HC 1224 Draft Groceries Code Adjudicator Bill

Written evidence submitted by Traidcraft

EXECUTIVE SUMMARY

1. We welcome the GCA as a body with the potential to reduce the harm caused to farmers and workers in developing countries through transfer of ‘excessive risks and unexpected costs [1] ’ onto supermarket suppliers. This however will require careful attention during the establishment of the GCA and the setting of its powers and parameters.

2. We believe that an effective GCA with sufficient resources and powers should be established in this Parliamentary session. We make recommendations below with regard to:

· how the GCA should be assessed;

· investigations, arbitration and information from third parties;

· enforcement powers, penalties, appeals, and funding; and

· staffing and location.

BACKGROUND

3. Traidcraft is one of the leading Fair Trade brands in the UK, fighting poverty though trade by direct trading, capacity building, policy analysis and campaigning. Traidcraft’s interest in the Groceries Code Adjudicator (GCA) comes from our extensive understanding of the development and commercial challenges which poor producers face in accessing sustainable markets, gained through our work as both a business and an NGO. Traidcraft plc is a company importing fair trade products with a turnover of £15m; in addition £3.8m worth of Traidcraft-licensed products were sold in supermarkets in 2009-2010 enabling us to compare supermarkets’ purchasing practices to those we experience from other customers. The work of Traidcraft Exchange in developing countries gives us first hand experience of the impact that supermarket practices have on workers and farmers in their supply chains.

The need FOR THE GCA

4. The Competition Commission undertook a thorough, two-year investigation of the Groceries market and its recommendations should be implemented in full, particularly since none of the parties involved appealed the findings. The most pertinent finding for the establishment of the GCA is that supermarkets ‘transfer excessive risks and unexpected costs onto their suppliers’. Another key point to consider for the design of the GCA is the climate of fear that the Competition Commission found exists within the supplier community, which prevents them from raising concerns despite experiencing problematic terms of trade from major retailers.

Compliance with the Groceries Code to date

5. There is evidence to suggest that abusive purchasing practices continue. The European Trade Associations CIAA and AIM presented in a public forum the results of an independently run survey of 686 suppliers from across the EU, including the UK. This found that in 2009 suppliers experienced on average 6 types of unfair practices and that this cost them 0.5% of their sales turnover. Nearly two thirds of suppliers took no action due to a fear of commercial sanction on the part of the retailer.

6. The delay in establishing the GCA has negatively impacted on compliance with the Groceries Code. With no monitoring and enforcement of the code since its establishment (contrary to the recommendations of the Competition Commission), the ‘transfer of unexpected risks and unnecessary costs onto suppliers’ by retailers continues unabated.

7. We recommend that, as there is cross-party support for the Adjudicator and everyday more producers are pushed into financial crisis, the draft Bill be enacted in this Parliamentary session.

How the effectiveness of the GCA is measured

8. The effectiveness of the GCA should not be based solely on ‘process indicators’ and assessment against the GSCOP, but also on reduction in harmful practices. How the GCA is assessed will substantially influence the activities which they will undertake, so it is important that the correct issues are assessed. Clause 16 (4) (a) covers process indicators such as how many investigations it launches. If trust is not built up quickly between the GCA and suppliers, there could be no complaints and therefore no investigations; this may lead to the GCA office being scaled back whilst the same problems remain. Clause 16 (4) (b) assesses the enforcement of the GSCOP. However the wording of this criterion does not take into account that many of the requirements of the code have caveats which mean that the GSCOP could be a vague standard to test the effectiveness of the GCA against.

9. We recommend that the GCA should also be assessed against the extent that the transfer of ‘excessive risks and unnecessary costs’ to suppliers by large retailers is reduced and that this criterion is added to Clause 16 (4).

Investigations, arbitration and information from third parties

10. Traidcraft agrees that the Adjudicator should start an investigation when they ‘have reasonable grounds to suspect that a large retailer has breached the GSCOP’.

11. Limiting the sources of information to trigger an investigation is unnecessary and makes the job of the Adjudicator harder. There is a substantial climate of fear amongst the supplier community, which means that they will only come forward if they are confident that they can remain anonymous. If it is known that one source of information needed to trigger an investigation needs to come from a direct or indirect supplier, then this may result in a witch hunt being undertaken by a retailer to find out who tipped the Adjudicator off, and reduce the likelihood of suppliers contacting the GCA. Clause 4 (2) can be deleted, since it is unhelpful to specify sources of information; Clause 4 (1) provides the standard to trigger an investigation.

12. The Bill correctly identifies that the GCA needs to prioritise patterns of poor practice applied by retailers to several of their suppliers. The climate of fear means that it is unlikely individual suppliers will want to come forward, let alone expecting several suppliers to come forward and contact the GCA. Limiting the sources of information which can trigger a complaint is also unwise since third parties may have information which could be usefully provided to the GCA, which is not in nature suitable to be put into the public domain. If Clause 4 (2) is not going to be deleted it is suggested that a third option is provided directing the GCA to also be able to receive submissions from third parties.

13. If the GCA is going to limit the sources of information it can receive to trigger an investigation, it is welcomed that indirect suppliers, i.e. second, third, forth tier suppliers are able to contact the GCA.

14. Once the investigation has started we welcome the ability of the GCA to obtain relevant information from any person. Since the government recognises the usefulness of third parties in being able to provide information during an investigation, it would also be useful to the GCA to be able to receive that information prior to starting an investigation as part of its process for assessing if there is ‘reasonable suspicion’ of a breach of the GSCOP.

15. Other regulatory authorities obtain information from third parties, providing a precedent for the GCA. For example the Financial Services Ombudsman receives complaints from for example the Citizens Advice Bureau.

16. The GCA could also benefit from receiving information from a wider range of sources, including third parties, when arbitrating.

Enforcement powers, penalties, appeals, and funding

17. The GCA should be able to ‘require’ or ‘direct’ a retailer to undertake certain actions if they are found to be in breach of the GSCOP, rather than only make recommendations Clause (8) (1). As the Bill commentary indicates ‘there is no express sanction for failure to comply with a recommendation, but failure might be taken into account in a future arbitration or investigation’; there is nothing to stop recommendations being ignored. As retailers ‘transfer excessive risks and unexpected costs’ onto their suppliers because it is in their business interests to do so, they are unlikely to implement the Adjudicator’s recommendation if they do not have to.

18. The Competition Commission’s Groceries Market Investigation final report (April 2008) proposed that an Adjudicator (referred to then as an ombudsman) should have the ability to levy fines from the outset. Traidcraft therefore recommends that the government sets up the GCA with the power to apply fines from the start.

19. It is not clear how the GCA will monitor if their recommendation to a retailer has been implemented (Clause (8) (2)). The GCA must have adequate information-gathering powers, after an investigation has finished to verify compliance, including reviewing information which is commercially confidential and therefore unsuitable for the public domain.

20. Compensation to single or groups of suppliers should be considered as part of the package of enforcement options available to the GCA. A breach of the GSCOP is likely to have led to suppliers incurring losses. The recent CIAA/AIM survey indicated that the average cost to suppliers was 0.5% of sales turnover implying in some cases that the losses are not insignificant.

Staffing, and appropriate location, of the GCA

21. Traidcraft recommends that the most suitable candidates, who do not have conflicts of interest, are recruited to fulfil the functions of the GCA. It seems inappropriate to limit the pool of candidates to staff from the OFT.

22. The Competition Commission found during their 2006 – 2008 investigation that the Office of Fair Trading (OFT) had failed to act to enforce breaches of the Supermarket Code of Practice for a number of reasons, and so proposed that a dedicated and independent body such as the GCA be set up to monitor and enforce the GSCOP. In addition, it is important that the GCA is able to focus on the retail sector, and its suppliers. It would therefore be unwise for the GCA to be housed in the OFT.

22 June 2011