Not cleared from scrutiny; further information requested; drawn to the attention of the Environment, Food and Rural Affairs Committee
Proposal for a Directive of the European Parliament and of the Council on unfair trading practices in business-to-business relationships in the food supply chain
Article 43(2) TFEU, QMV, Ordinary legislative procedure
Environment, Food and Rural Affairs
(39625), 7809/18 + ADDs 1–3, COM(18) 173
1.1With the aim of improving farmers’ and other small and medium sized enterprises’ (SMEs) position in the food supply chain, the European Commission has new legislation on unfair trading practices (UTPs), which are business-to-business practices that deviate from good commercial conduct and are contrary to good faith and fair dealing.
1.2The Commission believes that the food supply chain is particularly vulnerable to UTPs due to stark imbalances between small and large operators. Often farmers and small operators in the food supply chain do not have sufficient bargaining power to defend against UTPs. While some countries—including the UK through its Groceries Code Adjudicator—already have systems in place to guard against such UTPs, others do not and so the Commission proposal aims to ensure a standard level of protection across the EU. Even where there are policies in place, differences exist. While some apply to the whole chain, they do not in the UK and elsewhere.
1.3The proposed directive applies to sales of food by any SME supplier to any non-SME buyer. Suppliers may be based anywhere in the world, but buyers should be based in the EU.
1.4The Commission proposes to ban some of the most common UTPs, such as:
1.5While exceptions from the ban on the above UTPs cannot be negotiated through contracts, a number of other UTPs are prohibited unless agreed in clear and unambiguous terms at the conclusion of the supply agreement. In addition, the European Commission proposes that each Member State designate a competent authority to enforce the new rules, and sets out the minimum enforcement powers of such authorities. These include the power to apply an “effective, proportionate and dissuasive” fine. Enforcement authorities will be obliged to cooperate with each other, meeting once per year and providing mutual assistance in investigations that have a cross-border dimension. Member States may provide for more stringent rules to combat UTPs as long as they are compatible with the internal market.
1.6The UK’s Groceries Code Adjudicator has the power to investigate UTPs by the ten largest retailers in their relationships with their direct suppliers and has the ultimate power to fine retailers (up to a level of 1% of their annual UK turnover). The key difference between the GCA and the proposed model is that the Commission’s model would apply throughout the supply chain and to buyers not currently covered, including those within the food processing and food service sectors. It should also be noted that the GCA’s remit includes all groceries and so is not restricted to food.
1.7Turning to the UK’s withdrawal from the European Union, the legislation would need to be applied in national law 12 months after entry into force and so could potentially apply to the UK before the end of the post-Brexit implementation period. Regardless of that requirement, it would in any case apply to UK suppliers to EU buyers. UK domestic rules, though, would continue to apply to EU and non-EU suppliers to UK buyers.
1.8The Minister for Agriculture, Fisheries and Food is unsupportive of the proposal, arguing that such initiatives are best delivered by national legislation. He points in his to the UK’s existing GCA and to the Government’s Call for Evidence in October 2016 on the case for extending the GCA’s remit. The Government is particularly concerned that extension of the remit, as proposed by the Commission, would be very expensive and believes that other approaches are more appropriate to tackle challenges throughout the supply chain. The Minister further clarified his position in to the Environment, Food and Rural Affairs Committee on 2 May 2018, explaining that the UK is likely to abstain on the basis that the UK will not stand in the way of an initiative that is unlikely to affect the UK.
1.9The Minister’s approach appears to be based on two key concerns: the importance of Member State flexibility to make arrangements most appropriate to its market; and the cost of the increased remit of the regulator.
1.10On the desirability of taking action at the national level, we note that the European Commission assessed progress in 2016 and made a number of recommendations which, if they had been delivered, may have precluded the need for regulatory action. This included the suggestion that national UTP provisions apply to the whole supply chain.
1.11In his evidence to the Environment, Food and Rural Affairs Committee on 2 May, the Minister said that it was most appropriate for Member States to legislate in a way that works for their own supply chain. We would welcome a view on the extent to which the Minister considers the UK’s food retail market to consist of a homogeneous supply chain across the UK and to be largely isolated from the EU market. It would also be helpful to be clear to what extent a UK-only model is helpful to those trading with buyers in other EU countries. We note that Northern Irish farming representatives are supportive of the proposal and observe that this may be related to the relevance of the cross-border market. How sympathetic is the Minister to the potential benefits of a coherent EU approach to those UK suppliers trading with buyers elsewhere and what engagement has the Government had with such suppliers in formulating its position on this proposal? To what extent is there a risk that a more stringent EU approach would divert trade from UK buyers to EU buyers?
1.12On the Minister’s concern about the budgetary implications of a remit that extends to the whole supply chain rather than the more restricted UK approach, we would encourage the Government to engage constructively with other Member States. As the Minister notes, the proposal could prove contentious with other Member States and there is therefore a strong likelihood that the proposal will in any case be amended before adoption. It may be, for example, that there is shared appetite either to restrict the scope or to phase-in the arrangement, with steps built in to assess progress. Equally, the UK might gain some traction in sharing the responses that it received in its response to the Call for Evidence on extending the remit of the GCA.
1.13Turning to the scope of the proposal, we would welcome clarification of what is proposed to be covered. As we understand the proposal, it would apply to all non-SME buyers, including those outside the retail sector such as food service and food processing. Compared to coverage by the UK’s existing Code, what information does the Government have on the volume of buyers and trading relationships to which the proposal would extend coverage?
1.14As regards what is covered, the proposed legislation as drafted would require suppliers to be paid no later than 30 calendar days after receipt of the supplier’s invoice or after the date of delivery. No such fixed limit currently applies in the UK. To what extent might application of such a limit be helpful in the UK?
1.15On transposition, we note the six-month transposition deadline, with a further six months to apply the transposed legislation, and therefore that the UK is likely to need to transpose the legislation during the implementation period. Given the Government’s antipathy towards the legislation, we ask whether the UK: would be likely to amend its rules for several months and then revert to the status quo; would amend its rules and retain them post-implementation period; or whether the UK will push instead for a longer transposition period closer to the more standard two years and thus avoid the transposition requirement.
1.16Finally, the Minister’s core concern—that matters such as this are most appropriately regulated at the national level—suggests that the Minister considers that the proposal breaches the principle of subsidiarity (whereby action should only be taken by the EU where it is better placed to act than Member States). Regrettably, the section of the EM on subsidiarity simply replicates the Commission’s justification. We would welcome a comprehensive subsidiarity analysis from the Minister.
1.17We retain the proposal under scrutiny and draw it to the attention of the Environment, Food and Rural Affairs Committee. We expect to receive a response within ten working days.
1.18The European Commission sets out the impact of unfair trading practices (UTPs) on suppliers in the following terms:
“When occurring, UTPs can put operators’ profits and margins under pressure, which can result in a misallocation of resources and even drive otherwise viable and competitive players out of business. For example, retroactive unilateral reductions of the contracted quantity for perishable goods equates to income foregone for an operator who may not easily find an alternative outlet for these goods. Late payments for perishable products after they are delivered and sold by the buyer constitute extra financial cost for the supplier. Possible obligations for suppliers to take back products not sold by the buyer after the suppliers and buyer may constitute an undue transfer of risk to suppliers that has repercussions on their security of planning and investment. Being forced to contribute to generic in-store promotional activities of distributors without drawing a commensurate benefit may unduly reduce a supplier’s margin.”
1.19The European Commission has been looking into UTPs in the food supply chain for several years already. In January 2016, the Commission took note in a specific of positive developments to address unfair trading practices in the sector, both at national level and in the form of the voluntary (SCI) initiated by the private sector. At the time, the need for EU legislation in this area was considered unnecessary but the Commission committed nevertheless to re-assess that need in the light of subsequent developments before the end of its mandate.
1.20In terms of the current approach, including developments since the Commission’s Report in 2016, the Commission notes that 20 Member States have adopted rules on UTPs, but that the approach is diverse and there is very little coordination among Member States’ enforcement authorities. While the SCI has helped raise awareness, it is voluntary and does not cover all operators in the supply chain.
1.22The Groceries Code Adjudicator was created under the Groceries Code Adjudicator Act 2013 to oversee and enforce the pre- (the Code). The Code is set out in Schedule 1 to the Groceries (Supply Chain Practices) Market Investigation Order 2009. The 2009 Order applies to ten ‘designated retailers’, as set out in Schedule 2 to the Order, with the power for the Competition and Markets Authority to designate in writing as a ‘designated retailer’ any groceries retailer with a turnover exceeding £1 billion in the UK. It governs their commercial relationships with their direct suppliers who supply groceries for resale in the UK.
1.23The Code covers the following areas:
1.24The UK’s overarching approach is set out in the following terms:
“The UK broadly supports initiatives designed to promote a fairer, more transparent food supply chain. However, the UK Government believes these initiatives are best delivered by national legislation.”
1.25While the above approach implies an objection on the grounds of subsidiarity (i.e. the objective is best achieved by action at the national level), the Minister’s subsidiarity assessment is restricted to a simple repetition of the Commission’s view:
“The Commission believes that the EU proposal in question complies with the principle of subsidiarity as set out in Article 5 of the TEU. The Commission considers that Community action is justified as the proposed directive seeks to provide for a minimum European standard of protection by approximating or harmonising Member States’ diverging UTP measures.”
1.26The Minister notes that the issue of UTPs in the agri-food supply chain is widely acknowledged, and remains a concern for the majority of Member States. The Government, he says, recently published the results of a public consultation on the case to extend the remit of the Groceries Code Adjudicator, and the evidence gathered revealed instances of unfair behaviour among operators in the UK food supply chain.
1.27The findings of the consultation indicated there was insufficient evidence to justify an extension of the GCA’s remit. Instead the Government proposed a suite of targeted measures to address specific issues raised through the call for evidence. The Government has also committed to launch a call for evidence on how unfair payment practices for small businesses can be eliminated. This should provide evidence on the need to build on the Government’s existing late payment policies to drive an end to unfair payment practices experienced by small businesses.
1.28There are also a number of measures the Government is taking to tackle the late payment culture across all sectors, including the appointment of the Small Business Commissioner in October 2017 to help small businesses prevent or resolve payment issues.
1.29In formulating its position, the Government has consulted with the Devolved Administrations. The Minister notes that Northern Ireland farming stakeholders have welcomed the Commission proposals as a useful basis upon which to build and they will be monitoring progress of the draft directive closely.
1.30The Minister explains that the proposed directive was prompted by the conclusions of the . He summarises the outcome of the task force as concluding that any measures proposed by the Commission were to avoid anything which would cut across the operations of existing domestic regulators functioning in this space.
1.31Turning to the Government’s concerns and observations about the proposed Directive, the Minister says:
“If this directive is required to be transposed before the end of the EU exit transition period then we will be required to create an enforcement authority. The body would regulate any business relationship between an SME and a non-SME operating in the food supply chain, and subject to further analysis would likely demand a significant resource burden.
“If the directive was transposed as drafted, the new UTP rules would enable third country suppliers to rely on them if confronted with UTPs by buyers situated in the EU. This would have implications for UK producers who sell into the EU once we have left, as they would have recourse to these laws should they encounter UTPs in their dealings with EU based buyers.”
1.32Regarding impact assessments, the Minister indicates that the Government has not undertaken one, noting that the data gathered by the Government’s earlier call for evidence suggests that greater value for money is available through targeted measures aimed at specific problems.
1.33The Commission’s impact assessment estimates that the proposals will have overall economic benefits for small operators in the food chain who will be protected through UTP legislation. This will increase their businesses efficiency and should result in positive economic impacts on society. Social and environmental impacts are expected to be neutral or even positive.
1.34The Government is still analysing the details of the Commission’s impact assessment, but makes the following preliminary observations:
“The Commission impact assessment estimates that administrative costs to Member States will be limited, although highest in Member States where there are no current anti-UTP regimes.
“We have not conducted a formal assessment of financial implications, but are sceptical of the Commission’s assertion that ‘where there already exists specific legislation on UTPs, already covering the UTPs identified in the preferred option, and with an existing public competent authority with effective enforcement powers, additional costs from EU action are expected to be negligible’.
“We are still considering options for potential enforcement bodies, and expect that there will be significant administrative costs.”
1.35On timing, the Minister notes that the timetable for adoption is unclear. He adds that this is a controversial area for a number of Member States, which means that it is likely that the proposed directive will take some time to go through the ordinary legislative process.
1.36Turning to possible transposition before the end of the post-Brexit implementation period on 31 December 2020, the Minister observes that the proposed directive has an unusually short transposition period of six months, with a further six months before the transposed laws must be applied. There is therefore what the Minister describes as a “medium to high risk” that the UK would have to implement the directive before the end of the transition period. On the other hand, there is a “low risk” of a requirement to transpose if the UK withdraws from the EU on 29 March 2019 with no transition period.
1 A “Small and Medium-Sized Enterprise” which employs fewer than 250 persons and has an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million.
2 Aldi, Asda, Co-operative, Iceland, Lidl, Marks and Spencer, Morrison’s, Sainsbury’s, Tesco, and Waitrose.
3 The EU legislation should be transposed into national law six months after its entry into force.
4 Report from the Commission on unfair business-to-business trading practices in the food supply chain, COM(16) 32.
5 dated 3 May 2018.
Published: 22 May 2018