightened at the prospect of losing their supply chains to major supermarkets. Is there an opportunity to take a breather between now and 2013 to look at the extent of the complaints around that?

Mr Davey: The nature of the problem, Mr Murray, means that it is inherently difficult to research in an easy way. Let’s remember that the Competition Commission, with all its information-gathering powers, did its research over two years. It actually had to use Enterprise Act powers to persuade suppliers to give it information; they were so reluctant and so worried about retribution that even for an independent inquiry by an independent body, the information had to be pulled from suppliers, such was the fear. But, as I know other witnesses have evidenced to the Committee, 380 instances were brought forward in that inquiry. I see no need to revisit that question; I think it is well established. Colleagues have looked at this in detail, and I particularly think of my hon. Friend the Member for St Ives, Andrew George, who has done a huge amount of work in this area. If he was here he would be saying, "Case proven; let’s just get on with the remedy."

Q289 Ian Murray: That is quite useful. The Bill does not extend GSCOP to indirect suppliers. Can you recap on the reasons for that?

Mr Davey: The Competition Commission’s inquiry was not asked to look at the relationship between primary producers and intermediaries. While they came across suggestions that there were problems between intermediaries and primary suppliers during their inquiry, they say themselves in the report that the evidence was limited in scope. They certainly did not recommend that the GSCOP cover those relationships. However, they did say that when the GCA is in place arbitrating over the code and when it has had experience of making some investigations, if it continued to find that evidence maybe this issue should be revisited. There was no strong pressure from them that it should be widened at this stage.

Q290 Ian Murray: So there would be flexibility within the Bill for extension into that area if necessary?

Mr Davey: No, I think we would have to revisit it then. We have no evidence base at the moment to legislate in that regard, so I think we would be widely criticised if we did.

Q291 Ian Murray: Finally Minister, we have had evidence that there are perhaps equal if not more serious problems further back up the supply chain. I suppose it relates to the Chairman’s question earlier on that perhaps the large direct suppliers do not need the protection of an Adjudicator. What would be your views on that?

Mr Davey: It is likely that the smaller suppliers are going to benefit from the GCA being introduced. That is common sense. But I did not think it would be appropriate-I think you would get yourselves into a lot of problems and indeed the Competition Commission did not recommend it-if you were to limit the scope of the GSCOP and the GCA just to small producers and suppliers. I think that would be unnecessarily complicated. You may well be right that some of the big suppliers can take care of themselves, but I think if we had tried to somehow arbitrarily find some boundary between small suppliers and large suppliers, we would have tied ourselves up in knots. Indeed, the recommendations of the Competition Commission did not suggest we should.

Q292 Ian Murray: Is there a danger in the Bill that supply chains could be encouraged to reform to more indirect supply chains in order to slip under the legislation? Essentially intermediaries would be set up in order to deal with the contracts so the suppliers going to supermarkets would be almost indirect and therefore slip under the legislation. Is that a possibility?

Mr Davey: So supermarket A would set up-

Ian Murray: Would set up a supply chain through an intermediary.

Mr Davey: -supply chain A intermediary under their some per cent ownership. Well what you are pointing to there is the wisdom, if I might say so, of including indirect suppliers and their ability to make complaints. That would, I think, prevent that.

Q293 Chair: Can I just come back to this issue of the retailer’s right to complain to the Adjudicator? My understanding is that if a retailer felt that a supplier was exercising unfair trading practices against it, it would have the right to go to the Adjudicator for arbitration but not for investigation.

Mr Davey: That is correct.

Q294 Chair: Which would seem slightly unequal in terms of the balance of power between the two sides.

Mr Davey: I think it is highly unlikely that a supplier would delist a customer, in the sense that the suppliers fear-this is the whole point-that they could be delisted and their whole business could be hit if they make a public complaint to the Adjudicator and the retailer then takes retribution. That sort of problem does not really exist the other way round, it seems to me.

Q295 Chair: I understand the point you are making, but it is quite possible that a supplier in a monopoly position could still be charging what might be perceived as a disproportionately high price, the supermarket feels that this is the case and would like to have it investigated, but under the existing code and rules just cannot.

Mr Davey: I am not quite sure if I have understood, Chair. I would refer you to clause 2, subsection 2: "If a large retailer refers a dispute to arbitration under a supply agreement, the Adjudicator may accept appointment as the arbitrator." In other words, the Adjudicator can arbitrate. Let’s also be clear that the abuses the Competition Commission identified were abuses by retailers, not suppliers. In ordinary economics, it is quite difficult to see a monopoly supplier in this regard, because we do have free trade, and if supermarket X was really feeling that a supplier was charging it excessively, I am sure it would find another supplier.

Q296 Chair: We quite understand why this was introduced and the intrinsic power of the retailer over the supplier, but in dealing with that, I think it is important that we do not introduce an adjudication process that could in certain, perhaps very unusual and exceptional, circumstances lead to unfair practices going the other way and potentially disproportionately high prices for the consumer. I am not sure if what you have said addresses the issue of a retailer being able to obtain the information the retailer needs to know whether the prices they are paying to a supplier are fair prices.

Mr Davey: It is an interesting hypothetical question. If the retailers had evidence of that, I am sure they would want to approach the OFT and bring the OFT’s attention to it.

Q297 Chair: It would not preclude them taking that course of action?

Mr Davey: No, not at all.

Q298 Dan Jarvis: Minister, you have already referred to fishing expeditions. As a Committee, we have heard evidence that the Adjudicator’s investigation powers should be wider. The Food and Drink Federation referred to what they described as "informed reactivity." Is your objection to wider powers that the Adjudicator should not be able to launch fishing expeditions based on no information at all?

Mr Davey: Yes. We do not want the Adjudicator to initiate investigations where there is not a real suspicion that there is a breach of the code. I earlier referred the Committee to clause 4. I have heard some people say that they would like the Adjudicator to look at other information provided, for example by third parties. But the fact that in clause 4, subsection 2(b) we have said that the Adjudicator can consider "information that is publicly available," I think speaks to the concerns, be it of the federation you referred to or others, in this regard. The federation could talk to its members; they could anonymously tell the federation that practices of a particular retailer breached the code; and then the federation could, respecting anonymity, do research, do a report and publish that. The Adjudicator would be able to use it as part of its evidence for deciding to initiate an investigation. Likewise, an NGO that feels that primary producers in developing countries are, as indirect suppliers, feeling the effects of abuse of retailer power, could talk to those primary producers, produce a report, not name particular individuals, but talk about broad practices that suggested a pattern of behaviour, publish that research and that report, and the Adjudicator could rely on that.

When I was making the decisions behind the Bill I tried to get a balance and to make sure that the evidence was there and the evidence was rooted in breaches of the Code of Practice and not, therefore, things that people did not like. This is one thing I really want to get over to the Committee, and it is important we make it more widely known, because I do not want to raise false expectations of what the Groceries Code Adjudicator is going to be able to do. It is not going to be able to deal with every single complaint that anyone has against a retailer or a supermarket; that is not what the Competition Commission said, it is not what the GSCOP does and it is not what the GCA is intended for.

Q299 Dan Jarvis: Following on from your response, I want to specifically ask you about the trade associations, because we have heard strong views that they should be available as a source of initiating evidence. Can I ask you specifically why the Bill excludes them from doing that?

Mr Davey: The Bill does not exclude them from producing a report, as I have just described, and putting that in the public domain.

Q300 Dan Jarvis: Can I ask you about your views on opening up available sources of information to any that provide reasonable grounds for further investigation?

Mr Davey: Well I think clause 4 does what is needed; namely that people who are affected by a breach of the code, be they direct supplier or indirect supplier, can make an anonymous complaint to the Adjudicator. That ought to be a prime source of an investigation being initiated, if through getting a series of such complaints the Adjudicator can see a pattern of behaviour. But we have gone further than that in 4(2)(b). We have allowed this publicly available information to be able to be considered by the Adjudicator. I think that should meet the concerns of people who feel in some way that we have made some sort of arbitrary and unreasonable restriction of the information on which the Adjudicator can rely. Fundamentally, the GSCOP is about contractual relationships. So fundamentally, it is very important that complaints must come from those that it affects. But 4(2)(b) enables publicly available information that can add to those anonymous complaints to confirm that there is an issue that the Adjudicator should investigate.

Q301 Dan Jarvis: Finally, can I just ask you about individual whistleblowers? I am thinking particularly of employees who have moved from one retailer to another.

Mr Davey: Under clause 4 of the Bill, that information could not be used by the Adjudicator unless it was in the public domain.

Q302 Chair: From your answers I am not clear why the Bill excludes the Adjudicator acting on a complaint from a trade association.

Mr Davey: Fundamentally it goes back to the point I made about the contractual relationship. Let’s remember the supply agreements between the supplier and the retailer now contain, and are required to contain because of the order, the GSCOP as part of the terms of that agreement. The key concern is to make sure that those contracts and the code are abided by. The problem is that some people fear that if they make a complaint that the code has been breached by the retailer, there will be retribution, so we have made provision for anonymous complaints, because it is fundamentally the contractual relationship that needs to drive the Adjudicator’s investigations. But we have gone further.

I think if we had gone in the way that you wanted and allowed any third party to put forward complaints, there would be a danger that they may not be based on breaches of the contractual relationship. We have tried to have a balance. We tried to meet that concern in 4(2)(b). If a trade association is confident that a retailer is systematically breaching the code, presumably it has got that on the basis of talking to its members and feels confident enough about that to put a report into the public domain upon which the Adjudicator can rely. I think we have gone a long way to meeting that concern without opening up what is potentially a Pandora’s box.

Q303 Chair: It does seem odd that you say that it is okay for a trade association to take evidence from suppliers and it will be acted on provided it is put into the public domain. On the other hand, it is generally recognised that anonymity is crucial in this, and it would seem far more sensible to have a process by which a trade association could take complaints and in suitably anonymised form put them to the Adjudicator. At the end of the day, I cannot believe a trade association is going to risk its reputation by putting forward complaints that are specious and vexatious.

Mr Davey: A trade association can assist and work with its members to enable them to use the new process that we are proposing to make anonymous complaints. The trade association, or NGO for that matter, could work with the supplier, producer-

Q304 Chair: But it does not get over the anonymity issue.

Mr Davey: The supplier and the producer are protected by anonymity in the Bill, and the trade association can work with their members so that the members can take advantage of it. It is not common for anonymity to be allowed in these sorts of processes; it is quite unusual, relatively speaking. Allowing trade associations to help the individual take advantage of it I think is quite a strong development. Then allowing them to make a report-protecting anonymity in the way you described, Chair-and place it in the public domain, again, I think, goes quite a long way.

We had to strike a balance there. Trade associations, as you say, may want to make sure their reputation is not damaged, but they are also likely to feel that they need to show their members that they are doing lots of activity and their member subscriptions are very valuable. There could be a danger that trade associations are rather more proactive than the evidence might suggest. We had to strike a balance and there would have been a danger of unfairness to the retailer if we had skewed the balance in the way you suggest.

Q305 Mr Ward: On the issue of the public domain, isn’t this a difficulty? If a trade association, based on evidence from members, has a serious concern and wants to raise an issue, it has to put that straight into the public domain without the Adjudicator being able to carry out any preliminary investigatory work in private.

Mr Davey: First of all, the individual supplier, supported by a trade association, can immediately make an anonymous complaint; there is no delay in that. What we thought, though, was that if there is systematic abuse by a retailer, a trade association may well be a body that would be able to collect that and produce a report. Clause 4(2)(b) does what you are wanting.

Q306 Chair: It seems an odd process to me because if a report was then put in the public domain, I would have thought that it potentially prejudices an investigation and disadvantages retailers in a way that a confidential report from a trade association to the Adjudicator for the purpose of investigation would not do.

Mr Davey: I am not convinced by that. Let’s remember what the Bill says. The Bill says to initiate an investigation the Adjudicator can only rely on information provided by a supplier or information that is publicly available. That does not stop a trade association writing, prior to investigation, to the Adjudicator. The Adjudicator could have that information, but they could not initiate an investigation based on that report unless that report was in the public domain. However, once an investigation has been initiated, as part of that investigation, the trade association’s findings, be they in the public domain or not, could be relied on by the Adjudicator. That is in Clause 5.

Q307 Chair: On the basis of what you have told me, I cannot see why a trade association should be excluded from the various routes for making a complaint.

Mr Davey: Obviously we are going to have to disagree about this, Chair. I did say and I have certainly observed as a Minister that some trade associations, wishing to show their members how influential and active they are, go beyond the evidence that is before them. Without wanting to mention particular trade associations, I would have thought as Members of Parliament we have sometimes noted, and I would have thought someone with your experience, Mr Bailey, would have come across, trade associations that make claims that the Government or a public body must act when the evidence is pretty thin.

Q308 Chair: But that does presuppose the Adjudicator would fall for this. I think it is highly unlikely that any Adjudicator worth his or her salt would actually fall for this, and potentially it could exclude a source of complaint that has the trust of suppliers and would be very relevant to the issues at stake.

Mr Davey: I say again: if they want to do that, they can put it in the public domain. I do not think that would prejudice the investigations. With respect, I do not think you have given an argument that convinces me that putting it in the public domain would prejudice the investigation.

Q309 Mr Ward: So in practical terms, if a trade association that had been approached by a number of its members and had serious concerns went to the Adjudicator, the Adjudicator would say, "Unless you make this public, I am afraid I am not even going to look at it?"

Mr Davey: Or it can say, "Look, supplier X, producer Y; I am helping them write their letter to you, providing the evidence, and here I am, the federation, handing it to you on behalf of my supplier and they have given the evidence here." There is a role for the trade associations in assisting their members to make complaints based on a breach of the contractual relationship between the retailer and the supplier.

Q310 Chair: But I don’t see that that gets round the issue of a supplier concerned to protect their anonymity. If I was a supplier and I wanted to protect my anonymity, I would go to the trade association and ask them in a suitably disguised form to put this case to the Adjudicator. There is this filter. The trade association might say to me as a supplier, "Well you are the only one that we have ever had complain about this; I do not think it has really got a lot of substance." But if there are a number of suppliers doing that, the trade association, in a suitably anonymised form, can then put it to the Adjudicator. It seems to me that by having to go through the route of publicising that, no supplier would feel confident enough that their position would not become public. Built within the system is a disincentive for them to make a complaint.

Mr Davey: I have to say that I firmly reject that analysis, Chair, and I point you to clause 19. Clause 19 of the draft Bill makes it very clear that the Adjudicator, when he handles information provided by a supplier, has to treat that with confidentiality, protecting the anonymity. The Adjudicator is under quite strict disciplines from the Bill to protect the identity of the complainant. The trade association’s job in this is to say to its members who are making complaints, "Look, the Government has produced a Bill that protects your identity. You can make the complaints. We will help you make the complaints. But the Government quite rightly has said that the complaint is about a breach of the contract that you signed and therefore you need to initiate that, but we will help you and we can show you, in the legislation that Parliament has passed, how your identity is protected." So I think what you are asking for is double anonymity.

Q311 Chair: Yes, a double lock.

Mr Davey: Double anonymity. That is an interesting concept, but I think you only need anonymity once.

Q312 Chair: No, what we are talking about is two barriers to preserve it.

Mr Davey: What I would ask the Committee to do is to read clause 19 and to tell me, as the Minister, what is wrong with clause 19 in terms of protecting anonymity. That is what we have to do; we have to get that right. If you think clause 19 is insufficient, then please tell us. Scrutinise that 19.

Q313 Chair: What we will do is look at clause 19 and look at the evidence that we have had given to us, and then in our recommendations to you put what we think is the best way forward. But there is another angle on this, because the Adjudicator does have the right, as we discussed earlier, to investigate suspicious patterns of behaviour. Those are far more likely to be collected and collated by a trade association than an individual supplier.

Mr Davey: A trade association can obviously help more than one of its members to make the complaint and with the agreement of those members, if there are sufficient numbers, it can make the report as I have described. If there are sufficient numbers to warrant such a report, placing it in the public domain seems to be no threat to someone’s anonymity. If there is a large enough number of complaints going to the association, they will be able to say to their members, "Look, you are absolutely right; we have had 20 or so complaints. You can make your own decision to go to the Adjudicator if you wish to. The law protects your anonymity. But given there are 20, we would like to publish a survey based on that evidence. You will be totally anonymised in that survey; there will be no reference to you. Because there is a large number, it would be impossible for the retailer to identify you; and we want to go ahead and put that in the public domain." It seems quite reasonable to me.

Q314 Chair: The whole purpose of a trade association is to represent the interests of its members, but in this particular process it has to bat that responsibility back to the members.

Mr Davey: No. It can do one of two things. I am in danger of repeating myself again, partly because you are repeating the question. The first thing is that a trade association can be very active in assisting, advising, guiding, helping and encouraging its member to make the complaint. It is not batting it back; it is holding their hand. It is guiding them through that process and reassuring them that the law gives them the protection that they need.

Chair: I think we are just going to have to agree to disagree on this, but we will look at it in the round before we make our recommendations.

Q315 Ian Murray: Some of this may have already been covered, but there is an important aspect about the contractual relationship. Can you clarify whether the Adjudicator will have access to confidential terms and conditions in terms of contractual relationships?

Mr Davey: First of all, if the supplier makes a complaint, the supplier is able to hand over whatever evidence they have, which could be their supply agreement or any other information-e-mails or anything they want to hand over to the Adjudicator. When the Adjudicator has initiated an investigation, the Adjudicator is not being limited in the information that it can consider.

Q316 Ian Murray: But confidential contractual documents would be protected?

Mr Davey: Yes. As I understand it-I may be about to be getting advice on this-the Adjudicator is not required to publish all the information on which it has based its recommendations. I am told that part 9 of the Enterprise Act helps to protect in this regard.

Q317 Ian Murray: This is related to the discussion that you have just had with the Chair and other Members, and I appreciate you have already mentioned that the Adjudicator would not be able to go fishing, in your words, but if the Adjudicator got a hunch, say, that there was something untoward-if he was doing any sort of investigation into either a single or a wider issue and just gets a little hunch that there might be something worth investigating-is it in his or her power to perhaps phone a trade association or an individual supplier and seek further information or encourage suppliers to come forward?

Mr Davey: The Adjudicator is going to become very specialised in this regard and will be meeting lots of different people and getting information from lots of sources. I think you can be quite confident that given their focus on this sector, they will be picking up and reviewing a lot of information. But for all the reasons we have just described-the Chair may disagree-we thought it appropriate and sensible to limit the information that they should look at for the decision about initiating.

Q318 Ian Murray: Under the Bill, does that prevent the Adjudicator, during investigations that they may be doing in other, unrelated areas, from finding evidence that there might be a problem somewhere and asking suppliers or trade associations or otherwise to come forward with a complaint in order for them to investigate it, or can the Adjudicator open up a complaint without that particular process happening?

Mr Davey: Before an investigation has happened, it can encourage people to provide it with information, but it cannot require. The powers to require information from retailers and others really kick in after an investigation has happened, which, when you think about it, is the logical way.

Q319 Ian Murray: So essentially the Adjudicator does have the power to investigate stuff when it has the hunch there may be an issue?

Mr Davey: I would be cautious about saying "yes", because you used the word investigate. The Adjudicator will become an expert and he can encourage information to come forward and he can ask questions of people, but he does not have informationrequiring powers-information-gathering powers-at that stage. But I would expect and would certainly hope-we are certainly not putting restrictions on it-that the objective of the policy is that the Groceries Code Adjudicator becomes an absolute expert. The more that people become aware of it, whether suppliers, which we have been talking about at length, or trade associations, they will have a good working relationship with the Adjudicator and will be giving the Adjudicator plenty of food for thought. But what one does not want to agree to, and the Bill would prevent it, is a fishing exercise based on a hunch. Hunches would not be good enough to start an investigation.

Q320 Ian Murray: Can I just ask through a practical example, then? The Adjudicator is investigating an anonymous complaint that has come in about a supply chain issue. During the course of that particular complaint, they realise that there is a problem with the supply of potatoes between a major supermarket and several potato suppliers, but nobody has come forward to complain about it. What would be the process for the Adjudicator to go through to try to find a mechanism for allowing that complaint or that investigation to be heard?

Mr Davey: The question, if I may paraphrase it, because I want to make sure I am answering the correct question in the correct way, is that an investigation has not been initiated but there is some evidence that the Adjudicator has that there is something awry and he or she is developing a hunch. I think I am in danger of repeating myself if that is the question. You are nodding, indicating that it is the question. The Adjudicator would be able to encourage people, including a trade association encouraging its members, to come forward with complaints. So to that extent it can be very proactive, if that is what you are seeking.

Q321 Ian Murray: But it still has to come forward, though.

Mr Davey: This is not Inspector Frost. He cannot go on a hunch and arrest somebody; he has to go through due process and he has to have, as clause 4 says, "reasonable grounds to suspect that a large retailer has broken the Groceries Code". That is the test. He can encourage and can seek evidence to see whether or not there may be grounds to initiate an investigation, but he cannot go to a retailer and say, "Under my powers in the Groceries Code Adjudicator Act, I want you to give me some information." He cannot do that, not until an investigation has been initiated.

Q322 Simon Kirby: If I can look at it from a different angle, if I were a large supermarket I would be concerned about the ability to give the context of a particular anonymous complaint to the Adjudicator. It is not a level playing field. If I may draw a parallel, which hopefully is helpful, if somebody in this room thought you were an awful Minister, and I were the Adjudicator, you would want the ability to provide the context so I could make a fair and reasoned judgment knowing all the facts.

Mr Davey: I wish Ministers had a due process like that; that would be very good.

Simon Kirby: How do you address that-I think, legitimate-concern?

Mr Davey: The Adjudicator will only be able to launch an investigation-retailers should take some succour from the way the Bill is drafted-if they have real grounds to suspect that a breach has happened, so there is a test that has to be passed before an investigation can be initiated. I would have thought the retailers would welcome that. In a way, it shows, given the previous discussion we have had, that we have struck a balance in understanding that there are different interests. We have struck the balance to avoid fishing trips because we need to respect the rights of the retailers too.

Q323 Simon Kirby: If I may interrupt you, Minister, surely the context of that complaint-that breach-is important because the supermarket may be able to say, "Yes, but" and there may well be factors that only the supermarket can provide evidence to the Adjudicator about. But not knowing quite where the complaint has come from, surely that is impossible.

Mr Davey: Let’s remember that an investigation is very unlikely to be done on the basis of one complaint; it will be on a pattern of behaviour that they have detected from the different information that they will have received. The Bill is quite clear that that investigation can go broader than the subject matter of the particular complaints, and I think then the investigation would involve the Adjudicator talking to the retailers. It is only once the investigation has been initiated on the grounds of suspicion there has been a breach that the Adjudicator will be speaking to the retailers, and the retailers will be able to put their case. The questions from the Adjudicator will not be about a specific breach; they will be about a pattern of behaviour. That is what the retailers will have to respond to.

Q324 Simon Kirby: As a result of that deliberately broad investigation, is there not an additional cost, not only on the Adjudicator but retailers as well? I will give you an example. If I am a pork supplier, a pig farmer, and there is a legitimate complaint that goes to the Adjudicator, my complaint will be disguised-it will be about fresh meat-and therefore for both the Adjudicator and retailer, to disguise and to make the complaint anonymous, there will be a huge investigation, much of which will be unnecessary, surely.

Mr Davey: The Adjudicator will have to ask the questions carefully, proportionately and reasonably, of course. However, I am not going to deny that there will be a cost to the retailers of having to participate in an investigation. To that extent, there is a regulatory impact; I am not trying to deny that. The Competition Commission estimated the total cost of this in terms of cost to the taxpayer and the industry of about £5 million a year. But given we are talking about a groceries sector with over £70 billion turnover, I do think that we should see the regulatory impact in that context. This is pretty light-touch regulation. It is quite difficult to argue that we are taking a sledgehammer here; this is extremely proportionate and therefore, while I am sure the retailers wish they were not going to have to face these investigations, it is not unreasonable. Let’s remember the whole purpose of this is to try to get rid of the consumer detriment the Competition Commission foresaw. This is in the interest of consumers.

Q325 Mr Ward: I have a series of questions on enforcement and the issue of fines or no fines. If there was a very low level of complaints coming forward, it may well be based upon the fact that would-be complainants-suppliers-believe that the sanctions that are available, the naming and the shaming, are simply weak, so what is the point of coming forward without some penalties-a fine-being in place? It may be that the Code of Practice is very useful and is therefore making sure that there aren’t breaches, or it may be that the suppliers are just saying, "Well, what’s the point?"

Mr Davey: Certainly when I have talked to Andrew George and some of the trade associations who have been lobbying for this and are generally very supportive of this measure, and when you hear the depth of anger about some of the practices, I do not think they are going to be shy of coming forward, given that we are now giving them the protection of anonymity, and because if the Adjudicator upholds their complaints through investigation and accepts that there have been breaches of the code because of the pattern of behaviour that they have been able to substantiate, I think they will see naming and shaming as a pretty powerful penalty. In reading the transcripts of the evidence, it seems that a number of the members of the Committee feel that the naming and shaming requirements are actually quite a strong remedy.

Let’s be clear: there is a spectrum of remedies. There is an extremely soft spectrum, which is effectively advice, where there is no suggestion there has been a breach of the code but the Adjudicator is trying to help the retailer make sure they are abiding by the code and understand how the code is interpreted. But if there is an investigation that finds a breach of the code, the first sanction is to make a recommendation.

Q326 Mr Ward: There are no sanctions for failure to follow up a recommendation.

Mr Davey: There is a duty in the Bill for the Adjudicator to make sure that recommendations are monitored; he must monitor that recommendations are being followed. Clearly, if they are not being followed they are much more likely to want to escalate to a naming and shaming. There are these levels: recommendations, which may or may not name the individual retailer who has breached the code, and publication in a form that the Adjudicator thinks is proportionate and reasonable given the breach.

I should say that we have kept a reserve power-so you would not have to come back for primary legislation-to introduce a financial penalty regime. I think keeping it a reserved power again shows a balanced approach, but also has quite a strong deterrent for the retailers. Retailers do not just think about the next six months or the next year; they are thinking about the next 10 years. They will know that if they continually breach the code, the Government might say, "Hold on a minute. The sanctions are not proving tough enough. We will come back with financial penalties." Given that it is an ordermaking power, the Government will be able to do that relatively swiftly. We are holding a sword, in effect, over the sector: "There are sanctions here. There are recommendations and there is the naming and shaming requirement, but if you don’t get your act together, we will come back with financial penalties." I think that both gets the balance right and sends a really strong signal to the sector.

Q327 Mr Ward: But this was not a view shared by the Competition Commission or the Environment, Food and Rural Affairs Committee, was it?

Mr Davey: No, that is quite right, David, but Government has to make a judgment. We are not trying to overregulate; as you know, we have a policy to try to minimise regulation and we want to take a proportionate approach in this regard. I am sure there are some who would like us to immediately bring in financial penalties; there are others, I have to tell you, who did not think we should even take the reserve power and think even the reserve power is a step too far. But I wanted to make sure that reserve power was in the Bill and that if the approach we are taking does not work, we would not have to go through the process of primary legislation and could come back to Parliament with an ordermaking power and bring in those penalties.

Q328 Mr Ward: I am flitting from fairness to suppliers to fairness to retailers. What about the issue of rights of appeal on naming and shaming?

Mr Davey: They have judicial review powers, which I will come to in a second, but they want to think carefully about that, because this is a quasijudicial process. The Adjudicator is independent. They will go through a proper process, set out in the legislation, and indeed in the guidance that they themselves will issue, to ensure that they are treating each complaint fairly and they are not rushing to judgment in any way. But if the retailer still felt, despite there being an independent Adjudicator and despite them having to follow due process, that the publication requirements were unfair then they could go to judicial review; they could try to make out the process that the Adjudicator followed was not a fair process. I think that is the appeal that they need in this regard. So they have that through the judicial review.

Q329 Mr Ward: You mentioned the fact that you believe the recommendations and the naming and shaming are sufficient. Was the cost of appeals one of the considerations when looking at fines as a sanction?

Mr Davey: Not really, no. It was just whether or not we were taking a reasonable, proportionate approach. Let me make it absolutely clear: if, as a result of the measures we put forward in the way we are setting up the Adjudicator, the Adjudicator feels that the sanctions prove insufficient, no doubt the Adjudicator will come back to Government and say, "This is not working. I have got all these recommendation powers, these name and shame powers, but it is evident that the supermarkets do not think this is sufficient. Even though they are being reported in the Sunday papers and on different TV and radio stations for continually breaching the code, they are still not getting their act together. I need financial penalties." The Government would then want to think about that, and no doubt consult upon it, but would have the powers to bring in by order financial penalties. That seems an appropriate way of going about things.

Q330 Simon Kirby: Would those financial penalties not just increase prices for consumers though?

Mr Davey: That no doubt would be part of the analysis that the Government would make at the time it was deciding whether or not to introduce them. I am sure we would want to ensure that those penalties were constructed such that they did not have that deleterious effect. One would presume that one, maybe two, of the retailers would be hit, and consumers would still get competitive prices from the others. This is not an industrywide penalty were we to bring in the power.

Q331 Mr Ward: Would your powers to bring in penalties if required, if things were not working as we wished, also allow an escalation of penalties if there was continued breaching of the code? If that is the case, could that happen without a fresh investigation each time?

Mr Davey: The ordermaking power to bring in financial penalties is set out in schedule 3 of the Bill. If you read that, it says that the order that would bring in financial penalties must specify a maximum penalty, and that when the Secretary of State was to decide to bring that out, they would have to consult on the guidance around the penalties and so on. We have not prejudged how that would operate; we have created an ordermaking power that I think is quite a flexible one, but it does require the Secretary of State, before bringing forward those provisions to Parliament, to consult a number of people: the Adjudicator, the Competition Commission, the Office of Fair Trading, the large retailers and one or two other people set out in schedule 3. I think that process will ensure that the financial penalty regime, should one be needed, would be both fair and appropriate.

Q332 Mr Ward: There is no requirement to amend the Bill, as far as you are concerned, in terms of looking to ratchet up the repercussions of failure to abide by the code?

Mr Davey: Obviously the Committee will decide for itself, but I think schedule 3 is flexible enough. But we have not tried in schedule 3 to prejudge everything about the financial penalty regime; we have allowed that to be considered based on the evidence. Should it get to this point, there will have been an awful lot more experience and evidence about how the Adjudicator regime, with the GSCOP, is working and the sorts of problems. There would no doubt be evidence that the financial penalty regime was required, because all the other sanctions had not worked, and there is the time to provide the evidence base to make sure that order was right. Our concern at this stage was to make sure that the ordermaking power was flexible enough and that the Secretary of State would have to consult before coming forward with it, rather than setting out at this stage what the order would look like.

Q333 Chair: Is there not a problem that if there is prima facie case that recommendations are not being acted on and that breach of the code is ongoing, there has to be a further investigation to satisfy that before any escalation of the penalties can be introduced?

Mr Davey: To make sure I have got this right-no doubt I will get advice in a second-you are saying that there has been an investigation; the Adjudicator has decided that there has been a breach of the code; they have decided just to make some recommendations without naming the retailer; and the retailer then continues to breach?

Chair: Yes.

Mr Davey: Let’s remember that the Bill does require the adjudicator to see whether the retailer is complying with those recommendations. This is under clause 15. As I understand it, if there is non-compliance, the Adjudicator is empowered to act further. Let me just check. It has to report non-compliance. So that report of non-compliance is not that dissimilar from naming and shaming, because it will be in the public domain that, despite making this recommendation, this retailer has failed to comply. Despite being told that it is breaching, it has failed to comply, therefore it would operate pretty similarly, I think, to a name and shame.

Q334 Chair: Yes, but isn’t that the problem? In effect the Adjudicator should be able to use his or her reserve power to implement fines, having reasonable basis for saying that there is non-compliance, without having to do a further investigation. My understanding-if I am wrong, no doubt you will tell me-is that, having made a report, in order to introduce fines there would have to be a further investigation. Is that correct?

Mr Davey: Before fines can be brought in, the Secretary of State would have to make an order. In schedule 3, the Secretary of State would have to consult a number of people and indeed come to Parliament before that regime was brought in. Under the Bill, the Adjudicator’s maximum power is name and shame, but I think it is right that Government would have to decide whether or not the regime of sanctions was to be changed. It is just that we have enabled ourselves to do that in a flexible way, without requiring yet more primary legislation.

Q335 Chair: It would seem that the sanction for a retailer consistently failing to implement the recommendations and ignoring the socalled naming and shaming provisions is fairly weak.

Mr Davey: If a retailer does that, despite the press saying that retailer X keeps breaching the code, keeps ignoring the recommendations of the Groceries Code Adjudicator and is not taking any notice of the naming and shaming-if that is the hypothetical situation you are describing-

Chair: Yes.

Mr Davey: -it is certainly open to the Groceries Code Adjudicator to go to the Secretary of State, bring that to his or her attention and say, "Look, the powers that you gave me, Secretary of State, are not working. Will you please make an order?" But I think making an order bringing in a new financial penalty regime is a matter for Government, not for the Adjudicator.

Q336 Chair: That clarifies that. Can I turn to a slightly different issue, with a couple of questions on guidance? The Bill envisages the Adjudicator determining guidance. In order to speed up the process, do you plan to appoint an Adjudicatordesignate before the Bill receives Royal Assent?

Mr Davey: We are certainly considering that. As I made clear in answers to Mr Kirby earlier, we do not want to delay the implementation; we want to get this thing in. That is Government policy and our desire. While the Bill requires the guidance to have been consulted on and published within a six-month period of Royal Assent, if we can speed that up, we will certainly look at that. What would that require? As I have been advised, under the Second Reading convention, we could, with the agreement of the Treasury, spend some public money to recruit an Adjudicatordesignate, and we could ask that Adjudicatordesignate to begin developing the guidance. Then when we have Royal Assent, the Adjudicatordesignate would become the Adjudicator and would therefore, having done some previous work on the guidance, be able to publish pretty quickly and then go through what I think would have to be-though I stand to be corrected-a three-month process of consultation, and then publish the final guidance. I can see a fast-track process if we are able to do that, seeing the publication of the guidance probably about three months after the Royal Assent. That is not much of a delay, to be brutally honest.

The only way we could get it down so that guidance was there on the day of Royal Assent and reduce that three months to nothing would be if it was guidance that the Government produced. I would think, given it is the Adjudicator who has to operate the guidance, that that would not be advisable. We want the Adjudicator to be and to be seen to be independent of Government, and therefore the guidance should be from the Adjudicator. So I think the people who have pressed on this point are really trying to seek implementation of the regime between three and six months earlier. But the cost of that little bit of extra time would, I think, be an undermining of the independence of the Adjudicator. I think that would be quite a heavy cost. Again, we have had to balance that and our judgment is that it is better to allow the Adjudicator to produce the independent guidance and to be seen to be and to be independent, rather than rushing this through for the sake of three months.

Q337 Chair: Coming on to supervision, we have had some witnesses speak in favour of annual reviews of the Adjudicator. Would you be prepared to amend the Bill to do this?

Mr Davey: I would be very reluctant to. We put in threeyearly reviews. We think that is good practice. The Government, in how it is regulating, wants to make sure that the regulations are reviewed so that they are not onerous, so we can learn from the practice and implementation of those regulations. I think to do it every year would create instability and uncertainty in the system. Three years is sufficient; doing it every year would be pretty bureaucratic and costly. It is unlikely we would go from three to one; there might be pressure to go longer, but I think threeyearly reviews is the right balance.

Q338 Dan Jarvis: Following the question about the annual review, can I ask you whether the Adjudicator’s contract should include a break clause to allow for possible abolition at the three-year point or at subsequent reviews?

Mr Davey: I have to confess, Mr Jarvis, I have not yet thought about the contract in terms of employment of the Adjudicator in that detail. We think that having an initial five-year term gives a degree of independence and that is what we should be aiming for in the overall construct of that statutory office holder. I do not assume that the first three-yearly review is going to get rid of the Adjudicator; that is not my expectation, so the idea of the five years to keep independence is sensible. Of course, if the review suggested that the GCA should be abolished, the Adjudicator would not stay in existence.

Q339 Dan Jarvis: Can I ask you whether the Adjudicator’s salary has been determined? If it has, how much will it be?

Mr Davey: The answer to that is no, it has not been determined.

Q340 Chair: Coming to the funding issues, we have had a lot of evidence from retailers, not surprisingly, that funding could be considerably more expensive than originally estimated. How confident are you that the estimates for the set-up and operational costs of the Adjudicator are about right?

Mr Davey: The advice I have seems very good, and therefore I am confident of those figures. If one thinks about what would be involved, set-up costs of around £200,000 seem to me pretty reasonable. This is one office holder; he is not going to have a huge amount of staff; he is not going to have a massive organisation. We are trying to keep this very light touch. The annual running cost of £800,000 that we have estimated assumes that there might be three or four investigations a year; there are unlikely to be any more than that. We estimated £100,000 a shot and then the running costs the Adjudicator would have anyway, given that they will be arbitrating and having other activities. So it seems to me a pretty reasonable estimate.

Of course, when they set the levy, the Secretary of State has to agree to it. If the Secretary of State thinks that the Adjudicator wants to take too much and go way beyond the £800,000, the Secretary of State no doubt will ask questions about why the Adjudicator wants such a large budget and such a large levy. In publishing their demands for the levy and their finances, the Adjudicator will have to explain why they have come to that figure. Of course, there is another protection, isn’t there? If there is a surplus at the end of the year, it can be returned to the retailers. This is not an attempt to produce a system that sees costs spiral out of control; I think we have some pretty strong checks in there to prevent that.

Q341 Chair: You have partly answered my next question, which was if the Adjudicator found that there was widespread abuse of the code and needed more resources to carry out the range of investigations or adjudications necessary, would you cap the budget?

Mr Davey: The Adjudicator would make their case for an increased levy to the Secretary of State. I am sure if the Secretary of State was hearing evidence from the Adjudicator that there were serious breaches of the code that were having an impact on suppliers and thereby leading to large consumer detriment, the Secretary of State would want to listen to those and take them very seriously. It is worth noting that we have also made provision under clause 21 for payments by the Secretary of State by grant, but the overall position is that this should be funded by the industry, and I think that is right.

Q342 Chair: It is implied in your answer that there would be a cap in so far as presumably the Secretary of State would have to look at the quality and robustness of the case being presented by the Adjudicator and measure that against the resources that might be made available.

Mr Davey: As a Minister, in my dealings with Her Majesty’s Treasury, who all this has to be referred to, they would not want to see waste, whether it is being funded by the industry or by the taxpayer. While I would not want to describe it as a cap, there are powers, as I described, for the Secretary of State-the Adjudicator has to bring the levy proposals to the Secretary of State to consider-and I think that strikes the balance in terms of giving the retailers the reassurance that costs will not spiral out of control and ensures there is accountability. But I cannot really imagine that the Secretary of State, presented with evidence that the Adjudicator needed another £200,000 a year to operate and that that should come from the 10 largest retailers in the country, is going to decline it if the evidence is sufficient.

Q343 Chair: To finish off, let’s just imagine that GSCOP has been operational and the Adjudicator is in place. Such is the power of the Adjudicator and the co-operation of both suppliers and retailers that there are no real investigations to take place. What would you do with the Adjudicator then?

Mr Davey: Well if we have produced nirvana, obviously we would want to review things. The powers for a review are there. Let’s face it, we have not rushed this legislation; it goes back to the Competition Commission’s inquiry of 2006 to 2008. We are now trying to speed things up, but this has been a long time in the gestation. I think a Minister is going to think quite carefully before dismantling a system that has taken some time to create.

Q344 Chair: I think the politics of it would be very difficult indeed.

Mr Davey: I would agree with you, Chair.

Q345 Chair: Do you think, in the case of a high level of compliance and a diminishing number of potential cases, it might be that you pare down the office, given the fact that arguably the existence of the Adjudicator to referee the GSCOP is in itself quite important?

Mr Davey: I think you make a really valid point. The deterrent aspect is very powerful. In competition policy across the board, deterrence is very significant. If you talk to the OFT or the Competition Commission, their work, whether it is through taking cases, be they on markets or mergers or antitrust, creates a basis that sends clear signals to the market and to companies that if they behave in an anti-competitive way, action will be taken and the competition authorities are not afraid of acting. On a smaller scale, in relation to the groceries supply industry, that is exactly what the Adjudicator does.

If that deterrent effect proves so effective that the complaints completely dry up-there are no complaints for the Adjudicator to arbitrate on and there are no complaints anonymously being made to the Adjudicator-no doubt the Adjudicator will be twiddling his or her thumbs and saying to the Secretary of State, "There doesn’t seem to be a problem here." The Secretary of State will then have to determine why there is no problem. Is it because the deterrent effect is so powerful that it is keeping everything under lock and key and if that deterrent effect was removed the complaints would return, or not? I would not want to prejudge what a future Secretary of State may decide on that. There would be the political dimension that you referred to, but they would also have to take that decision based on the evidence and, no doubt, debate and consultation about whether or not the deterrent effect had to be there long term or whether people had cleaned up their acts and would continue to comply with GSCOP without an Adjudicator. But I have to say that I think we are a long way from that nirvana.

Q346 Chair: Yes, I do not see that being a problem that has to be handled. That concludes questions, Minister. Can I thank you for giving your evidence? It has been a fairly rigorous examination of the Bill, and we will be making our recommendations in due course.

Mr Davey: Can I thank the Committee for the work it is doing on this? It is really important. I have always thought that pre-legislative scrutiny is a real improvement in the way Parliament does its work. Given that this Bill is genuinely considered to be crossparty, I think it enables the Select Committees to operate at their very best. I am really looking forward to hearing your report. I am sure it will be a very positive one.

Chair: Thank you.

Prepared 8th July 2011