HC 1224 Draft Groceries Code Adjudicator Bill

Written evidence submitted by ActionAid

Summary

ActionAid strongly supports the introduction of a Groceries Code Adjudicator. We encourage the Select Committee to make the case for:

· Introducing the Bill and passing the legislation in the current session of Parliament.

· Strengthening protection for suppliers against retaliatory action by retailers, and improving the body’s effectiveness, by allowing it to carry out proactive surveys and spot checks, and by allowing third parties to submit complaints.

· Including a system of financial penalties from the point of establishment.

· Retaining the provision for indirect suppliers to make complaints.

· Ensuring the body is adequately funded and appropriately staffed.

· Extending the scope of the body to encompass the whole groceries supply chain within the UK.

Introduction

1. ActionAid welcomes this opportunity to submit to the Business, Innovation and Skills Select Committee inquiry into the draft Groceries Code Adjudicator Bill.

2. ActionAid is an international development charity that combats poverty worldwide. We work in over 40 countries to help the most vulnerable people gain their rights to food, shelter, work, education, healthcare and a voice in the decisions that affect their lives.

3. ActionAid has contributed to the policy process that led to the draft Bill since the Competition Commission began its groceries market inquiry in 2006. Grocery retailers import an estimated £3 billion worth of goods from developing countries each year. This trade brings vital jobs and investment to poor countries.

4. However, irresponsible purchasing practices also result in an unfair transfer of wealth from producers in developing countries to retailers in the UK, and are a major barrier to improving the poverty wages and poor conditions endured by employees of supplier businesses in developing countries. [1]

5. As such, we warmly welcome the Government’s decision to introduce a Groceries Code Adjudicator (GCA) to monitor and enforce the Groceries Supply Code of Practice (GSCOP). It is particularly encouraging that the draft Bill provides for suppliers to submit complaints anonymously, and gives indirect suppliers standing to make complaints.

6. The GCA has overwhelming public support. Over 90% of respondents to a GfK NOP poll from January 2011 believe retailers treat farmers and suppliers unacceptably, and 84% of respondents want the Government to introduce an independent regulator to monitor retailers as soon as possible. [2]

7. The GCA also enjoys cross-party support, has been debated in Parliament, and has been subject to several detailed inquiry and consultation processes. The GSCOP has been in existence for over one year, however it remains unenforced. There is a pressing need to move forward as quickly as possible, and we urge policymakers to introduce the Bill and complete the legislation within the current Parliamentary session.

8. If the GCA is to monitor and enforce the GSCOP effectively, we believe the draft Bill needs improving in certain areas. The following sections provide suggestions for making these improvements.

Investigations and anonymity

9. ActionAid submits that the GCA should be able to use credible evidence, irrespective of its source, when deciding whether to begin an investigation.

10. Currently, the Bill restricts the GCA to considering complaints made by only by suppliers when deciding whether to investigate alleged breaches of the GSCOP. Retailers will therefore know that a complaint could only have come from a supplier. This raises serious concerns, as it greatly increases the risk of retailers taking retaliatory action against suppliers they suspect of making a complaint.

11. To help protect suppliers’ identities, the Government proposes that the GCA will investigate patterns of behaviour among retailers on the basis of complaints submitted by more than one supplier. This is an important feature of the GCA and it should be retained.

12. However, knowing that complaints must have originated from suppliers, a retailer could still take punitive action against some or all of the suppliers it had subjected to the particular behaviour investigated by the GCA.

13. This is evident from the fact that retailers with buyer power often unilaterally change (and from the supplier point of view worsen) contract terms across whole supply categories as part of their day-to-day trading operations. [3] This shows that even if a retailer did not suspect a particular supplier of making a complaint, it could take punitive action against a group of suppliers that it had subjected to the behaviour investigated by the GCA.

14. If the GCA is able to initiate an investigation on the basis of credible evidence gathered from a wider set of sources – for example, through its own surveys or spot checks, or through submissions from third parties – retailers would not know who was responsible for gathering or providing the information. This would:

· Encourage suppliers to provide information to the GCA, thereby improving its effectiveness.

· Reduce the incentive for retailers to take action to indentify suppliers.

· Reduce the grounds for retailers to take punitive action against suppliers they suspect are the subject of an investigation.

· Reduce the grounds for punitive action against suppliers that retailers know for certain are the subject of an investigation.

15. As the Bill proposes, the GCA should also be able to consider information in the public domain when deciding whether to begin an investigation. However, media stories that relate specifically to purchasing practices that may be in breach of the GSCOP are infrequent, and we believe the onus for carrying out key functions of a public body should not fall on journalists or other third parties.

16. Furthermore, in the vast majority of instances, the information published would need to conceal suppliers’ identities, and much of the useful case detail would need to be omitted. The concern therefore is that this cannot be relied on as mechanism for triggering an investigation.

17. It is vitally important that the Government strengthens the anonymity protections for suppliers. If only one or two are subject to retaliatory action, confidence in the GCA would collapse, potentially to the point of it becoming almost wholly ineffective.

18. Allowing the GCA to initiate investigations on the basis of credible intelligence gathered, including by the GCA itself or submitted by third parties, would strengthen protection for suppliers significantly, improve the quality and quantity of information flowing to the GCA and enhance its effectiveness.

19. We therefore encourage BIS to act on the Competition Commission’s recommendation that the GCA develops a threshold that must be met before an investigation is commenced, similar to that in Section 25 of the Competition Act 1998, which allows the Office of Fair Trading to conduct an investigation if there are reasonable grounds for suspecting an infringement. [4]

20. We suggest Section 5 of the Draft Ombudsman Undertakings, arrived at by the Competition Commission after extensive consultation and deliberation, could also be used as a credible basis to strengthen protection for suppliers and improve the GCA’s effectiveness:

5. 2 (c) [the Ombudsman may consider] complaints from any other person, to the extent that it relates to a breach of the Code and/or the Undertakings

21. Concerns have been raised that by allowing the GCA to consider information from a wider set of sources, it may become overwhelmed by a large volume of complaints. If this happened, we expect they would be prioritised according to their importance and resources available, as is standard practice with any number of existing regulatory schemes.

22. Of greater concern is that by restricting the sources of information that could trigger an investigation, suppliers will be discouraged from coming forward and the GCA would be rendered far less effective.

Financial penalties

23. ActionAid submits that the GCA should be given the power to levy financial penalties on retailers from the point of its establishment.

24. We are concerned that non-binding recommendations to retailers found to be in breach of the GSCOP, and publicly naming companies in more serious cases, will not act as a sufficient deterrent. As a consequence, more suppliers will be pushed into financial distress through breaches of the GSCOP than would be the case if a penalties system was in place from the outset. If the GCA is to be effective, it is vital that retailers recognise GSCOP breaches are considered a serious matter and that the consequences will be significant.

25. It has been suggested that introducing financial penalties from the GCA’s inception would be a disproportionate measure. However, penalties are a vital part of enforcement in virtually every other industry regulated through public statute, and after a major inquiry and extensive deliberation, the Competition Commission recommended that the Ombudsman (precursor to the GCA) should be able to levy "significant financial penalties on retailers for non-compliance." [5]

26. The GCA would seek to use penalties only in severe cases that are supported by convincing evidence, and where suppliers are named. While such cases would be few and far between – perhaps one per year – they would send a clear message to retailers and act as a strong deterrent. Furthermore, retailers that comply with the GSCOP would not be affected in any way. This seems hardly disproportionate.

27. The Competition Commission first concluded that abuses of buyer power are endemic in the groceries supply chain over a decade ago. Lobbying by retailers helped weaken the resulting code of practice, which proved ineffective. Retailers are now strongly opposed to penalties, and it is reasonable to consider that one of the main reasons for this is because the absence of penalties will weaken the GCA’s effectiveness. Suppliers have waited too long for effective enforcement, and we believe they should not have to wait any longer.

28. Further reasons for empowering the GCA to levy financial penalties from its inception include:

Negative publicity alone will not be sufficient

29. The GCA should be able to publish the names of retailers found to be in breach of the GSCOP, however this will not be a sufficient deterrent in and of itself. Negative and often shocking reports about conditions for producers and workers in retail supply chains have been given regular coverage by national media outlets for well over a decade. However, the Competition Commission’s findings show clearly that retailers have continued to engage in harmful supply chain practices despite this negative coverage.

30. The effectiveness of negative publicity rests to a large extent on the assumption that consumers will boycott a retailer in protest at unfair treatment of suppliers. However, consumers may not act as the GCA would wish them to. Market research consistently shows that considerations such as price, quality and convenience drive consumer choice of retailer to a far more significant extent than supplier relations, or even ethical performance more broadly. [6] Reliance on negative publicity as a deterrent also assumes consumers will be aware that a specific retailer had been ‘named and shamed’. However, it is not certain that the GCA’s reports will always be covered by major news outlets, or if they were covered, how much prominence will be given to them. Conversely, a financial penalty given to a retailer would sharply increase media coverage and public awareness of a retailer’s behaviour.

Financial penalties will improve compliance with the GSCOP

31. A study by the Office of Fair Trading found that most companies and lawyers believe financial penalties are important, or very important, to prevent infringements of competition law. [7] BIS has stated this study supports the case that retailers’ compliance with the GSCOP will be lower in the absence of financial penalties. [8]

32. Improved compliance would have the further advantage of reducing the costs associated with the GCA’s complaint and investigation functions.

The risks for consumers and suppliers are minimal

33. Concerns have been raised that retailers would pass on the cost of a penalty to consumers or suppliers. As such cases such would be few and far between, this is unlikely to have significant repercussions for consumers and suppliers.

34. Retailers compete intensely for customers, which should help deter them from passing on the cost of a penalty. Even if a retailer did so, the impact on individual consumers would be negligible as the cost would be spread across sales of between £1 billion and £60 billion, depending on which retailer received the penalty.

35. Furthermore, supplier trade associations such as the British Brands Group and National Farmers Union recognise that if any additional costs from the GCA are passed on by retailers, they are more likely to be transmitted to suppliers than to consumers. Despite this risk, these groups support the GCA as the benefits brought to consumers and suppliers through improved compliance with the GSCOP will outweigh these potential costs.

Risks relating to appeals can be kept to a minimum

36. Cases that result in a financial penalty would be few and far between. Furthermore, the GCA would only impose a penalty when there is very strong and convincing evidence that a retailer had breached the GSCOP. The GSCOP requires retailers to write down contract terms with their suppliers, which will enhance the GCA’s ability to gather firm evidence and present a robust case.  For these reasons, the risk that financial penalties will result in burdensome appeal cases can be kept to a minimum.

Indirect suppliers

37. ActionAid is extremely pleased that the Bill makes indirect suppliers eligible to submit complaints to the GCA. Almost all suppliers in developing countries trade with UK retailers through intermediaries. If the GCA’s remit excludes indirect suppliers, the Government would lose an important opportunity to strengthen its commitment to ethical trade, and the CGA would not be able to monitor or enforce the GSCOP effectively. As such, the Select Committee’s intention to re-visit this issue raises concern.

38. The Competition Commission reported that "unexpected costs and excessive risks" are passed on from retailers’ direct suppliers to indirect suppliers further up the chain, including primary producers. To remedy this, the Commission recommended that indirect suppliers should be able to submit complaints to the Ombudsman.

39. This is measure is crucial to the GCA’s success, as when retailers breach the GSCOP, direct suppliers are likely to have a much greater incentive to pass on unexpected costs and excessive risks to indirect suppliers, rather than to notify the GCA. A look at the options available to direct suppliers shows why.

40. A breach of the GSCOP would result in financial losses for direct suppliers, who broadly speaking would have four options available under the GCA scheme:

a) file a formal dispute case and attempt to win compensation;

b) submit a complaint anonymously;

c) absorb the losses incurred by the breach of GSCOP; and/or

d) recoup losses by passing on the costs and risks to indirect suppliers.

41. These options are looked at in turn.

a) The Government recognises that in a majority of instances, the ‘climate of fear’ amongst suppliers will prevent them from filing formal dispute cases. As such, disputes alone will not remedy the Adverse Effect on Competition.

b) The ability to submit complaints anonymously will encourage direct suppliers to provide information to the GCA. However, anonymous complaints would not result in suppliers receiving compensation for financial losses incurred through an infringement of the GSCOP. Therefore direct suppliers would still have an incentive to pass on costs and risks to indirect suppliers.

c) Direct suppliers could absorb losses incurred through a breach of the GSCOP. However, this would damage their business operation, and the Adverse Effect on Competition would remain in place.

d) The greatest incentive for direct suppliers is therefore likely to be to recoup any losses incurred by passing on excessive costs and risks to indirect suppliers.

42. Furthermore, direct suppliers tend to hold market power over indirect suppliers such as primary producers, meaning the incentive to pass on excessive costs and risks will be even greater.

43. This indicates that in cases where the GSCOP had been breached, excessive costs and risks may be transmitted to indirect suppliers in a majority of instances and a large number of breaches could go undetected. As such, if indirect suppliers are not permitted to submit complaints, the GCA will be deprived of the information it needs to enforce the GSCOP effectively.

Resourcing

Funding

44. ActionAid is concerned that the GCA’s proposed budget of £800,000 per year will severely limit the number of investigations it will be able to carry out, and that in turn this will prevent it from remedying the Adverse Effect on Competition effectively.

45. The Competition Commission recommended that the total annual costs of this remedy should be in the region of £3.9 to £5.4 million (comprising £3 million retailer costs and £0.9–£2.4 million costs of the Office of Fair Trading). [9]

46. £800,000 is a very small sum compared to the size of the industry that the GCA is tasked with regulating (in the order of £130 billion per year), and when compared to the ten largest grocery retailers’ operating profits, which together exceed £5 billion per year. For illustration, the following table draws a comparison with the Advertising Standards Authority.

	Groceries Code Adjudicator [1]	Advertising Standards Authority [1]
Industry turnover	£128.18bn	£3.94bn
Core running cost	£0.8m	£3.45m
Levy as percentage of industry turnover	0.0006%	0.1-0.2%

Staff

47. The choice of person appointed to the role of GCA will be critical to its success. The appointee should be someone who has the respect of suppliers as well as retailers if the body is to be established and run successfully. Accordingly, the GCA should be appointed on the basis of an open recruitment process and their suitability for the role, rather than selected from a limited pool of candidates (for instance from within the Office of Fair Trading only).

Extending the scope of the GCA

48. ActionAid submits that the scope of the GSCOP and GCA should be extended to cover the whole of the groceries supply chain within the UK.

49. The Competition Commission made the following informal recommendation in its Final Report: "we suggest that, if it subsequently appears that, despite the operation of the GSCOP (and the Ombudsman) intermediaries continue to transfer excessive risk and unexpected cost further up the supply chain, Defra and BERR should consider the introduction of appropriate measures, including the extension of the GSCOP and the role of the Ombudsman or the introduction of a similar, complementary code and arrangements to cover the intermediaries and primary producers." [10]

50. A recent merger between the large-scale suppliers Northern Foods and 2 Sisters highlights the need for this measure.  According to media reports, the companies’ new parent group is aiming to reduce the number of its approximately 4,500 (second tier) suppliers by around 50%. Firms that continue to supply the group will be asked to offer better deals and ‘loyalty overriders’ where they agree not to pass on price increases even if their costs increase. [11]

51. If UK-based suppliers were covered by the GSCOP, there is a possibility that this company could be in breach of its provisions (e.g. that aim to prevent unexpected cost transfers; to ensure fair dealing; or that relate to de-listing).

52. However without an extension of the code, the GCA has no means of addressing the Adverse Effect on Competition when suppliers transfer unexpected costs and excessive risks to other suppliers, including to primary producers.

Thank you for considering the points raised above. If you would like clarification on these or any other issues relating to the GCA Bill, please do not hesitate to be in contact.

17th June 2011