Small Business, Enterprise and Employment Bill
The Committee consisted of the following Members:
Fergus Reid, Committee Clerk
† attended the Committee
Simon Clarke, Fair Pint
Gill Jones, Deputy Director for Early Years, Ofsted
Kate Nicholls, Chief Executive, Association of Licensed Multiple Retailers
Tom Stainer, Head of Communications, Campaign for Real Ale
Andy Tighe, Policy Director, British Beer and Pub Association
Q 171171 The Chair: Good morning. It might be helpful if I take the opportunity to remind the Committee that the deadline for amendments to be considered on Tuesday 21 October is the rise of the House today. We now resume our oral evidence taking, with the British Beer and Pub Association, the Association of Licensed Multiple Retailers, the Campaign for Real Ale, and the Fair Pint campaign. I remind Members that questions should be limited to matters in the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has agreed. We have until 12.30 pm for the first panel. I welcome the witnesses. Could you introduce yourselves for the record, please?
Simon Clarke: My name is Simon Clarke. I am a director of Morgan and Clarke chartered surveyors, tied publican of the Eagle Ale House in Battersea and a member of the steering group for the Fair Pint campaign, the Independent Pub Confederation and Fair Deal for Your Local. You could call me the bad penny. I have been at all four witness sessions for the Select Committee since 2008. I was involved in the industry mediation in 2009, negotiations with the BBPA on the code content in 2010, and the Royal Institution of Chartered Surveyors rent assessment guidance revision panel in 2010. I am grateful for being given the opportunity to speak today.
Broadly, we welcome the introduction of statutory regulation for tied pubs. We are concerned about the Bill’s contents—some small wording issues, which no doubt will be better dealt with at a later date. Our greatest concern is the lack of the market-rent-only option in the Bill. That is where we stand.
Kate Nicholls: My name is Kate Nicholls. I am chief executive of the Association of Licensed Multiple Retailers, which is the national trade body representing pubs, clubs, bars and casual dining outlets.
Tom Stainer: I am Tom Stainer, the interim head of communications at the Campaign for Real Ale. We really welcome the legislation and are particularly pushing that a guest beer right is included and a market-rent-only provision is made.
Andy Tighe: I am Andy Tighe, policy director at the British Beer and Pub Association. We represent brewers who account for around 90% of UK beer sales, pub
Q 172 Toby Perkins (Chesterfield) (Lab): I will start where Andy finished. Much of the debate around pub companies over the course of the past nine or 10 years has focused on the major pub companies, but the Bill as drafted would introduce significant compliance requirements right across the industry, including on organisations that own a small number of pubs. The principle of there being two separate codes for companies with over 500 pubs and those with fewer is established in the Bill. First, does the panel agree with that principle? Secondly, does the code, as suggested at the moment, cover the right aspects of the matter and make the right demands of each group?
Andy Tighe: As I mentioned, we are also concerned about the disproportionate burden placed on smaller brewers that were never part of the original proposals. From a larger pub company perspective, there is obviously sympathy with that position, but there is also a concern that if they are excluded from the Bill, there could be a material distortion in competition based on the two areas that I mentioned earlier. One area is the Government adjudicator getting involved in setting rents on an individual basis. There could be between 3,000 and 5,000 rent events every year based on parallel rent assessments that are difficult in themselves to produce. In relation to temporary agreements, you could have a situation where if the smaller companies did not come under the scope of the Bill and a large company had had its temporary agreements under the scope of the Bill, it would have to close pubs temporarily because of the obligations under the code. A pub down the end of the road operated by a smaller brewer, however, could remain open because, under the self-regulatory system, there is no provision for temporary agreements as it has never been felt that there was any issue.
The larger companies would accept that the smaller companies are not part of the legislation, and were never intended to be included, if the two issues were addressed: if the parallel rent assessments were for information purposes only and if tenancies at will or temporary agreements would only be part of the Bill if the tenant had been in situ for more than 12 months.
Tom Stainer: We have long argued that companies with fewer than 500 pubs should be exempt on the basis that family brewers’ agreements with their licensees tend to be fundamentally different from the leases that pub companies operate. We do note, however, that the Government’s decision is that the code applies to all tied premises. The 500-pub level is about right because it represents about 1% of the market and less than 1% of the market operates under these arrangements under the regional brewers. That contrasts with large pub companies, which offer longer-term leases that present a greater risk to tenants. Surveys that we have done to
We also feel that the tie works for family brewers and actually helps to protect diversity and the business of those local family brewers operating across the UK, and that it would be onerous to expect them to adhere to all parts of the code, which is why we suggest that the family brewers with fewer than 500 pubs should not be expected to adhere to an enhanced code. We would suggest moving some of the more onerous aspects from the basic code into that enhanced code.
Tom Stainer: We would suggest that you would move into the enhanced code the requirement for rent assessments to be signed off by a qualified surveyor. We would also suggest that you move the requirements to publish an annual compliance report, to appoint a compliance officer and to record all business conversations in writing. Those changes would ensure that the core code would not impose any significant new requirements on the smaller family brewers that they have not already voluntarily agreed to under the existing codes under which they operate.
Kate Nicholls: I agree. The concerns that we have heard around the Government’s proposals are less to do with the code per se and more to do with internal compliance costs. To go back to your first question: is the principle of two codes one that we agree with? Yes, absolutely. It is right that you have got some statutory regulation that applies to all, and that then there is an enhanced code for the larger companies. I agree with Tom: there are elements that you can take out of the basic code to move into the enhanced code, to make sure that those compliance costs are reduced. The principle of a statutory regime applying to all is one that we support.
Simon Clarke: First of all, I would like to point out that our position originally was that the statutory code would apply to any pub-owning business with more than 500 pubs. I said pubs rather than just tied pubs, which is the current proposal. The point of the exercise there is obviously to apply the regulation to the bigger pub companies. So the original proposal was not to include any statutory regulation—this is on our part—on the family brewers. That said, I know, certainly within Fair Pint, there will not be many people shedding a tear if they are expected to comply, to a degree, with some regulation. I would echo the sentiments of both Kate and Tom there, that we would have no objections to the idea of some regulation.
The idea that there is an additional cost burden seems to be based on three points, really. One is providing a compliance officer, another is compliance reporting, and the other is passing of the rental valuations. There has been a period of four years of self-regulation, so it seems to me there must be a compliance officer already within these firms. The code is not asking them to employ a full-time member of staff to undertake that role—just to identify somebody who is accountable, as far as I can see; so I cannot see that that is an additional burden of cost at all. Also, we are working on the basis
All that said, we have no real objections to any of those things being moved into the enhanced area of the code. I think that basically they are all pretty well red herrings, disguising the fact that the bigger issue is statutory regulation of those big firms. Those family brewers have got what is effectively a protected, dominant position in 20,000 pubs that are tied in this country. That has been revealed in a letter from James Staughton, the owner of St Austell Brewery and the chairman of Independent Family Brewers of Britain, in a letter to George Osborne, back in October. So the long and short of it is, if there was a move to move things from core code to enhanced code, that would not be a problem for us.
Q 174 Toby Perkins: The code at the moment does not include any mandatory rent-only option for tenants. Instead of that it has a right to demand a parallel rent assessment, so that publicans can see what they could have won if they had been independent. Does the panel have confidence that that will actually provide transparency, be trusted, and deliver the intention of tied tenants being no worse off than free-of-tie tenants, as the Bill envisages?
Simon Clarke: First, the Bill is a codependent document with the code, and the parallel rent assessment is a codependent mechanism with the market-rent-only option. One without the other is not going to succeed in its aim, I would suggest. The problem with the parallel rent assessment, while it is a useful tool for a tenant to establish what their rent might be, all other things being equal, is that it is cold, hard numbers. I think if you undertake the exercise purely by the numbers, you are going to end up in a situation where almost every tied tenant in the land is going to be looking at a rent approaching zero, because of the nature of the overcharging on the tied product prices. Clearly, that is not market price, because there are other terms within the agreement between the landlord and the tenant in a tied agreement that are not easily quantified. That is something that, actually, funnily enough, we agree with the BBPA on. Therefore, those things need to be put in the hands of a tenant to decide its value to them. For example, I think Shepherd Neame puts a perceived value of £6,000 a year on the provision of a website. I do not think their tenants would do that and I cannot see how third parties would be able to arbitrate the difference.
Equally, it is not contractually binding, so even if we were to agree a value on that and include that in the parallel rent assessment, which can be included if we can quantify it, you have got a situation where it might be withdrawn the next day. You have established a rent for the next five years on something that might be withdrawn. On its own, I cannot see it working. That is why we need the market-rent-only option in there to go hand in hand with it. The two things need to be there together.
Kate Nicholls: We believe the Government’s proposals are sensible, pragmatic and proportionate. Because they have been extensively consulted on, they should be capable of being implemented swiftly, and that is the key thing that we need to happen now.
There is nothing inherently wrong with the tied model. It is the way it has been operated and it is the behaviour of the companies that needs to be regulated. Our view, as ALMR, has always been that that comes about through regulation of the rent assessment process and rent setting. We believe the proposals will help in that respect.
The problem is that there has always been disparity between the two parties and there is one party that does not have very much information. Measures that improve transparency and equip the tenant to enter into a genuine commercial negotiation and make an assessment whether the deal is good or bad and walk away from it when it is not good, have to be beneficial and, in our view, the right way forward.
Tom Stainer: I can only echo what Kate said. The objective of this is to ensure that pub company dealings are fair and lawful. It is to add flexibility and allow people to run their businesses in a fair way, and have the flexibility to take an option if they feel the current deal is not working for them. They should also be no worse off than a free-of-tie tenant.
I echo what Kate said—that it needs to be transparent and fair. You need to link rent reviews and assessments with an independent adjudicator to ensure that if there are any differences of opinion, there is someone independent to police it. The rent reviews also need to be completely transparent and independent of the tenants or the pub companies.
Tom Stainer: No, I agree with Simon that you also need to have that flexibility, to give everyone in the arrangement flexibility if they feel their business would work better under a market rent only. That is all we are asking for: give them the flexibility so that there is that option if they require it; having looked at the figures and had an independent assessment, they have the option to go for the market rent only. They may decide that remaining within the tie works. CAMRA’s attitude would be that the tie can work and can deliver very good pubs and can be beneficial to both parties. But it needs to be fair, lawful and to share the benefits of the agreement between licensee and pub-owning company.
Andy Tighe: I echo a lot of what has been said. From our perspective, providing a parallel rent assessment is problematic for some of the reasons set out. The tied agreements and free-of-tie agreements are very different. It is not necessarily just about the price of beer, although working out a free-of-tie price of beer is very difficult, because it will be based on volumes purchased, exclusivity, credit terms, whether it comes with technical and cellar support, length of the contract and all sorts of things.
To use that as a basis to arbitrate on rents, we think, would be very problematic and would get the adjudicator into very difficult situations. It would probably be unlawful under European law as well. But companies are happy
Simon Clarke: There is a requirement in the self-regulatory regime that the tenant seek independent professional advice. Indeed, there is a pre-entry awareness training scheme. I think it still costs £20 and takes two hours. That is an online awareness course. That does not come with any health warnings, which I would argue it should. They are expected and are required to prove to the pub company—I think the pub company have to be able to demonstrate that they have recommended that the tenant take that action. But what we are seeing is that there is a behavioural bias among tenants. We can tell them that something is not a good idea, but they will still charge ahead and do it.
Q 177 Andrew Griffiths: Is it true that, in that due diligence process, applicants are made to do a business plan, are provided with the previous pub’s turnover, are told how much beer has been sold in that pub and are given advice about how much to pay for their beer and how much the rent would be for that particular pub? Is all of that true?
Simon Clarke: I think they have to take professional advice. Along with that, obviously, come the codes of practice that the pub companies are reporting. I confess that I am one of them; at the outset of my lease, I read the contract and all the paperwork, and I did take advice. I believed the blurb. I was told that I was entering into a mutually beneficial partnership and, unfortunately, a lot of people will take that as what will happen.
Q 180 Andrew Griffiths: Am I also right in thinking that, under the statutory code, any publican who felt that could ask the adjudicator to rule on whether they are paying too much for their beer and their rent? Would the adjudicator have the power to not only intervene but fine the pubcos if he felt that they were acting unfairly in that individual case?
Simon Clarke: You are asking two questions there. The first was whether you have the ability to go to the adjudicator. It is not clear in the code or the Bill whether that is available to all tenants. I think it is only available to those tenants who apply under the enhanced code. If you are a brewery tenant, for example, I do not think that referral is available to you. The second point is that you can go to the adjudicator and the adjudicator can go through the exercise of the parallel rent assessment.
Kate Nicholls: From our view, that would ideally come about as part of the negotiation between the pub company and the lessee. That kind of information would be available, rather than people having to apply to the adjudicator only when their rent negotiation has broken down—that is how I read the current Bill and code. If you do the parallel rent assessment, you can look at some of the costs, margins and rents that would be available in an open market review and in a tied situation. That information would materially help the lessee to understand the scale of what they are taking on and the nature of the business decision, as well as the different approaches if they are taking a commercial lease, free of tie, or an industry lease. It is a very complicated and different set of circumstances. Usually, they are apples and pears, and you need some help and information to work through it. In our view, if that information was made available to the tenant on request as part of a commercial negotiation, it would help them get to a better deal with their existing landlord.
Q 182 Andrew Griffiths: Do you have concerns about those parallel rent assessments then being taken to the adjudicator? We heard from Mr Tighe that there could be 3,000 to 5,000 individual rent negotiations, each of which could end up going to the adjudicator. Does that concern you at all?
Kate Nicholls: If the Bill works properly and if you correctly apply the provisions of the code as currently drafted—I appreciate that it is still in draft form and that there will be discussions—as well as applying our Royal Institution of Chartered Surveyors guidance, with the purposeful interpretation of a tied tenant being no worse off than a free-of-tie, you will deliver better rents and better situations for the tied lessees. There should be no need for each case to go to the adjudicator. If you have got 3,000 to 5,000 cases going to the adjudicator, we as an industry are doing something wrong.
In my view, the adjudicator’s role should be to determine where the market is not functioning properly and where particular clauses of the code are not being complied with. You need to build on the existing arbitration provisions under self-regulation to provide resolution for the lessee. What a tied lessee wants and needs is a swift resolution to their problems and restitution when something goes wrong. When we deal with our individual lessees who are taking cases under the current self-regulatory regime, we find that they want it resolved and for the distraction to go away.
Q 183 Andrew Griffiths: Do you feel that temporary agreements—when, for instance, a pub closes because a tenant has died or there has been a bereavement, family difficulties, a divorce or whatever it might be, so a temporary tenant runs the pub while a permanent replacement is found—should be within the scope of the Bill?
Kate Nicholls: No, we do not believe they should be within the scope of the Bill. When we have been negotiating on the self-regulatory regime, we have always excluded tenancies at will and temporary agreement of less than a year. Often, my members who are multiple lessees
Tom Stainer: I disagree with excluding tenancies at will from the code. There are a couple of simple options to help companies deal with such situations. Anecdotally, we had several round-table discussions with licensees, and we found that tenancies can run on longer than they are intended to—they can run on for weeks or months—during which time the licensee does not have the necessary protection.
We are concerned that if franchises and tenancies at will are not included in the code and the legislation, companies could see them as a loophole to get out of what is intended. Companies might convert stable tenancies into franchises when they are not suitable to be run in that way, or get in tenancies at will that lack protection. To prevent pubs from closing and to get people in to run them while you are doing the due diligence for a new tenant, you can get in temporary management companies that are skilled at running pubs on a short-term basis.
Tom Stainer: There are tenants who parachute in. In those cases, you could certainly operate a tenancy at will under a free-of-tie arrangement to ensure they do not have the problems of a full tenancy, because obviously they would not run into the same problems.
Andy Tighe: As we mentioned, we agree with the ALMR that no issues have come to light, as far as we are aware, about tenancies at will. From a proportionality perspective, we do not see any reason to include them. It is no one’s interest to run pubs under a temporary agreement for longer than necessary. It is much more in the interest of both parties to have substantive agreements.
Q 187 Andrew Griffiths: How long does it take to do due diligence? If I went to one of your members and wanted to take on the Dog and Duck, how long, on average, would the due diligence process that the Bill puts in place take?
Andy Tighe: Due diligence can take several months—up to six months, if somebody is new to the trade. Temporary agreements are vital to enable those pubs to remain open. If they close temporarily, there is a high risk that they will not open again, because their customers will go somewhere else.
This question is particularly to Tom, but also to the other panellists. Tom, you make a point in the evidence submitted by CAMRA about the distinction, which you touched on earlier, between family brewers and the larger pubcos. You referred to a survey you conducted in 2013 into tenants’ views of the larger pubcos and family brewers. There is a distinctive difference between those views. Can you outline that difference a bit more clearly, and perhaps give case studies and examples that you have seen? In my experience, all the complaints that have come to me are from constituents who are tenants of the larger pubcos. None are from the smaller family brewers, including Brains. I wonder whether that experience is common across the whole country.
Tom Stainer: First, congratulations; Brains is a lovely brewery. You are well served by them. As I said, we have argued that the family breweries—those with fewer than 500 pubs—should be excluded but we know that the Committee feels that the pub code should apply. You mentioned the survey that we did in 2013. That supports the view that family brewery tenancies should be treated differently because 71% of tenants tied to the larger pub companies—those with more than 500 pubs—stated that they had a negative view of the beer tie arrangement. That compares to just 49% of licensees that are tied to the family brewers.
We are not pretending that family brewers are cuddly, sweetness and light, and do no wrong. We are not saying that they should be let off and given an easy shift. It is about ensuring that they treat their tenants well and, on the whole, they tend to. Family brewers have shown that they are in it for the long haul. They have been custodians of their pubs for a long time. The pub-owning companies are selling off far more pubs than family brewers are. Those pubs are being sold to developers and turned into housing or shops, whereas the family brewers are, on the whole, looking after their pubs. The family brewer’s name is above the pub door. Their whole business—beer brewing and pubs—relies on their reputation, so they need to be seen to be fair. Because they operate regionally, it is doubly important that they maintain a reputation for fairness and we hope that they continue to do that.
Simon Clarke: Thank you. First, I would like to say that one of the reasons that you are seeing less in the way of reports of behaviour is that those big six pub-owning companies have about 75% of all the tied pubs in the country. There is a disproportionate amount of them. Having said that, you are going to have a lot of Brains pubs around you, I am sure. On the whole, we have had very little in the way of complaints from the brewers. There are around 30 in the Independent Family Brewers of Britain; of the bigger ones, issues are arising. We are getting issues with Shepherd Neame and with Fullers. I have two or three on the go at the moment with Fullers. They are not code breach issues; they are legal issues. They are certainly not immune from this.
The purpose of the exercise, and probably what we are trying to achieve, is to take away the opportunity to abuse a system, rather than to abolish it in its entirety. We are not for abolishing the beer tie. We are for the
May I touch on the issue of tenancy at will, because I got missed out before? There is a bit of treading on eggshells with this. Certainly, some people use them in the right fashion but others do not. I see it as the kill zone, really; this is where you get and commit naive tenants to an agreement without them having taken any pre-entry awareness training, as Andrew said earlier. They go through the process of pre-entry training while they are waiting for the documentation for the longer-term agreement to take place. During that period, they have moved their kids into a new school, decorated, advertised and started their business. They have committed resources and funds to that pub and are therefore in a poor negotiating position when it comes to the final longer-term agreement.
My brother had three tenancies at will in his pub—the Carpenters Arms in Metherell—before he finally got his longer-term lease. He eventually failed, which I told him he would. Again, optimism bias was there. Despite being told, off he went and did it. Three or four tenants after him went through the same process before, eventually, the pub company sold it. He is now back there as a manager, on more money with less risk and more time on his hands. To all intents and purposes, the pub seems to be thriving again.
Tenancies at will need to be covered by the statutory code but there is an easy way out of it, as Tom mentioned. As they are supposed to be temporary, make them free of tie. Then they will not be covered.
This is all about informing the tenant. If the tenant gets an opportunity to trade and experience a free-of-tie model for perhaps only a few months—less than a year—at least they will be able to understand, from their own perspective and without taking advice, the circumstances and profitability that they would enjoy if they were free of tie before they entered into a tied agreement.
Q 190 Sheryll Murray (South East Cornwall) (Con): Welcome. How does the cost of the voluntary code that we have at the moment, which includes the Pubs Independent Conciliation and Arbitration Service and the Pubs Independent Rent Review Scheme, compare with the estimated cost of the new arrangements?
Andy Tighe: At the moment companies pay £5 per pub towards funding self-regulation. The cost under the adjudicator as set out in the consultation would be £95 per pub, plus, of course, all the costs of compliance that ensue, such as code compliance officers, the training elements and so on.
That is one of the reasons why the family brewers are keen to continue with self-regulation. They believe that it is working and they are committed to carry on funding that. It is now under the chairmanship of Sir Peter Luff, as you are aware, and, as has been said
Q 191 Sheryll Murray: If I may interrupt, I realise that I should have made it clear that the chairman of the Independent Family Brewers Association, James Staughton, is a constituent of mine, so I will put that on the record. Do you have any figures to compare the number of family brewers that are taken to arbitration with those of the larger companies?
Andy Tighe: As I said, as far as I am aware there were only two PIRRS investigations in relation to smaller brewers, which was out of about 100 inquiries and, in terms of PICAS cases, it was none out of the 40-odd cases that it dealt with in the past year. However, I do not have the exact figures to hand.
Andy Tighe: No. The protection that the tenants and lessees enjoy under the current self-regulatory code is very similar to what is in the statutory code. Of course, the statutory code was based very much on that latest version. We have already talked about some of the enhancements, which are about code compliance, sign-off by a RICS surveyor, and parallel rent assessments for the larger companies, but the basis is similar.
Q 193 Sheryll Murray: Do you foresee a problem if companies and family brewers with fewer than 500 pubs were removed from any statutory regulation but signed an undertaking to say that they would continue with the voluntary code, but if that did not work, we revisited this at some later stage?
Andy Tighe: Absolutely not. As I said earlier, that is obviously the position of the independent family brewers and they are very much committed to doing that. From the perspective of a larger pub company, a member of the BBPA, the only issue with that is if it leads to a material distortion in competition: if there are any economic elements in the code, rather than behavioural issues. That comes down to the adjudicator setting rents under the “no worse off” principle—as Kate said, you are comparing apples with pears, so that is very difficult to do—and the temporary agreements, because they are high risk: between 5% to 10% of pubs that are run on temporary tenancies at any one time will close.
Kate Nicholls: I sit as a board member on the pub governing body that oversees PIRRS and PICAS and those two bodies do an awful lot of work over and above the cases that they receive. They get an awful lot of inquiries and they are not restricted to the large pub companies; they get a lot of inquiries to help the tenants and lessees of smaller pub companies and regional brewers. Not all of those inquiries are complaints and not all of them are taken forward to cases, but those two bodies provide an invaluable service in giving help, advice and information to the tenants and the lessees of
The other point is that size is not an indicator of good or bad behaviour. It is an indicator of risk in the marketplace, because of the potential that you have to affect more people, but any individual lessee who is suffering—if the tie is not operating correctly for them or if they suffer abuse—needs to be dealt with fairly. That is why we support statutory regulation for everybody. We do not want to leave lessees of smaller companies unprotected.
Simon Clarke: I would like to echo most of what I have heard there. As I said before, we were content that the small family brewers were not going to be bound by statutory regulation. We were content that market forces would have the desired effect, if we had a market-rent-only option in the statutory code, on the companies that basically own 75% of all the tied pubs. I happen to know that there are a couple of brewery cases in the pipeline—or about to be in the pipeline—going to conciliation and arbitration. But certainly history tells us that none has actually gone through yet. If their proposal is that they want to be excluded from statutory regulation, and they make a commitment that they will continue with self-regulation, we have no problem with that.
Tom Stainer: Going back to the cost of the regulation, I think that the £5 per pub figure suggests that the current system is fairly under-resourced, and perhaps that is why it is not operating in the way that it should. We would argue that £90 or £95 a pub is a very modest amount of money to be considering to deliver the benefits of a fair and more flexible deal for both licensees and the pub-owning companies. Importantly, and because we are an organisation that represents 166,000 drinkers across the country, including one over there, it would deliver a very good deal for customers and pub users as well.
Q 195 Mr Iain Wright (Hartlepool) (Lab): I would like to pick up on Sheryll Murray’s questioning. Like Stephen, I must declare an interest. I am a member of CAMRA. I love beer far too much. I also have the best brewery in the world in my constituency—Camerons Brewery—which is 150 years old next year. It is investing for the long term, so your comments, Tom, are really important. It also has a pub estate, so I was interested in the views about whether amendments should be introduced in the Bill to exempt companies operating fewer than 500 tied pubs.
Kate, I was particularly interested in your point about good and bad behaviour. Is it not simply a question of the proportionality of the burden of regulation? That would fall disproportionately on smaller tied-pub breweries. Should we amend the Bill to reflect that?
Kate Nicholls: You are absolutely right that it is a question of proportionality. As I said earlier, on the question of two codes, a basic code that applies to everybody, which gives everybody certainty of the same level of protection, and an enhanced code for the larger companies is right. There is stuff currently in the draft code that should be moved from the basic code to the enhanced code. Tom touched on them earlier: the RICS sign-off, the compliance reports and the compliance
Q 196 Mr Wright: May I ask all four members of the panel a simple question? Should an amendment be introduced to exempt breweries with fewer than 500 tied pubs? Is that something you would support? Yes or no?
Tom Stainer: We were not arguing for companies with under 500 to be included—if the Committee is minded to do that. As I explained, we would argue for those measures to be moved into the enhanced code, for that reason of proportionality that you mentioned.
Andy Tighe: If parallel rent assessments are for information purposes only, and the issue of temporary agreements is adjusted so that, for example, they kick in only after the temporary tenant has been in there more than 12 months, then yes, definitely.
I am a bit confused because, following exactly Ian’s line of inquiry and Kate’s response, if some of those additional compliance costs were moved into the enhanced code, and you maintained a core code that applied to everyone but was less onerous in terms of the compliance regime on the family brewers, would everyone support that?
Andy Tighe: From our perspective, self-regulation works. The system works. It is a lower-cost system to achieve everyone’s aims: fair and lawful dealing between landlords and their tenants. Again, it is about proportionality.
Simon Clarke: We were asked for a yes or no earlier and now you are asking for a yes or no again. The bit that I wasn’t able to say then is that it is important that the 500 is 500 pubs, not 500 tied pubs, but the code applies to the tied pubs. We could end up with, for example, a brewery having 10,000 pubs with no statutory regulation. In that respect, obviously, we have issues with the 50 tied or 500 pubs.
As I said before, we were quite content that family brewers would not be controlled by statutory regulation so, as far as we can see, if you moved things around within the statutory code so that they have less onerous terms, that is more than we were expecting.
Q 198 Ian Murray: May I declare an interest as a former lessee of Enterprise and Greene King, Bellhaven and the G1 Group, so I know a bit about tied leases? My main contention of the way the current system operates is that the tie has pushed up prices for consumers on the basis that lessees have had to make a certain gross profit to make their business operate properly. If that is the contention for pushing up prices for consumers and consumers have used their feet and gone to the supermarket instead of into the licensed trade, which has perpetuated the closure of premises, will the Bill with its current provisions reduce prices for consumers and allow the industry to become more fruitful not just in sustaining the current estate of licensed premises but perhaps even increasing it?
Andy Tighe: From our perspective, the data show that over the past four years at least prices are cheaper in tenanted leased pubs than in independent or managed pubs. We do not think there is an issue with the tied model increasing prices to consumers, or that any aspects of the Bill would result in lower prices. Certainly if an adjudicator is setting rent based on “no worse off”, that could lead to some transfer of value from pub operators to tenants and a risk of less investment in the sector and further pub closures, and that would obviously increase prices rather than decrease them.
Tom Stainer: I disagree with that. We have looked at the results of a survey by the Federation of Small Businesses which shows that if licensees had a greater share of the profits by having to pay less for their beer and have better margins, they would invest. Some 74% said they would invest in advertising and promotion, 75% would increase staff hours—that is employment—78% would increase spending on maintenance work, and 73% would increase spending on refurbishment and modernisation. That makes a business more competitive and offers a much better service to customers and brings people in. We hope they would pass on some of the savings to customers to remain competitive and to offer a good business. They are business people and they know what will bring people through the door.
Kate Nicholls: Pricing for consumers is not just about the cost at which you buy in the product and sell it. It is about much more complicated and interrelated factors: the offer you want to put out and the amount of margin you want in the business to enable you to invest and move forward. What we want is a long-term sustainable industry and in particular, sustainable growth so that we can grow the tied segment of the market. We need stability, consistency and certainty to allow businesses, tied lessees and landlords to invest. That is what has held us back over recent years. If we go ahead and implement this Bill quickly and its provisions follow swiftly thereafter, this is an opportunity to deliver a period of certainty for the industry so that lessees can invest.
Simon Clarke: You benefit from experience in this. You probably know, as I do, that the tied tenants are effectively setting the price of a pint of beer. That is determined by the gross profit they achieve, the cost of running the pub and some sort of margin for themselves. Many of them are squeaking by; we know that 80% are on £15,000 or less, and the price of a pint at the bar is just covering those costs. The free-of-tie operators in the managed houses can charge the same or more than that if they want to, achieving a much higher GP. As a
The prices are set by the tied tenants, and that is the baseline for anyone who is going to price a beer. If we were able to have the market-rent-only option in the Bill, I suspect we would see tenant profitability increase considerably and investment in the sector. You will not need to worry about investment in a pub company if you are already a more profitable pub; arguably, you do not need support any more in the form of investment. The FSB figures included what a tenant would potentially do with this increase in profitability, and that included lowering the price of a pint and hoping to earn a little more money themselves.
Q 199 Oliver Colvile (Plymouth, Sutton and Devonport) (Con): Thank you all for coming. I am sorry I was not here at the beginning; I was in the Chamber, trying to save a tennis court in my constituency. I have microbreweries in my constituency, and there are about 30 of them across Devon. How do you see these changes impacting on them? If you ever want to come to The Hyde Park pub in Plymouth, you are very welcome to do so. It is a good community pub that I would be delighted to take you to.
Tom Stainer: We would be very keen to see you think about the de minimis that you have set. Currently, you are suggesting that companies employing fewer than 10 people should be excluded from the code. You cited small microbreweries; they might run one or two pubs and could be employing 10 people just on the brewing side of their business, which means that the employee level being set at 10 is maybe the wrong measure. We would be very supportive of setting that level so that a company which runs fewer than 10 pubs would qualify as a micro-business and would therefore be excluded from the code. That would help those small breweries with maybe one or two tied houses at the moment to invest, expand and grow their businesses in local areas like yours.
Andy Tighe: This just shows the danger of undermining the tied business model. Those microbreweries are growing—as you say, there are increasing numbers of them—by looking to buy tied pubs to sell their beer in. It is a fundamental model for the growth of those companies as well.
Q 200 Oliver Colvile: There are also community pubs—people deciding that they do not want to see the pub go. Someone may want to develop one, as is happening in my constituency. We must do everything we can to protect those pubs as well.
Tom Stainer: I don’t think that any of this is about undermining that tied system. A fair, balanced tied system can be fantastic for small breweries and regional breweries. What we are talking about here will be beneficial for the larger pub companies as well, in terms of the profitability of the pubs they are running, their reputations and everything else. This is not about undermining the tie. It is about making it fair, making it work and delivering great pubs for drinkers.
Simon Clarke: I deal with quite a few brewers that are members of the Society of Independent Brewers. Incidentally, it is interesting that you bring up microbrewers. You have your family brewers, which are fairly large regionals now, and some of them are not family-run anymore. Then you have your microbrewers, of which there are 1,200 to 1,400 in this country, which is great news. Around 400—a third—are represented by SIBA.
It might surprise you to know that SIBA initially sowed the seeds of the market-rent-only option in mediation back in 2009. It has since U-turned on that. In 2013, it put a public consultation submission in saying that it is no longer in favour of the market-rent-only option. I have to say that of all the family brewers I have dealt with—I deal with a lot—I have yet to find one who even knew that SIBA had put a submission in, let alone that it had U-turned. It seems to me that the executive of SIBA are not necessarily delivering the views of their members. You have all got microbrewers in your constituencies, and it would be beneficial for you to have a little chat with them to see where they fall on that.
Having said that, your question was about the brewery in your constituency. Our original plan was that the family brewers would not be included in the statutory regulations, so the microbrewers would certainly not be.
Q 201 Andrew Griffiths: Mr Clarke, may I give you a scenario on your free-of-tie option? I should first declare that I am the Member of Parliament for Burton, which is the epicentre of brewing and pubs. I am also the chairman of the all-party group on beer. If I am renting a pub from Marston’s, which is based in my constituency, you are suggesting that while Marston’s might have owned the pub for 50 or 100 years and I might have been a tenant for 10 years or 10 months, I should have the right to say to Marston’s, “I no longer want to buy my beer from you. I want to sell Greene King’s beer or someone else’s beer”—even though it is a Marston’s pub that it bought and owned—“and I want someone else to tell Marston’s what I will pay it in rent.” That is the reality of a free of tie, market-rent-only option, is it not? That scenario could happen.
May I ask one other quick question? You talk about a limit of 500 pubs, no matter how many tenanted pubs a company owns. You are suggesting that a company that owns 501 pubs, where only one has a tied tenancy, should be included, but a company that has 499 pubs, all of which are tenanted, should not be included. How does that protect the tenants?
Simon Clarke: It is a market share issue. If it has 501 pubs and one is tenanted, the pub company will pay £95 towards the levy and that one tenant would be
Q 204 Andrew Griffiths: It is not just about paying to be part of the scheme; there are also the scheme’s compliance costs. It is about the compliance costs of being regulated, not just how much you pay to be in. That company, even though it had one pub, would have the same compliance costs.
Q 205 Ian Murray: I will be very quick. This is more of a comment. I cannot accept, with the exception of Simon, that reducing a barrel of beer from £500 to £300 does not benefit the consumer in any way, given that every single time we have a Budget, most of the pub and beer associations rightly say to us that we should we be reducing duty. When it goes down by 1p, the bunting goes up. Unless the process can reduce prices for the consumer and, I fully appreciate, for tenants, how is this a way forward to get more people through the doors of pubs?
Andy Tighe: I think I can answer. It is about the overall costs of running that business, not just the price of the beer. If there is a negotiation for the price of your beer to go down, then your dry rent goes up and you lose some of the other benefits associated with the tied pub model.
The Chair: Order. I am afraid that brings us to the end of the time for this panel. I am sorry to interrupt. I thank all of the witnesses for coming to give evidence. We will move on to the next panel.
Examination of Witness
Q 208 Toby Perkins: Welcome. Gill, you or Ofsted have said that encouraging schools to take on younger children will raise educational attainment, particularly of children from low-income families. How do you
Gill Jones: We have to be very careful to understand what we mean by having two-year-olds in schools. We are not suggesting for a moment that two-year-olds in schools should be subject to any sort of formal education. I think that has been rather misinterpreted by the press since the launch of our annual report in April.
The early years foundation stage in school is by itself a mixture of educational performance within the school. At the top end of the foundation stage, when children are five and getting prepared to go into year 1, you tend to see more formal activities, preparing them to read, write, take part in activities. The younger the children, the less formal those activities are. The younger children are playing in the sand, in water, dressing up and having the sort of activities that you would want them to have.
The formal versus the informal is a bit of a red herring, because all schools understand the early years foundation stage. Many schools already have nurseries with three-year-olds in. Many schools also have private providers on their sites where they run provision for nought to four, and they work very closely with them. In those schools the teachers are able to help those nurseries to give children the good grounding in early language and communication skills in preparation for what they need when they get to more formal schooling when they are older.
Q 209 Anne Marie Morris (Newton Abbot) (Con): If I may, I will turn to clauses 65 and 66, about the registration of multiple premises. The Bill proposes that that should be done through a single registration process. How is Ofsted going to ensure that all of the premises are suitable?
Gill Jones: At the moment, Ofsted will still be required to visit every premises as part of this multiple premises provision. So even though the Bill allows one provider to register several premises, we will still have to visit all premises. So for us there will be no change in this. This is of benefit to the provider but will make no difference to Ofsted as it stands.
Q 210 Anne Marie Morris: May I ask you about a time line? Clearly, if they say they have four premises, you know where you are and you can go and look at them all and say, “Yes, fine.” Often you have situations where you start with one premises and then you look at another premises. How would Ofsted deal with a request to add when in theory the permission includes additional premises? Some of those additions would be short term, such as if there was a flood and they had to be relocated elsewhere. How would you deal with some of those after-the-event additions and those short-term problems?
Gill Jones: Currently we have different ways of organising registration visits according to the needs. We have temporary registration protocols that we put in place in the event of a flood, for example. In terms of the time it takes to go and visit premises, it takes as long as it takes and much will depend on the location of the premises and their proximity to the master premises. It is really important that we get registration right because it is the gateway to providers looking after children. If we don’t get registration right then we risk having providers within the system that we do not want.
We have offered some feedback to the Department on this part of the Bill. One of the things we feel is that if a provider is well known to us and has several premises which we have been to inspect, and we have judged their provision to be outstanding, the need to visit those providers when they are opening up new premises is less of a risk to us. We would welcome some slackening of that where we are confident that the provider is doing a good job. However, if the provider is unknown to us and wants to open multiple premises, then we think it would be extremely important that we visit all those premises and do a thorough investigation of the quality.
Q 211 Anne Marie Morris: So how does that work in practice? The point behind the legislation is to try, as you say, to make it easier for the provider. But it seems as though there is a way of doing it if they are well known, with a history, and a way of doing it if they are not. That seems a bit pot luck: the school may be excellent, but it just happens to be the first time they have set up. How do you get some balance and fairness into the system?
Gill Jones: We have to rely on the information that we have in the system. So if it is a provider that is known to us there will be an inspection history. We also have data on whether there have been complaints against the provider. Before we take any action, whether it is inspection, investigation or new registration of new premises, we would look at that history. If the provider has no history, we have to start from scratch and our registration processes must be very thorough, otherwise we are in danger of putting young children at risk.
Q 212 Anne Marie Morris: So if I want to open a school I will not be certain under this Bill whether I will have to go through quite a complicated process or whether it will be quick, depending on my track record with Ofsted?
Gill Jones: Can you explain to me what you mean by a school as schools fall under a different regulation in terms of Ofsted regulation? In this part we are talking about private providers that have to register on the early years register. That is separate from the schools that are taking two-year-olds. They are already registered. Perhaps I am talking at cross purposes here.
Gill Jones: That is through our registration process. If you wanted to set up as a childminder and you are unknown to us, we would do a full registration visit—check your suitability as a childminder, your knowledge of the early years foundation stage and the suitability of your premises. Under the Bill, you could register more than one premises in your name at the same time and only one registration application would be needed, but we would visit all those premises as part of that registration. As a single childminder you might operate from three different premises: for example, your house, your mother’s house and maybe in a school classroom that is vacant at the end of the day. Under the Bill, we would make only one registration dataset but we would make three visits to the different premises to check their suitability.
What we would like, as part of the Bill, is not to have to visit all the premises of childminders who are well known to us, have outstanding judgments, and who want to extend where they operate. We would not necessarily want to visit all the premises that they operated, because we would have trust in their judgment from what we have already seen through our inspection and complaints history. That is where we think that there might be a little more flexibility for Ofsted in the Bill because currently, for us, there would be no difference, whether you make a multiple or a single registration.
Q 214 Chris White (Warwick and Leamington) (Con): First, do you feel that the Bill meets the increasing demand for new provision? Secondly, you have mentioned known providers a number of times. I imagine that the Bill will open up to a number of new providers, which are not known to you. How do you feel Ofsted is going to be able to manage that process to give an assurance on standards?
Gill Jones: We have robust procedures in place to ensure quality. With regard to the loosening of registration regulations to allow two-year-olds in schools, we have a well respected inspection system to judge the quality of schools. We have a lot of data on schools. We have procedures to accept complaints and safeguarding issues, and we investigate and inspect as a result of those. The flexibility that a school is afforded by being able to open its doors to younger children is a really positive move and a positive part of the Bill. Child care provided by schools, particularly for the most vulnerable and poorest children, is enabling them to make much better progress and have better outcomes by the time they are five, seven, 11 and going on to 16. If you think of the achievement gap between the more affluent and poorer children in our society, it is important that we get high quality provision in place for younger children.
We are confident in Ofsted about provision that is led by school leaders who want to do the work because, let’s face it, there will be a lot of head teachers who say, “No thank you, I don’t want two-year-olds in my school.” Head teachers who are passionate about improving life chances for our poorest children are going to want to open this sort of provision and are going to be excellent at delivering it. That is a positive for the system.
It is a good thing when new providers want to work with and approach head teachers. We are not saying that it has to be just the school that opens the provision. Many providers want to work with schools to prepare children well for starting school. There is flexibility there as well. When a new provider approaches Ofsted, we have a system in place. Our website is welcoming to new providers, though perhaps not perfect yet. We are working to improve it. Anyone who wishes to set up as a child care provider can do so via our website. We have a range of checks, which are very robust, and the length of time it takes to register will depend on the provider. In Ofsted, we have to be confident that, when we register someone to provide child care, they are suitable to do that job so we take a lot of care about that.
Q 215 Nicola Blackwood (Oxford West and Abingdon) (Con): You have spoken a bit about the benefits that the proposals could bring in raising attainment for children from lower income families and we have heard a bit about the concerns around what exactly that means.
Gill Jones: When two-year-olds are in school provision that is managed by the governing body of the school, they will fall under the section 5 framework in terms of inspection. Currently, section 5 inspection covers children from the age of three to 18 and that will be extended down to include two-year-olds. In the section 5 framework, there is a behaviour and safety judgment and a leadership and management judgement. Both those judgments look at safeguarding and welfare.
Within the section 5 judgment, we introduced in September this year an early years grade for the overall effectiveness of the quality and standards in the early years foundation stage. That looks at the welfare of children in that stage. When a school is inspected it will, under section 5, have an early years judgment. That early years judgment will be predicated on how well the school is delivering the early years foundation stage. Within that there are welfare requirements so it will be taken account of as part of that inspection.
Of course, we have inspection cycles. Depending on where the school is—whether it is outstanding, whether it is good—the cycle will be different. Schools that we have the most concerns about, and those where we have most concerns about leadership, we go into frequently. If a school requires improvement, for example, we are in that school two or three times in a year and we re-inspect on a regular basis. If a school is outstanding and we judge the leadership to be outstanding, we leave that school alone. The very fact that the outstanding leadership is there is important, but we have risk assessment procedures that will trigger an inspection even if a school is outstanding. For example, if we get safeguarding complaints about a school through to Ofsted, if their data have a large dip, or if we have a number of complaints that come through local intelligence such as the press, we will also look more closely at the school.
Q 216 Nicola Blackwood: In your experience, how effective are schools at implementing their safeguarding measures when you compare them with other child care settings such as a Sure Start centre or domestic settings?
Gill Jones: It is difficult to make a general comparison in that way. We could retrieve behaviour and safety grades in our section 5 inspection frameworks and we could compare those with welfare grades in our early years registered framework. My instinct would tell me that they would come out pretty much the same. I do not think that we have inspectors working for Ofsted who are not alert to behaviour and safety issues in schools and safeguarding issues in early years settings. We train our inspectors well in safeguarding. Every part of training that we deliver always has a welfare and safeguarding focus to it, because we know that children who are not comfortable in school, who feel bullied, vulnerable or at risk, do not learn as well as other children. It is under the umbrella of inspection, and it is on all inspectors’ radars.
However, my experience of being a head teacher prior to joining Ofsted tells me that it is difficult to identify people who are determined to break the rules
Q 217 Oliver Colvile: First, thank you for coming to see us. I must declare an interest, because I am a school governor at St Andrew’s primary school in Plymouth, and a very good school it is too. Thank you for the Ofsted report that you gave it.
I represent a city and a town with a university and a further education college. One of the things we need to do is encourage teenagers who may end up having children at a young age to go to university or a further education college. Do you think we should be looking at trying to extend this provision to include universities and further education colleges, or am I being particularly stupid? I may well be, so do not worry.
Gill Jones: That is a really interesting question, which I have been asked before. Yes, it is really important to get child care where people need it. I know the difficulties that young people who have young families face in going out to work or carrying on with their education. One of the barriers to carrying on is the fact that child care is often too expensive or in the wrong places, so they cannot access it. Yes, we do need more child care where people need it. We have not got enough child care in some areas.
Deregulating in colleges or universities is different from deregulating in schools. Where we are deregulating in schools, it will mainly affect primary schools and nursery schools that are already keen on young children and understand their levels of development. A primary school head teacher might have children aged six who have a developmental age of two or three, so they are familiar with the different needs. For a university, the level of care and safeguarding for students is very different from the level of care and safeguarding for two-year-olds. I would want to be convinced that those who are leading the provision are accountable in some way. They would not currently be accountable under our Ofsted frameworks for two-year-old provision in a university or further education college on that site.
Gill Jones: I hope so. In our annual report we recommended that more schools should be responsible for getting children ready for school. One of the key aspects of that is about providers knowing what they need to do to prepare children for school and having a shared view of the sort of skills young children need, particularly in language and communication. That will be the key to improvement. Where we see children not achieving, it is very often due to a language and communication barrier: they do not have the vocabulary they need to conceptualise things and they cannot bring meaning to what is being said to them because they have not had that experience at a young enough age. Where children have poor provision or are in poor
Gill Jones: We would currently inspect child care on a domestic premises under our early years registered framework, so essentially we would be looking at the progress that children make and the learning there, at their welfare and safety and at the leadership and management. I know that might sound a little bit weird for childminders, but it is about how they are implementing the early years foundation stage.
Gill Jones: For a single childminder, currently, we would inspect once in the four-year inspection cycle. Our inspection cycle will finish in August 2016 and a new inspection cycle will start after that. We had a previous four-year inspection cycle, so it is possible for people to be inspected anywhere within that cycle. However, if concern is raised against a provider, we will investigate that concern. That investigation can lead to an investigation visit or to an inspection being brought forward, or to just a note being put on the file to be picked up by the next inspector.
Q 221 Andrew Griffiths: Obviously, ensuring the safety of the child is the most important thing here, but, of course, on the other side of the coin these are businesses operating to provide care and to make a profit. Is there any scope within this for reducing some of the burden on providers, or do you think that would be the wrong way to go? Have you had any conversations, particularly with domestic providers of child care? How do you think they will react to the proposals in the Bill?
Gill Jones: I think the proposals, in terms of our inspection, will not affect providers a great deal. I think if we were to change our inspection regime and have a lighter touch, or were not to inspect them against the whole of the EYFS, some childminders would put their hands up and shout in glory. However, equally, other childminders say to us, “Actually, inspection is the best thing that has happened to us. It is really helped us develop. Since the introduction of the EYFS, the fact that you are looking at learning and development when you come out, is really helping us to work in a better way with children.”
That is really important for where childminders are at the weaker end of the spectrum. It may not be so important for the childminder I used for my own children. She was fine—she lived around the corner and it was a nice corner, so my children were fine—but if you do not live in an area where you can guarantee that sort of thing, or if you are a parent who cannot make those choices easily, it is important that, as an inspectorate and a regulator, we are there, giving some form of quality assurance.
Gill Jones: As I said, we would like a little more flexibility around providers that we know well, when they are opening new premises. In terms of our inspection activity, the Bill does not have a great deal of impact, other than that we will be inspecting some children under a different framework from the one that they are inspected under currently.