HC 1224 Draft Groceries Code Adjudicator Bill

Written evidence submitted by Sainsbury’s

Introduction

1. Sainsbury’s has consistently supported the strengthened and widened Groceries Supply Code of Practice (the Code) and we have made significant investments to implement it throughout our business. We support effective Code enforcement, but we do not believe that an additional enforcement body is necessary, as the strengthened provisions in the Code and the existing enforcement regime are already self sufficient. These provisions, which were not in place in connection with the old Code, provide suppliers with an effective route to resolve complaints. Since the new Code came into force on 4 February 2010, we have received fewer than 10 supplier complaints out of over 3,000 suppliers, and all of them have been settled internally to the satisfaction of the suppliers without the need for recourse to the "Dispute" process under the Code.

2. Sainsbury’s therefore believes that the right approach would be to refrain from establishing an Adjudicator until the need for further enforcement mechanisms can be properly assessed using the reporting methods already in place under the Code. However, we recognise the Government’s commitment to introducing an Adjudicator, so the comments in the remainder of this submission are about the operation of the proposed new body, not whether a new body is required.

Summary of our views about the operation of the Adjudicator

3. We agree the Adjudicator should sit within the OFT (and then the new Competition and Markets Authority) and hope that this will enable the Adjudicator to learn best practice from the way that the OFT operates. The OFT previously dealt with the old Code and has considerable experience and expertise in investigations. Moreover, the OFT is consumer focused and the Code is ultimately about serving the interests of consumers.

4. We agree that the Adjudicator’s sole purpose should be to oversee and enforce the Code and that only those involved in the supply chain should be able to make representations to the Adjudicator. The Adjudicator must not get involved in any other aspect of the commercial relationship between retailers and their suppliers, eg pricing or costs which are outside the remit of the Code and were outside the scope of the original Competition Commission investigation. The limited resources of the Adjudicator should be focused on complaints from smaller suppliers, rather than larger suppliers many of whom are multinational businesses that are larger than the retailers they supply.

5. The mechanisms in the Code must be used to the fullest extent so complainants should exhaust all routes under the Code before referral to the Adjudicator. The dispute resolution process, whereby the supplier notifies the retailer of a dispute, should not be capable of circumvention by a supplier going direct to the Adjudicator as this may undermine the Code and the prospects of disputes being resolved without the need for full arbitration. The only basis on which the Adjudicator would not redirect complaints back to the Code dispute resolution process should be where the supplier can provide compelling evidence that it has been treated adversely by the retailer in relation to the handling of an alleged breach of the Code.

6. Our main concerns about the draft Bill can be summarised as follows:

6.1 the impracticality, unfairness and potential burden of anonymous complaints;

6.2 the risk that indirect supplier complaints may lead to burdensome investigations;

6.3 the need for retailers to be involved in developing guidance on how the Adjudicator will operate and for this to be prepared before the Adjudicator is appointed;

6.4 the potential cost burden of wide-ranging investigations;

6.5 the need to ensure enforcement powers are proportionate, and therefore that financial penalties are unnecessary;

6.6 the Adjudicator’s lack of accountability.

Anonymous complaints

7. We foresee practical problems and significant burdens and costs of allowing anonymous complaints and there is a risk of burdening retailers with wide-ranging and costly investigations that cast an otherwise unnecessarily wide net in order to hide the identity of a complainant. There is also the risk that anonymity will encourage vexatious complaints. In both cases, there is the risk of significant burdens on the Adjudicator as well as retailers which would be inconsistent with the Government’s Better Regulation policy. In any case, it will be difficult for a retailer to change its behaviour to address specific problems without knowing the details of a complaint. Moreover penalties could not be imposed on the grounds of an anonymous complaint, and complainants could not seek redress in the form of civil remedies as they can do with a complaint that follows due process under the Code. Anonymous complainants will also not be able to demonstrate that all processes under the Code have been followed first, thus undermining a principle of the Adjudicator process. Raising complaints directly with retailers using the mechanisms and protections set out in the Code will result in much more effective outcomes for suppliers than pursuing an anonymous complaint with an Adjudicator.

8. If anonymous complaints are to be permitted then appropriate checks and balances need to be put in place and set out in the proposed guidance about how the Adjudicator will operate. For example, within the constraints imposed by anonymity the retailer(s) concerned must be involved well before any decision to launch an investigation. The Adjudicator must be reactive, guided by the specific complaints it receives about a direct breach of the Code, and not proactive in seeking information or investigating matters that are outside the scope of a specific complaint. In the light of our experience of suppliers who have made use of the Code, we would recommend that only those suppliers with an annual UK turnover of less than £1 billion should be able to make anonymous complaints.

Indirect suppliers

9. Beyond direct suppliers, the Adjudicator should consider relevant complaints made by indirect suppliers (ie those who do not contract directly with retailers but who are part of the supply chain to the retailer in question) for the purposes of information gathering only. This is because the nature of the supply chain is such that it will be difficult to establish a causal relationship between a complainant and one retailer. The original complaint must be accompanied by evidence relating to a specific breach of the Code to help avoid spurious investigations.

10. We agree with the Government that it is not necessary for representative bodies or other special interest groups to be able to make complaints. It is also important that the Adjudicator resists initiating investigations in response to concerted pressure from such bodies or public misconceptions about supply chain issues.

Guidance from the Adjudicator

11. We agree that guidance needs to be published about the way the Adjudicator will conduct investigations as well as criteria on the application of relevant enforcement provisions, ensuring that the materiality thresholds are appropriate, proportionate and pragmatic, and that the primary purpose of the Adjudicator is the protection of consumers’ interests. Retailers must be consulted about all guidance. It is important that this is published before the Adjudicator is appointed so that it is clear from the outset how the new body will operate. For example, we would want to see any guidance set a high bar before investigations are initiated, such as evidence of consistent breaches of the Code or a settled pattern of behaviour contrary to the Code, and should be clear about what will not be investigated as well as what will be.

12. As part of the guidance, whilst ensuring the parties’ commercial interests are protected, the Adjudicator should commit to publishing any advice provided to a supplier since this will help retailers’ compliance. Advice to suppliers should not be allowed to distort a retailer’s efforts to resolve a complaint going through its internal dispute resolution process under the Code.

The costs of investigations

13. We agree that a retailer found to have clearly breached the Code should be required to pay all or some of the costs of the investigation. We also agree that vexatious or unwarranted complainants should be required to pay all or some of the costs of the investigation, though have some concerns about how practicable this will be. However, we remain concerned that, without sufficient checks and balances, costly, time-consuming and unnecessary investigations will create burdens on both the Adjudicator and retailers.

14. Given the anticipated considerable burden of gathering relevant data to respond to an Adjudicator’s data request, it is critical all investigations have deadlines for their start and finish. We suggest that investigations should be brought before the Adjudicator within 3 months of an alleged breach, and concluded within 6 months of the alleged breach. Both deadlines could be extended subject to agreement of both the retailer and Adjudicator.

15. Without guidance on how the Adjudicator will operate we have no way of knowing how accurate the figures are in the Regulatory Impact Assessment (RIA) prepared by Government for the Adjudicator set up and running costs. In any case Government should seek to set a limit on the budget for the Adjudicator and retailers should (a) receive an annual report about how their funds have been used, and (b) be consulted each year about the size of the retailer levy for the coming year.

16. We believe that the suggested £120k cost a year per retailer in the Regulatory Impact Assessment is likely to be an underestimate given our experience of investigations by the OFT. Ensuring appropriate thresholds about when and how the Adjudicator will operate will be crucial in determining final costs.

Enforcement powers

17. We believe that the levying of financial penalties is unnecessary. The Code already contains a number of deterrents that will encourage compliance and we consider that the levying of penalties would be disproportionate and would risk undermining the dispute resolution process already available whereby potential breaches of the Code can be dealt with effectively, to the direct benefit of the affected suppliers, via an arbitration award. Financial penalties may also be more liable to appeal than an arbitration award under the Code (which may only be appealed in limited circumstances) or recommendation, resulting in increased costs and delays for all parties. Giving the Adjudicator the power to require retailers to publish information about a breach of the Code is a significant deterrent because of the risk of considerable reputational damage to the retailer concerned.

Accountability of the Adjudicator

18. We note that the Secretary of State intends that the Adjudicator should be completely independent of Government. We can understand why independence is seen as important but have concerns that there will be few checks and balances on the Adjudicator, apart from the 3-yearly review to be conducted by the Secretary of State. It is not clear to whom the Adjudicator will be accountable, or what action may be possible if there are concerns about the operations of the Adjudicator outside of the 3-yearly reviews. In addition, there is currently no means for the retailers who are funding the new body to comment on its operation outside these reviews. We believe that the draft Bill should be amended to address these gaps in accountability.

14 June 2011