HC 1224 Draft Groceries Code Adjudicator Bill

Written evidence submitted by the British Retail Consortium (BRC)

1.0 Introduction

1.1 The British Retail Consortium (BRC) is the trade association of the retail sector and is the authoritative voice of the industry to policy makers and to the media. The BRC brings together the whole range of retailers across the UK , from independents to large multiples and department stores, selling a wide selection of products through centre of town, out of town, rural and online stores.

1.2 Our membership includes all the major food retailers, including 9 of the 10 companies covered by the Groceries Supply Code of Practice (GSCOP) and, therefore, potentially the Adjudicator , who between them account for 90% of the UK ’s grocery sales . The company not in BRC membership is Lidl.

1.3 One of our members, Waitrose, held a different view to others on the need for the Adjudicator. Waitrose, however, are in general agreement with other members regarding the specific operation s of the Adjudicator in the Bill, particularly regarding its functions, powers and location. Their position is explained in more detail in their written submission to the Committee.

1.4 Retailers supported the launch of GSCOP and its appropriate enforcement . Whilst our preference would not have been for a separate body to oversee GSCOP our evidence concerns itself more with the process and operation of the proposed body. In particu lar our concern focuses on two main issues.

· The lack of guidance on how the Adjudicator would use complaints from anonymous or indirect suppliers and in particular more details of a threshold which would trigger investigations

· The practical problems in responding to anonymous complaints and those from indirect suppliers

These concerns are raised to ensure the Adjudicator ’s role is clearly defined to oversee the operation of GSCOP and does not add unnecessary burdens to retailers and their supply chains.

2.0 Need for the Groceries Code Adjudicator

2.1 Having invested heavily in training and compliance with GSCOP, our members believe it would have been better to reflect on the success of the Code before introducing an Adjudicator. We are pleased the Committee is examining the operation of GSCOP to date as that will demonstrate the protection this affords to suppliers and the high level of compliance by retailers . That said, we understand the political support for the Bill and have therefore restricted our comments to the practical operation of the Adjudicator in line with the topics raise by the Committee.

2.2 In terms of operation of GSCOP our members will be giving their annual reports to the OFT over the next few months, but our understanding from discussions with them is the Code is working well and has not led to major problems for either retailers or suppliers which could not be resolved using the existing provisions . Companies have worked closely with their suppliers and invested in extensive and ongoing training for their buying staff . They have developed transparent complain t procedures enabling suppliers to directly contact dedicated compliance officers and worked closely with suppliers. This has driven compliance but if issues do arise there is a clear route for suppliers to raise concerns. The compliance officers are dealing with complaints but they have all been resolved internally , without the need for independent arbitration.

3.0 Functions and Powers of the Adjudicator

3.1 We do not object to the functions as suggested, our concern is how the Adjudicator would carry these out and, in particular, how thresholds will be set to determine what information would trigger further investigations.

3.2 The role of guidance to the Adjudicator on how to deal with investigations and enforcement will be crucial. Without robust procedures to determine what processes the Adjudicator follows it will create unnecessary and unwarranted costs. Clause 13 sets out the need for guidance but we believe it should be more explicit. It should set out the thresholds that would need to be met before the Adjudicator undertakes an investigation. The guidance should be the subject of consultation to ensure the criteria is proportionate and available before the Adjudicator begins to operate, not within 6 months as proposed. Only in this way will all parties know that investigations are the exception not a regular exploratory exercise for the Adjudicator. The need for guidance is emphasised by the proposal for the Adjudicator to take evidence from indirect suppliers and anonymous complaints, which we cover in more detail in the sections below.

3.3 On arbitration, our concern is that the Adjudicator is competent, which presumably will be covered by the specification of the role and the point in the explanatory notes regarding conflict of interest. On this second point we would welcome more guidance on how a retailer could appeal against the appointment of the Adjudicator as arbitrator. Advice to suppliers should remind them of the need to exhaust the usual remedies through GSCOP before requesting arbitration .

3.4 Similarly, in principle we agree that the Adjudicator could make recommendations to the OFT regarding changes to GSCOP. However, we would want the OFT to consult interested parties on any changes to ensure a thorough examination of the recommendations.

4.0 Coverage of Indirect Suppliers

4.1 W e have significant concerns that encouraging complaints from indirect suppliers will increase the number of spurious investigations where there has been no breach of the Code by any retailer, thus imposing unnecessary burden and costs on the sector.

4.2 The problem lies in the way major retailers’ supply chains are structured and the influence they may or may not have over indirect suppliers. Retailers’ suppliers are generally large food manufacturers and processors. These companies source from farmers and other small producers who will make up the bulk of indirect suppliers who might contact the Adjudicator. The problem is that as well as supplying to retailers those intermediary manufacturers and processors are also supplying other customers such as the hospitality sector, other manufacturers or the Government’s own procu rement. This makes it difficult to determine the influence of a single retailer , particularly if the complaint is solely linked to the conditions of GSCOP . It is interesting that the BIS policy document on the Adjudicator recognises there is no need for complaints from third party associations as they would not have sufficient kno wledge of contractual matters. W e fail to see why an indirect supplier divorced from the contract would be in any better position to complain.

4.3 A good example of this is the dairy chain. There are thousands of dairy farmers in the UK sending their milk to dairies to be processed. That dairy could have a variety of customers some for milk to be further processed or some for liquid milk. Those customers might be retailers covered by GSCOP or they might be manufacturers, retailers not covered by GSCOP, hospitality sector or the Government’s own procurement. We believe it will be impossible for an individual farmer whose milk is mixed with hundreds of other farmers to identify that a breach by a retailer has occurred.

4.4 W e believe many indirect suppliers will complain to the Adjudicator based not on any evidence of a breach of the code but instead based on general misconceptions of how the food chain operates. Such misconceptions are often exacerbated by the claims of particular interest groups. For example, it has been reported that the Adjudicator will help increase farm prices even though price is not an issue covered by GSCOP. E ach of those enquiries will need to be checked and answered. A concerted campaign by indirect suppliers will put additional pressure on the Adjudicator to investigate a particular supply chain thus increasing the unnecessary costs and burdens on retailers.

4.5 We believe unless clear and early guidance is given on the type of information from indirect suppliers that the Adjudicator will accept and making it clear this has nothing to do with increasing farm prices, there will be a large volume of spurious enquiries.

5.0 Anonymous Reports

5.1 We are extremely concerned about this proposal for two reasons. Firstly, it removes the rights of natural justice and secondly it potentially adds significant regulatory burdens to retailers in meeting the Adjudicator’s investigative requirements whilst preserving anonymity.

5.2 The explanatory notes to the Bill explain that the Government has considered the anonymity issue in relation to human rights legislation but decided to pursue it to protect suppliers. We are concerned that the reliance on anonymous complaints will prejudice the rights of defence of the retailer. By screening the identity of complainants, a retailer will be unable to properly respond to an allegation against it. This may, in turn, undermine the credibility of the process. We query whether such an approach is ultimately compatible with the right to a fair trial under the Human Rights Act. GSCOP already gives protection to all suppliers who raise complaints, not least through clear provisions against unjustified de-listing and we feel this negates the need to ignore human rights legislation.

5.3 Supermarkets are supplied by a relatively small number of suppliers for any final product . In order to preserve the anonymity of the complainant within a small pool of suppliers, additional, disproportionate controls will need to be put in place . In discussions with officials about this they have suggested that the Adjudicator could ask questions or request information about a range of product categories in order to preserve anonymity. Widening the scope of an investigation obviously has resource consequences as the retailer wou ld need to supply information about dealings with a number of suppliers, despite only one making the complaint.

5.4 An example demonstrates the practical complexity of this problem. If a carrot supplier complained to the Adjudicator and he decided to pursue that complaint he would have to find a way to obtain the information from the retailer without disclosing the carrot supplier’s identity. As there are relatively few carrot suppliers it would be clear who that was if they were described as such so the Adjudicator would have to hide his identity amongst other suppliers. So the Adjudicator could ask for details of recent trading practices with all vegetable suppliers to ensure anonymity. That would maintain anonymity but at the same time require the retailer to examine thousands of records of correspondence and meetings with a number of companies to provide material that is only relevant to one complainant, which may not in itself lead to a further investigation.

5.5 The example demonstrates that preserving anonymity will add substantially to the burden on the retailer, rather than targeted enforcement which is a principle of better regulation. It would be better for all parties, in terms of speed and accuracy of response to know who the supplier is. The supplier has the protection of GSCOP and the knowledge that the Adjudicator will investigate the case on their behalf.

6.0 Appropriate Location for the Adjudicator

6 .1 We agree that the ultimate location of the Adjudicator should be within the OFT initially and then the new Competition and Markets Authority . This would be seen as a more accountable structure and one which retailers will be familiar through other issues. It shoul d ensure greater co-ordination as this body would be responsible for market investigations in the supply chain .

6 .2 Currently the proposal is simply to share the premises of the OFT to share some costs. The Adjudicator does not report to anyone within the OFT, it sets its own budget and can carry out its functions independently so in many ways it could share an office anywhere to share costs.

6.3 We believe in terms of better regulation the Adjudicator should be more directly integrated into these organisations. This would enable it to share best practice. For example, the OFT has dealt with the Code and has considerable expertise and experience in investigation. Moreover, the OFT is consumer focused and the Code is ultimately about serving the interests of consumers.

7.0 Enforcement Powers, Penalties, Appeals and Funding

7.1 In principle we accept the proposed enforcement powers, provided that the criteria for using these powers is proportionate and that there are fair processes in place to provide adequate right to appeal and to avoid unnecessary costs or the risk that undue enforcement might occur. To this end it is essential that retailers are involved in developing the criteria for using enforcement powers and guidelines are published before the Adjudicator is established.

7.2 . We feel there should be more rigour to challenge a final investigative report. We note there would be an opportunity to comment on the final draft but there should be a further appeal beyond the Adjudicator if the retailer felt their comments had not been appropriately dealt with. This would be particularly important where the Adjudicator might use its enforcement powers to require a retailer to publish the report, which would have a detrimental e ffect on that retailer’s brand.

7.3 We believe the proposal to levy financial penalties would be a disproportionate power. We need to remember that the basis of the original Competition Commission inquiry which led to GSCOP and the Adjudicator proposal was to ensure a UK food market that functions for the benefit of consumers not to penalise retailers. We believe the Code is sufficient in itself to achieve that and, if more pressure were required, there are the 2 enforcement powers of recommendations and naming and shaming. It is disproportionate to then levy financial penalties on top of those powers which would identify and correct any breaches in the Code, any more would simply be to punish retailers. Also, we should not forget that the supplier has the right to try and obtain further remedy if a breach is confirmed.

7.4 We have already stressed the need for robust guidance for the Adjudicator to ensure that unnecessary costs and burdens are avoided.

7.5 We believe the area where most unnecessary costs could potentially be produced is the investigation of perceived breaches of GSCOP. Our concern is not that investigations will lead to identification of breaches. It is that they will add enormous burden and cost to retailers when there is no problem. We believe it is inevitable the Adjudicator will be pressured into investigations to satisfy the demands of interested groups. This will be particularly an issue where complaints from indirect suppliers are permitted, a point we discuss ed in more detail earlier .

7.6 The point about investigations has an important bearing on the costs of the Adjudicator and the costs and burdens to retailers. If these investigations do not, as we suspect, lead to identifying that a retailer is in breach of GSCOP they will be an unattributable cost that would then be shared across all 10 retailers covered. We support the approach of recouping costs from vexatious complainants but imagine that would be extremely difficult in the case of an indirect supplier.

7.7 In terms of budgetary control we are concerned that there is a lack of scrutiny in the process. It needs to be remembered that the proposal is, with a small exception to help through temporary cashflow problems, for the Adjudicator to be funded solely by 10 retailers. We do not understand, therefore, why there is no preliminary and then annual review with retailers on the budget. Currently t he only possible challenge is the 3-yearly Secretary of State review . Our view in light of the Government’s better regulation agenda is there should be more challenge available to those that will be funding the Adjudicator to prevent unnecessary costs being passed to the retailer and ultimately the consumer.

7.8 Our concerns on costs and funding are reinforced by the assumptions made in the regulatory impact assessment. T he current regulatory impact assessment of £200,000 set up cost and £800,000 running costs are likely to be an underestimate and unrealistic. To avoid poor regulation, we need more surety on the way the Adjudicator will operate and run its affairs combined with a role in scrutinising its budget. Taking into account our concerns that the current regulatory impact assessment appears massively conservative we believe it would be reassuring if the Government were to cap the maximum level of funding from the 10 retailers at £800,000 and commit to meet and additional funding requirements.

15 June 2011