3 A statutory code of conduct
23. The Government's consultation covers an extensive
range of issues and poses questions on a wide range of options.[32]
We do not wish to re-run that consultation. However, we highlight
those areas where greater clarity is needed.
The overarching principles
24. In his forward to the consultation document,
the Secretary of State declared that two principles would be at
the heart of the Statutory Code:
- Principle of Fair and Lawful
Dealing;
- Principle that the Tied Tenant Should be No Worse
Off than the Free-of-tie Tenant.[33]
25. According to Brigid Simmonds (BBPA) the first
principle was already enshrined in Version Six of the Framework
Code and therefore the industry had "no difficulty"
with it.[34] In respect
of the second principle, that a tied tenant should be no worse
off than a free-of-tie tenant, she also confirmed that the BBPA
accepted the principle. [35]
The ALMR and the IPC also supported the principles "wholeheartedly"
and "absolutely".[36]
26. Mr Brindley representing the BII agreed that
it was a "a reasonable principle" but saw difficulties
in its application:
I have spoken to several chartered surveyors
who have told me that it cannot be done, because you cannot compare
apples with oranges. You can compare apples with apples, and oranges
with oranges, but you cannot compare the two.[37]
Phil Dixon agreed with Mr Brindley and said that
the overriding principle should be that "all tenants should
be treated fairly".[38]
27. There is general agreement that the Statutory
Code should include the Governments overarching principles of
fair dealing and that a tied tenant should be no worse off than
a free-of-tie-tenant. However, clarity on how this will be enshrined
in law is necessary. We look to the Government to provide us with
early detail on how these principles will be achieved through
legislation.
Additions to the Framework Code
28. Phil Dixon argued that although some aspects
of self-regulation had worked "it has not addressed the issue
of the tie and the prices licensees are paying for their beer.
It has not worked in terms of the way rents are being set by RICS
guidelines".[39]
The Government's proposals aim to address these matters. Options
put out to consultation include a mandatory free-of-tie option
alongside other issues related to risk and reward, including:
- The right to request open market
rent reviews;
- Transparency;
- The gaming machine tie;
- A guest beer option; and
- Flow monitoring equipment.
29. The evidence from our witnesses did not deliver
a consensus on these issues. There was broad agreement from organisations
representing lessees that a range of these would be beneficial.
However, dividing issues were the mandatory free-of-tie option
and the guest beer option. The ALMR, IPC and Licensees Supporting
Licensees believed that the free of tie option was central to
addressing the problems of risk and reward. In respect of both
options Brigid Simmonds (BBPA) made clear the BBPA's position
"we are absolutely against the free-of-tie and the guest-beer
option". She highlighted the benefits of the tied model as
a "low-cost entry" for lessees, and that a mandatory
free-of-tie option would "alter the market and close doors".[40]
However, Simon Clarke of the IPC argued that the free-of-tie option
would not necessarily signal the end of the tied model:
If [ lessees] are not being treated fairly—if
they feel that the case is that they are not getting the return
that they would do if they were free of tie—they could choose
that option. It is very much a matter that the future of the tied
model would be determined on whether the terms are fair or not.[41]
30. A free-of-tie option was supported by our predecessor
Committee:
The dispute over the tie could be ended easily:
every lessee could be offered the choice of being free or being
tied. This would enable both sides to prove their competing claims.
We believe each and every existing lessee should, in a phased
programme, be offered this choice and the same choice should be
offered to every new lessee as he or she takes on the lease. To
make the choice fair, the process of agreeing revised rents must
first be improved as we have previously recommended.[42]
Although a voluntary agreement is preferable,
we doubt that the pubcos would respond effectively to such an
approach. We therefore recommend that the Department considers
how best to achieve this end and that it opens an urgent consultation
into the principle and phasing of this proposal. The status quo
is not an option.[43]
31. The mandatory free-of-tie option is seen by
many lessee organisations as a key tool to address the imbalance
in risk and reward. It is also the option which is resisted most
vigorously by the BBPA. It is for the Government to decide, on
the balance of evidence, whether this should be included in a
Statutory Code. We have not previously recommended the abolition
of the tied model but we do support a free-of-tie option. If the
tied model is proved to deliver significant benefits to the lessee,
then the option would not be taken up, and the tied model would
remain.
The 500 threshold
32. The Government proposes that the Statutory Code
should apply to companies which own more than 500 pubs. Brigid
Simmonds (BBPA) understood the rationale for this threshold and
stated that the BBPA accepted it with the caveat that it did not
extend to companies with managed pubs:
We believe it should only be those that own leased
and tenanted pubs, because that is the area where this Committee
has expressed its concerns.[44]
Kate Nicholls, from the ALMR, agreed that the Statutory
Code should apply only to those companies with leased and tenanted
outlets and not "pub ownership per se".[45]
33. The Independent Pub Confederation (IPC), Licensees
Supporting Licensees and the Association of Licensed Multiple
Retailers (ALMR) all supported the threshold.[46]
Kate Nicholls (ALMR) also argued that the financial burdens of
a statutory system meant that a threshold was sensible:
The cost of the adjudicator, the cost of the
levy, and the internal compliance are significant. The threshold
is good in determining who can afford to bear that cost, and it
will undoubtedly be a cost for the smaller operators below that—we
do have to be cognisant of that.[47]
34. This view as also supported by Phil Dixon:
I think in all such things people have to start
somewhere; you have got to. I am not sure it should be zero. I
think the poor old Bathams family in the Black Country, with 11
pubs with one tenancy, will probably think they do not deserve
this.[48]
35. Peter Bradley from Licensees Supporting Licensees
added that the Statutory Code should include "something robust"
which could be applied to smaller companies if it was found problems
were arising in companies with fewer than 500 pubs.[49]
36. However, the BII and the FLVA took a different
view. Bernard Brindley (BII) argued that "there should be
no threshold" because "if legislation is good enough
for one, it is good enough for everybody".[50]
Martyn Caffrey representing the FLVA agreed believing that any
reputable company would "wish to be covered by that and be
measured by that".[51]
37. Bernard Brindley (BII) also raised concerns about
the sector being governed by two different regimes:
We would certainly not want to split our membership
into those who are legislated for and those who are not. We would
be coming from the point of view that the threshold should be
zero. [52]
38. We understand the rationale for setting a
threshold for the Statutory Code. However, we see merit in including
a level of flexibility in any Bill to allow the Secretary of State
subsequently to alter the threshold in the interests of the industry.
39. We accept the argument that the Statutory
Code should only apply to pub companies with leased and tenanted
pubs and recommend that the Department reflect this in the Bill.
Self Regulation and arbitration
40. The Pub Independent Rent Review Scheme (PIRRS)
and the Pub Independent Conciliation and Arbitration Service are
the two industry bodies which provide resolution and arbitration
services to lessees. PIRRS was established following our predecessor
Committee's 2009 Report[53]
and was specifically designed to provide a low-cost rent dispute
system. PICAS was established as part of the Government's self-regulation
proposals to provide "mediation and arbitration on any matter
relating to the Framework or Company Codes".[54]
Bernard Brindley (BII) explained that while both PIRRS and PICAS
were administered by the BII, "they are controlled by a separate
board completely".[55]
41. PICAS received support from the majority of our
witnesses. Brigid Simmonds (BBPA) described it as "a great
system"[56] while
Bernard Brindley (BII) described it as "very, very successful".[57]
He went on to argue that PICAS was also proving effective in changing
the attitude of pub companies:
[They] do not want to go before PIRRS or PICAS,
so they are settling their cases beforehand. They are not getting
as far as PICAS or PIRRS because they are determined to settle
beforehand.[58]
42. Kate Nichols (ALMR) believed that PICAS was having
a "beneficial effect" in terms of "mediation and
in helping people to resolve their differences".[59]
However, Simon Clarke (IPC) highlighted the fact that PICAS "cannot
deal with legal issues" which he argued was a significant
weakness in the Service. Peter Bradley also believed that confidence
in PICAS would only come with the certainty provided by a Statutory
Code and Adjudicator.[60]
43. In its consultation document, the Government
acknowledged the "positive role that PIRRS and PICAS have
played in resolving disputes" and stated that it did not
wish to "discourage these bodies from continuing to operate"
after the establishment of an Adjudicator. It argued that having
the two would provide a tenant with:
The option of going either to the Adjudicator
or alternative dispute resolution mechanisms, thereby introducing
a degree of healthy competition into the dispute resolution market.[61]
However, it did not rule out merging these services
with the office of the adjudicator:
Alternatively, and recognising the cost to the
industry of these services, the Government suggests that an alternative
might be for companies below the threshold to voluntarily commit,
in their contracts with tenants, to use the arbitration function
of the Adjudicator to resolve disputes. Such disputes would be
arbitrated on the basis of the contractual terms and conditions,
including any terms found in the company code, and the companies
would not be subject to the wider compliance or investigatory
parts of the regime.[62]
44. Brigid Simmonds (BBPA) appeared open-minded over
the future of PICAS and PIRRS:
For the moment, we have said very clearly that
PIRRS and PICAS will continue to operate. Statutory legislation
does take time to introduce. If you had the big companies covered
by an arbitrator, there is a question about whether you need PIRRS
and PICAS for the smaller companies, given that they have not
had any complaints against them, but we have certainly not set
our mind against continuing PIRRS and PICAS.[63]
Bernard Brindley (BII) saw a benefit of PIRRS and
PICAS working with the proposed Adjudicator but believed that
there would still be a potential demand for their services from
tenants of pub companies below the 500 threshold.[64]
Kate Nicholls (ALMR) agreed that the
two services would need "very close liaison" with the
Adjudicator but believed that they could continue to provide an
alternative avenue for redress:
The adjudicator can provide a sort of over-layer
of scrutiny to make sure that PICAS and PIRRS are delivering what
they need to be doing, but as I say, PIRRS and PICAS provide an
option [...] I think the Government is right that you would need
to be introducing choice for the lessee in where they go when
they want to have redress, as to what suits their case and what
suits their circumstances.[65]
45. Simon Clarke (IPC) believed the Adjudicator should
take responsibility for PICAS and PIRRS,[66]
while Phil Dixon saw this as the only way to guarantee the future
of the two services:
There is no way that Britain's pub companies
will pay twice. They are not going to pay for self regulation
and regulation, so unless the adjudicator takes it on board, they
will disappear, and that will be a very sad day.[67]
46. Both PICAS and PIRRS have been positive developments
in the pub industry but we are unclear as to how they will fit
into a new statutory landscape. The Government needs to ensure
that, whichever route it takes, the role of these two arbitration
bodies is not lost as a result of a statutory/non statutory split
in the oversight of the industry.
Powers of the Adjudicator
47. The Consultation document sets out the
Government's intention to establish an Adjudicator to oversee
the Code. According to the Government the proposed Adjudicator
would be based on the model of the Groceries Code Adjudicator,
and would:
- Arbitrate individual disputes between large
pub companies and their tenants, including about whether or not
a rent review has genuinely been conducted on an 'open market'
basis, in accordance with the new statutory Code;
- Carry out investigations based on complaints
that have been received, and have wide-ranging powers to require
information from pub companies during an investigation;
- Where an investigation finds that a pub
company has breached the Code, impose sanctions—including,
in the case of severe breaches, financial penalties—on that
company;
- Publish guidance on when and how investigations
will proceed and how these enforcement powers will be used;
- Advise pub companies and tenants on the
Code;
- Report annually on his or her work;
- Recommend changes to the Code.[68]
The Government goes on to consult on three powers
which could be made available to the Adjudicator,
Recommendations,
Requirements to publish information ('name and shame') and Financial
penalties.[69]
48. Both the IPC and Licensees Supporting Licensees
were in favour of the Adjudicator having the full suite of powers.[70]
Bernard Brindley
from the BII was also in favour of fines and told us that he had
unsuccessfully argued for PICAS to have a similar power.[71]
He argued that the primary way to stop pub companies "abusing
the system or breaching their code of practice" was "through
their financial balance sheet".[72]
When we asked Phil Dixon for his view on the powers which
should be made available to the Adjudicator, he responded:
"all of them,
without any question whatsoever".[73]
However, Brigid
Simmonds (BBPA) told us that the BBPA were not in favour of this
and had concerns over both naming and shaming and fines.[74]
49. When we undertook pre-legislative scrutiny
of the draft Groceries Code Adjudicator Bill, we recommended that
the Adjudicator have the power to fine. The Government accepted
this recommendation during the Bill's passage through Parliament.
We recommend that the Government provide similar powers to this
Adjudicator.
32 Annex 3 Back
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