The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)
My Lords, the Bill received its First Reading on 10 May, the day after the Queen’s Speech. This reflects the high degree of importance that the Government place on this measure and our desire to establish the adjudicator as soon as possible.
The purpose of the Bill is to establish a groceries code adjudicator to enforce the groceries code and ensure that large supermarket retailers treat their suppliers fairly and lawfully. As a competition measure, this is not a devolved matter and will affect the entire United Kingdom. However, the Bill has been discussed with the devolved Administrations, who support the adjudicator’s establishment.
Before I turn to the detail of the Bill itself, I wish to explain why we must now take action. In its 2008 report on the supply of groceries, the Competition Commission found that in certain circumstances the buying power of large supermarkets was potentially a cause for concern. The commission found that at times retailers transferred excessive risks or unexpected costs to their suppliers. This in turn was likely to lessen suppliers’ incentives to invest and innovate, which could act to the long-term detriment of consumers.
As a result, the Competition Commission made an order that required large supermarket retailers—those with a turnover of more than £1 billion pounds a year—to incorporate the Groceries Supply Code of Practice into their contracts with suppliers. The code requires large retailers to treat their suppliers fairly and lawfully, and places limits on a number of practices, such as the retroactive alteration of contracts. It applies equally to British and overseas suppliers.
However, the Competition Commission recognised that, by itself, such a code would not achieve the desired change. Very few suppliers would be willing to take a retailer to arbitration or to court, due to the buying power of the retailers and the fact that the supplier will be dependent on them for future business. In consequence, the Competition Commission recommended that an independent groceries code adjudicator be established to enforce the code and ensure that it was effective.
I know that noble Lords on both sides of this House are eager to see the adjudicator introduced. As a former supplier to supermarkets myself, I am very aware of the concerns that the code and the adjudicator will address. However, I also know that in most cases large supermarkets act well, that they contribute to jobs and prosperity and that the groceries market overall is a highly competitive one, which has been very effective in delivering low prices and wide choice to consumers. The adjudicator’s powers must therefore be both adequate and proportionate, ensuring that he or she can uphold the groceries code while avoiding excessive burdens on retailers.
The adjudicator will investigate large retailers and hold them to account if they have broken the groceries code. There will be no restrictions on who can complain to the adjudicator, and all complaints will be kept in strict confidence. This means that the adjudicator can receive information from any source, potentially including direct and indirect suppliers, including farmers, whistleblowers within the large retailers and trade associations representing their members. If retailers do break the code, the adjudicator will have tough sanctions, including so-called “name and shame”, instructing retailers to publish information about a breach. We think that these sanctions are powerful enough to uphold the code. However, if this proves not to be the case, the Bill allows the Secretary of State to grant the adjudicator a power to impose financial penalties.
Aside from this investigatory role, the adjudicator will have a number of other functions. These are: to publish guidance on when and how investigations will proceed and how enforcement powers will be used; to advise large retailers and suppliers on the groceries code; to recommend changes to the groceries code to the Office of Fair Trading; to arbitrate individual disputes between large retailers and their direct suppliers, or appoint another person to do so; and to report annually on his or her work.
I emphasise that the adjudicator’s direct responsibility is restricted to enforcing the code, which concerns the relationship between retailers and their direct suppliers. By preventing retailers from passing on excessive risk and unexpected costs, the adjudicator will increase the stability of the supply chain as a whole, unlocking investment and innovation.
I recognise that in some sectors, some suppliers have concerns around the activities of intermediaries in the supply chain. However, any extension of the code or of the adjudicator’s role in this way would need to be based on proper evidence and due consultation. Extending the code down the supply chain would be likely to lead to over-regulation, restricting practices which are not problematic and placing an undue burden on business.
I will now discuss further two areas that I know are of particular interest to those who support the Bill: how the adjudicator will carry out investigations and what powers he or she will have to hold to account retailers who have broken the code. There will be no restrictions on who can complain to the adjudicator. In order to begin an investigation, the adjudicator must have reasonable grounds to suspect that the retailer has either broken the code or failed to follow a previous recommendation by the adjudicator. Investigations are central to the adjudicator’s role in enforcing the groceries code. That is why we have thought long and hard about what sources of information the adjudicator should be able to consider and have listened carefully to the views of the BIS Select Committee on this.
When the draft Bill was published last year, it provided that the adjudicator not only had to have reasonable grounds to suspect a breach of the code to begin an investigation, but that this had to be part-based on information either from suppliers or in the public domain. At pre-legislative scrutiny, this proved to be one of the most contentious points, with many who gave evidence arguing that the restriction on sources of information should be removed. A few also said that the adjudicator should be able to begin investigations “proactively”—in other words, whenever he or she wanted, based on no evidence at all.
The BIS committee in the Commons advocated a middle way: that the sources of evidence should be extended but that proactive investigations should not be allowed. After careful consideration, the Government have decided not to restrict the information that the adjudicator can consider. We agree that it is possible that sources other than suppliers, such as trade associations or whistleblowers, may have information that would be of value to the adjudicator, and we have therefore decided that the adjudicator should be able to consider any information that he or she has available. The requirement for “reasonable grounds to suspect” a breach or failure will continue to provide a necessary check to prevent investigations being launched without cause.
We have some concerns that, if trade associations do not act responsibly, the adjudicator could be burdened with dealing with larger numbers of less direct and lower-quality complaints. The Government have therefore provided in the Bill that at each triennial review the Secretary of State must assess whether the involvement of third parties is helping or hindering the adjudicator. If the latter applies, he will be able to restrict the sources of information which the adjudicator can consider in deciding whether to commence an investigation. This will ensure that trade associations have a clear incentive to act responsibly, while still allowing them to play a full role.
The Government welcome the way in which pre-legislative scrutiny of the Bill has made the provisions on investigations stronger and better. The version now before your Lordships’ House strikes the right balance between preventing proactive investigations or fishing trips that could be burdensome to retailers and providing the adjudicator with the necessary freedom to begin investigations in response to genuine complaints, from whatever source.
The other major area worthy of discussion is what remedies the adjudicator will have to hold retailers to account. It is clearly critical that if the adjudicator finds that a large retailer has broken the groceries code, he or she has adequate enforcement powers that can be used against the large retailer in question. The Bill provides that the adjudicator will be able to take one or more of three possible enforcement measures: to make recommendations; to require the large retailer to publish information—so-called “name and shame”; or to impose financial penalties. I ask noble Lords to note that financial penalties may be used only if the Secretary of State makes an order allowing this, and an order would grant this power generally, not case by case.
The range of enforcement measures available will allow the adjudicator to tailor his or her action to the nature of the breach in order to enforce the groceries code most effectively. It will also allow the adjudicator to take more than one measure if appropriate. In some cases, it may be most appropriate, for example, both to make a recommendation and to require information to be published to inform the wider industry.
Some noble Lords may ask why imposing financial penalties is a reserve power only. The reason is that the Government believe that in a highly competitive market retailers will not risk reputational damage from unacceptable behaviour towards suppliers and that therefore the powers to make recommendations and to require information to be published will be sufficient to have a significant effect on behaviour. However, if they prove not to be sufficient, the Bill contains a reserve power for the adjudicator to impose financial penalties, subject to an order made by the Secretary of State for Business. This order would need to be made under the affirmative resolution procedure, ensuring a suitable degree of scrutiny by Parliament.
That last point raises a final very important issue: how will the adjudicator be accountable? I would like to assure the House that the Bill provides for a strong level of accountability. Every year the adjudicator will be required to publish an annual report setting out any arbitrations and investigations that he or she has carried out, any use of enforcement powers and, if recommendations have been made to large retailers, whether those have been followed. The adjudicator must also publish a report after each investigation. Two years after appointment and then every three years, the Secretary of State will be required to carry out a thorough review of the adjudicator. He or she will be required to consult interested parties, publish a report of the findings and lay that report before Parliament.
Finally, the Secretary of State may abolish the adjudicator if he or she considers that the adjudicator has not been sufficiently effective in enforcing the groceries code or that there is no longer a need for the adjudicator. The Secretary of State may also transfer the adjudicator’s powers to another public body. All these powers are subject to the appropriate degree of oversight by Parliament. The adjudicator’s work to uphold the code will support investment and innovation in the supply chain by stopping supermarkets passing on excessive risk and costs to suppliers. It is a proportionate, targeted and pro-growth measure that will act in the long-term interests of the consumer. I therefore commend it to the House. I beg to move.
Lord Grantchester
My Lords, today brings a major step forward in the implementation of a more honest and transparent regime in the relationship between the major retailers and their suppliers. The measure before your Lordships’ House today has Labour’s fingerprints all over it. It has been a thorough process since the initial referral by the Office of Fair Trading of the supermarkets in their grocery supplies business to the Competition Commission back in 1999. There have been extensive consultations, reviews and recommendations since the second inquiry in 2008, and this strengthened the supply code recommending the establishment of an ombudsman to oversee supermarket practices.
In August 2009, the Competition Commission recommended that this be put on to a statutory basis as no satisfactory voluntary agreement could be reached. In February 2010, our Labour Government brought in the new Groceries Supply Code of Practice to replace the Supermarkets Code of Practice, with the intention of putting the adjudicator on to a statutory basis.
In May 2011, the Conservative-led coalition introduced a draft Bill that has received widespread comment and scrutiny by both the Environment, Food and Rural Affairs Committee and the Business, Innovation and Skills Select Committee in the other place. The Government’s response is before your Lordships’ House today.
There is little doubt that this legislation is necessary. Each step along the way has been tested and found wanting. Suppliers in the groceries market have constantly challenged the practices of supermarkets. I declare my past experiences in the supply chain both as a member of the various trade associations in the farming sector and as chairman of a farmer-controlled co-operative supplying milk largely to the retailer the Co-op, as well as other dairy products to other major retailers.
The reasons for the code and the adjudicator to monitor and receive representations are as valid today as they have always been. While it is true that the largest 10 retailers receive supplies for some major brand suppliers such as Coca-Cola and Kellogg’s, the market is mostly characterised by many much smaller category suppliers to dominant retailers that are dominant across all retail food sectors. This brings features into play that require a strong code of practice to safeguard the confidence and investments necessary for suppliers if there are to be benefits to consumers in the long term.
The Bill not only delivers on the 2008 recommendations by the Competition Commission; it upholds the will of Parliament, as expressed in the Enterprise Act. The adjudicator must actively monitor and enforce the code of practice and provide suppliers with the confidence to come forward with information on possible breaches of the code.
Having said that, we are assessing the Bill before us today against several tests. Does it have the right measures to work in practice and deliver on its promises? Will it bring about change? Does it promote enterprise and growth, leading to sustainable jobs? Will it stimulate innovation in the supply chain? Will the suppliers risk using it? Will it regulate better and in a proportionate manner at an affordable cost? Will it help consumers enjoy better products at affordable prices that translate into sustainable returns for supplying businesses? Will it create a positive, forward-looking structure that is informative, constructive and transparent to all stakeholders, including Parliament, and that will be responsive and timely in its actions?
I am sure that many noble Lords in the debate today will pick up and examine these points in detail. While it is unfortunate that some noble contributors are unavoidably absent, I know that many have expressed an interest in joining us in coming forward with amendments to improve these aspects of the Bill in Committee.
The two main issues that came out of the draft Bill concerned, first, information provided by third parties such as trade associations, in addition to direct suppliers, and secondly, whether enforcement powers should include the fact that the adjudicator may levy financial penalties. With regard to third parties, we are very pleased that the Government have accepted this recommendation and included it in the Bill. It is very necessary to build confidence in suppliers to provide information anonymously without fear of recrimination. This measure also provides a forum for trade to assess the alleged practice at arm’s length and endorse the fact that any alleged malpractice is serious. It should help to deter overzealous complaints.
For that reason, we are alarmed by Clause 15(10), which allows the Secretary of State to delete this provision and revert to the position where evidence may come only from the supplier. Furthermore, this provision is subject only to the negative resolution procedure. Could the Minister indicate in her response to the debate why the Government would wish to signal this intention?
The second area of contention in the draft Bill concerned the adjudicator’s ability to levy fines. The adjudicator may impose financial penalties under Clause 6 but only after a rather clunky drawn-out process under Schedule 3. Why did the Government lose their nerve when it came to introducing the most effective deterrent in the Bill? This is contrary to the recommendations of the BIS Select Committee, which stated that,
“powers to fine should be on the face of the bill, and that the Adjudicator should also be given the power to escalate from a lower to a higher-level penalty if Code breaches continue”.
Under the Bill, a persistently offending retailer can be fined only after extensive warnings, after the adjudicator has published guidance, after the Secretary of State’s consultations across a long list of organisations, including the Competition Commission and the Office of Fair Trading, and after Parliament has agreed to a statutory instrument. This is regulation at its most bureaucratic. Surely we need something more agile. Will the Minister explain why the Government are so averse to giving the adjudicator the ability to enforce through meaningful penalties?
Under Clause 9(6), any fine must be paid into the Consolidated Fund. In Committee, we will explore whether there should be a more meaningful use for any such funds, for example to promote more innovation in the supply chain. Similarly, complying retailers may wish to see this fund used to reduce their contribution to fund the adjudicator.
The retailers, through the British Retail Consortium, have argued that the Bill will increase prices to consumers. From retailers with over £1 billion of turnover, with many multimillion pound profits, this seems rather disingenuous. The cost of the adjudicator will amount to less than one-tenth of 1% of turnover. Perhaps the BRC could consider whether the levy to fund the adjudicator could be shared on a basis proportionate to each retailer’s turnover. I am sure that it is valid to consider in Committee whether there should be some budgetary ceiling or control on this levy.
It is important to recognise that progress has been made since the code was introduced in 2010. Under Labour, we are heading in the right direction. A lot of excellent work has been undertaken by retailers in setting up compliance units, training their buying teams, reforming practices and sending annual compliance reports to the OFT. Asda has published a summary of its report on its website. However, there is still a long way to go with transparency. Retailers could publish more information and publish their reports to Parliament, to the adjudicator and to trade associations, and could make their customers aware that fair trade starts at home. The OFT could also be more responsive. I understand that retailers liken the OFT to a black hole into which they submit their reports, never to hear back.
The important element in all this is that the code must be kept alive, relevant and responsive to changing circumstances. The adjudicator must be more active than is envisaged under Clause 13. His reports should be forward looking, seek improvements and be sent wider than merely the Secretary of State and the OFT, as outlined under Clause 14(5).
The Groceries Supply Code of Practice applies only to the relationship between retailers and their suppliers. When the Competition Commission published its report in 2008, it indicated that there was a case for extending the code down the supply chain to intermediaries, consolidators and their suppliers. It held back from making any specific recommendations on this as it was considered beyond the scope of its remit.
There is much evidence to support the contention that processors, under supermarket pressure, merely pass on that pressure down to their suppliers. Indeed, only last week the dairy supply chain was braced with reports of big alterations on pricing without as much as one month’s notice, each following the lead taken by Dairy Crest.
The Government must not be complacent on this. The introduction of the adjudicator is not the end of the process; it is the beginning. What will success look like? Under Clause 16, the “Transfer of Adjudicator functions and abolition etc” is extremely worrisome to the supply chain because of any possible effect that it may have on the code and its future direction. The code must be a living document that is open for continual improvement in order to ensure that the framework is responsive and aggressive and ultimately works in the best interests of all businesses as well as consumers.
Lord Razzall
My Lords, notwithstanding the fact that there are 19 speakers in this debate, I am quite certain that the Bill has overwhelming support in your Lordships’ House. Indeed, having listened to the words of the noble Baroness and the noble Lord, Lord Grantchester, it rather reminds me of the scene in “Spartacus”. I think most people in your Lordships’ House are old enough to remember “Spartacus” and that wonderful scene when Kirk Douglas, playing the slave, was about to be arrested by the Romans and every one of the slaves stood up and said, “I’m Spartacus”. The debate reminds me that all three political parties will claim to be Spartacus and that this was their idea. However, I am sure that that will nevertheless produce significant support for the Bill.
The noble Lord, Lord Grantchester, made a number of valid points, many of which I share his view on, and I shall touch briefly on some of them. Clearly the significant change that the coalition has made is to widen the groups of people from whom the adjudicator can take evidence, particularly the trade associations. As the noble Lord, Lord Grantchester, pointed out, there has been concern that people can go on fishing expeditions. However, the remedy proposed in the Bill is fairly blunt because, were it to be found that that had been the case, we would revert to the provision in the previous Bill under which those powers are removed. In responding, the Government ought to indicate whether there should be more flexibility here. I am not entirely sure why a trade association which has not been involved in fishing expeditions, and has not been proved to be defective in the way it has approached this matter, should be excluded under the all-or-nothing nature of Clause 15(10).
The second point that the noble Lord, Lord Grantchester, made, which I entirely agree with, is on the penalties. The procedure for introducing penalties seems to be extremely cumbersome. Perhaps the Government, when we get to Committee or Report, could look at whether that process should be streamlined to make the ability to introduce penalties more effective and speedy?
I am not sure whether the noble Lord referred to the question of anonymity, which is a concern here. Clearly, with the power of the 10 leading supermarkets, people complaining to the adjudicator must have anonymity, but there are circumstances under Clause 18(3) under which disclosure of information by the adjudicator may be authorised. The Government need to look at this to explain to farmers, suppliers and the trade association under exactly what circumstances they envisage that those anonymity rules would be breached.
I entirely agree with the noble Lord’s point that the Government should perhaps look at where the fines should go, notwithstanding the current economic difficulties. At the moment all fines, if there are any, will go into the Consolidated Fund. As the noble Lord has indicated, it would be worth while seeing if we can be a little more creative about the use to which those fines are put.
Then, of course, there is the question of the abolition of the adjudicator. It seems surprising that the adjudicator under Clause 16(2) can be abolished with a fairly simple procedure, and I wonder if the Government could look again at whether there should be a right for more serious consultation.
We have all been lobbied by the leading supermarkets, and nine of them think that the fee proposals will make a serious dent in their profits. I am delighted to say, as a regular shopper there, that Waitrose does not take that view, and it has a structure that the rest of the corporate world should emulate. Waitrose makes the point that there is likely to be an average cost per retailer of £200,000 a year, which for most of the major retailers is equivalent to 0.02% of their profits, so I do not think that the complaints made by the major supermarkets really stand up. However, I agree with the point made by the noble Lord, Lord Grantchester, which is a Waitrose point, when he asked whether it was fair that everybody should pay the same flat fee, and would it not be possible to have an annual review after which the people against whom there had been the largest number of complaints should pay more and the good boys could pay less? I very much support this Spartacus Bill.
The Earl of Sandwich
My Lords, I am another supporter. I should declare an indirect interest as the life tenant of agricultural land in West Dorset and a member of the NFU, but my real interest comes from my experience of the voluntary sector and fair trade organisations such as Traidcraft and the Fair Trade Foundation, many of which have links with the churches, which I know will have a close interest in the Bill, as we shall hear in a moment.
From small beginnings, these organisations have made tremendous inroads into our supermarkets in recent years. I also know it has been an uphill struggle for some of them, just as it has for small farmers and milk producers, who often operate just the wrong side of the price margins. It means everything to them to get this sort of guarantee. The noble Lord, Lord Plumb, knows about this, as does the noble Lord, Lord Knight of Weymouth, as he comes from the West Country. I see that the BIS leaflet on the adjudicator has a dairy producer on its front cover, which is always encouraging.
Dairy farmers have simply gone out of business all around us and they still blame the supermarkets. They hark back to the time of the Milk Marketing Board, when they received a fairer and more stable price and there was much more certainty in forecasting and budgeting. Anyone who has worked with small businesses must be relieved to see this legislation come forward at last. Although it is imperfect, we must not hold it up for long, because of its importance. Although it is essentially a Labour measure, this is not a bargaining chip for the coalition. It is long agreed by all the parties and, while capable of being improved, it must be allowed to pass into law—perhaps in time for the adjudicator to start work in the new year. In the Minister’s words, retailers act well on the whole, and breaches of the code have, thankfully, been rare.
The major bone of contention is of course the extent of powers given to the adjudicator who, in the Bill, still appears to be the dog that growls but has only one or two teeth. The supermarkets—even the good ones such as Waitrose, which was just mentioned—that are nominally behind the code are nervous about the Bill. Not surprisingly, they resent any interference with the market. They think that the code is working; they distrust the influence of trade associations; they do not like flat levies—or fines, for that matter—and they would like any powers that enforce the code to remain at the naming and shaming level. Clause 9 says that financial penalties on retailers can be enforced only via the Secretary of State and,
“only if … other powers are inadequate”,
as stated in Schedule 3. It is easy to see that this process could be cumbersome. Clause 19 also stops short of requiring retailers to pay levies towards the adjudicator’s expenses, again leaving it to the Secretary of State. The reserve powers in both these clauses surely need to be strengthened if the adjudicator’s office is to have credibility.
Then there is the vexed question of third parties, which was mentioned by the noble Lord, Lord Razzall, and the previous speaker. Sainsbury’s says that obtaining evidence from trade bodies and charities is impractical and would add an unnecessary layer of bureaucracy. On the other hand, the CLA argues that third parties must be included and the NFU says that the GCA must have,
“the power to take credible evidence from reputable sources, and to use its judgment to assess its worth, before launching an investigation”.
Those points seem very reasonable. The Government have listened to them and the BIS Select Committee has spoken on this. As a result, the draft Bill has been altered to include third parties and, on the whole, to ensure anonymity. However, under Clause 15(10) there could still be restrictions on sources of information. I know that the Minister will cover that in her reply.
I appreciate that there is a risk of overregulation and I look forward greatly to the noble Viscount, Lord Eccles, who will expand on that. The adjudicator cannot be expected to investigate every complaint and the Government’s concessions will not satisfy everyone. Problems are bound to occur when retailers hide behind larger suppliers and middlemen. The British Retail Consortium claims that very few farmers supply directly to retailers and that most grocery supplies now come from large manufacturers such as Kraft and Nestlé, some of whom may have greater market power than the food retailers that they supply. We must keep a close eye on how legislation affects these other suppliers. Under the Bill, their business should be covered by the adjudicator.
I do not intend to play a major part in Committee because others have so much more experience, but I wanted to offer those few words and I shall be watching to see how far the Minister will have to bend in the face of some of the strong arguments that I know will be deployed.
The Lord Bishop of St Edmundsbury and Ipswich
My Lords, my colleague the right reverend Prelate the Bishop of Wakefield was very much hoping to speak in this debate but is unavoidably detained elsewhere. I know he will hope to speak at later stages. However, as I come from a rural diocese I found only too familiar the stories that he told me about the situation in the part of Yorkshire covered by his diocese and his concerns, which go back to 2004 when, on a very cold January night, he picketed the Arla dairy complex near Wakefield. Since then other noble Lords, particular the noble Earl, Lord Sandwich, have raised this matter in this House on a number of occasions.
As we have already heard, the impact of unfair prices has been particularly severe in the dairy industry. Before I went to East Anglia, I had seven years in Cheshire, a part of the country that had been noted for its dairy produce, and saw the effect of unfair prices. I am sure noble Lords are all too familiar with all the disturbing stories about retailers and suppliers.
The Church of England is delighted with the speed with which this Bill has been brought to this House following the gracious Speech. Detailed work within the Church of England on this issue began following a question to the 2005 General Synod; that sounds as if I am claiming that the Church of England had a Spartacus moment about seven years ago. The ethical investment advisory group conducted a detailed study into the practices of supermarkets in relation to their farmer suppliers. The ecumenical network of locally based agricultural chaplains and rural officers interviewed farmers in Yorkshire and the south-west and north-west of England. Such was the fear of some farmers that they would recount their experiences only to the church because they trusted it not to betray their confidence or reveal their identities. Such levels of fear should not be part of ethical or efficient business practice.
Fairtrade Begins at Home, which was published in 2007, was submitted as evidence to the Competition Commission inquiry in 2008. It identified practices such as: flexible payment terms, which seldom work to the advantage of the farmer; contracts subject to arbitrary change; retrospective variations to supply agreements; deductions from invoices without clear reason; and evidence that facilitation payments were required from suppliers—one such demand was £500,000.
There have been many positive developments in the relationships between farmers and supermarkets in the intervening years. However, sufficient problems remain for a groceries code adjudicator to be necessary, despite the introduction of the groceries supply code of practice two years ago. It is therefore important that the powers outlined here are implemented rapidly.
An important and valuable component of the Bill is the proposal to allow complaints from direct and indirect suppliers, as well as from whistleblowers within retailers and third parties. This is an essential part of addressing the climate of fear pervading business with some of the large retailers. It protects the anonymity of complainants and adds credibility to the office of the adjudicator. In the current financial climate, co-operatives and collaborative producer groups remain essential for the development of farming businesses, especially for livestock farmers. As indirect suppliers, it is important that co-operatives and producer groups operating on behalf of individual farmers will be able to make a complaint where the groceries code has been broken.
The decision to include enforcement through recommendations on how a retailer applies the groceries code and the requirement to publish information on breaches are positive. The adjudicator must be able to guide and encourage as well as have the means to take action. Nevertheless, like others who have spoken, the Church of England is extremely disappointed that financial penalties as currently proposed will not accompany the Bill when it comes into force. Provisions for the imposition of financial penalties are contained in the Bill, as we have heard, but they seem to create unnecessary delay. This will result in limitations in the immediate effective working of the adjudicator. As we have heard, large retailers have deployed the argument that financial penalties will lead to an increase in food prices but, as their turnover is several billion pounds, the Church of England does not believe that that argument stacks up. The British Institute of International and Comparative Law reiterated the importance of teeth—financial penalties—for effective enforcement of fair commercial relationships in food supply chains.
Given that only two years have elapsed since the introduction of the groceries code and that a full report on its functioning is yet to be forthcoming, we urge that the adjudicator role be given three years, if not longer, rather than the two years that it has been given, to establish itself before it is reviewed. Regular review of any function of governance is important, but only after a proper period of time has elapsed can an accurate assessment be made.
The first annual report of the Groceries Supply Code of Practice, when it comes, should contain information which will be useful guidance as to how the adjudicator will work and how long it might be wise to wait before a review is conducted. I welcome the Minister’s implication that a wider view of the information that can be considered has been taken by the Government and we certainly support the widest possible access to sources of information for the adjudicator.
It is, of course, to be hoped that where disputes arise, they will be primarily resolved through the existing Groceries Supply Code of Practice, but inevitably circumstances will arise when an anonymous direct complaint to the adjudicator is the only suitable avenue of recourse open. After years of hard work by many people, organisations and others, it would be unfortunate if we were to fail at the final hurdle by not providing the groceries code adjudicator with the budget, staff and financial enforcement mechanism needed to do the job properly.
Lord Plumb
My Lords, I declare my interest as a farmer and a member of several producer organisations. It is good to follow the right reverend Prelate and to know that the church is as keen to see fair play in the market as any one of us who is actually involved in it.
I congratulate the Minister on her opening statement. She led us well and answered many of the questions that we have in mind, but undoubtedly, as amendments are put before us, we shall debate some of these issues more fully. The noble Lord, Lord Grantchester, raised a number of points that obviously qualify for amendment and will therefore be interesting to discuss and to debate.
At a time when we are pressing for the removal of red tape and market regulations, it may seem rather strange to be calling for a groceries code adjudicator and possibly more controls, but as the Minister has said, the road towards the appointment of someone has proved for more than a decade to be essential. Yes, the fingerprints of the party opposite have been all over it, but now we need to put our footprint on it and clear it for some considerable time, one hopes.
The supply of groceries was referred to the Competition Commission in 1999. The supermarket code of practice was established in 2006 and the Office of Fair Trading referred the supply of groceries back to the Competition Commission. All, of course, moving round, backwards and forwards, and getting nowhere. It recommended an independent ombudsman then to police a new, strengthened Groceries Supply Code of Practice, having failed to get any voluntary agreement.
We now, therefore, have the opportunity, which I hope we will take advantage of, to create a supply code with teeth—teeth that can control some of these issues. The dairy industry has been referred to several times as one in need of recognition, in order to make sure that there is real fair play between the producer price and what the consumer has to pay. It will, we hope, take over from the supply code which has been in force for the past few years and which, as the president of the NFU, Peter Kendall, has said, is,
“essentially a rule book without a referee”.
It is surprising that many retailers have raised objections to the introduction of an adjudicator, since many have been taking steps to build stronger relationships through contracts with suppliers, but short-term financial performance can lead to abuse in the market power at the expense of the farmer and the grower. If supermarkets are operating fairly, surely they have nothing to fear from an adjudicator.
Let us not forget that there are something like 80,000 suppliers and 10 buyers. That speaks volumes, because it means that the farmers and growers have to co-operate and be stronger themselves in order to determine a fair return for their investment.
I hope the Minister will answer some of the questions that will be put. She has already answered some but I should like confirmation in particular on the adjudicator’s initiative investigations, which will be based on evidence from third parties. It is a crucial point that needs finally to be clarified. Will retailers be fined—and fined immediately—if they breach the code? Without these powers, the effectiveness and efficiency of the service will be seriously hindered.
Of course, we do not want an appointment that leads to all talk and no substance, and another year of bureaucracy without action. I like to think that the correct action can lead to fair market practice and the stimulation of longer-term collaborative relationships in the whole of the food chain. It was interesting that the editor of Farmers Weekly observed:
“As gatekeepers of the food system, supermarkets are in a powerful position to create a greener”,
and fairer way forward for all. That may be so but, sadly, too many ride roughshod over guarantees of supply and prefer to take decisions driven by short-term commercial goals.
As we all know only too well, food production is, by its very nature, a long-term and risky business. In this House, we talked of the drought not long ago; a week later we witnessed floods. Disease and uncertainty are always with us. Therefore, producers cannot rely on the adjudicator alone. We need strengthening among co-operatives and co-operation between farmers to improve their bargaining power. I have to say that that has been a theme of mine for the past 50 years. There have been improvements but there is a lot of room for greater collaboration.
Therefore, I congratulate the Minister on many of the issues that she has put forward, including amending the Government’s initial proposals in last year’s Bill. The current Bill states in Clause 4 that the adjudicator can launch an investigation where there are “reasonable grounds to suspect” a breach of the code. The trade should welcome the crucial element in safeguarding the adjudicator’s duty to protect the identity of complainants.
As we develop the debate on this extremely important issue, we shall hear many of the myths that come forward. For instance, it is already said by retailers that a supermarket adjudicator will just add to retailers’ costs and push up shop prices for customers. It is estimated that the cost will be around £200,000 a year. The cost of the adjudicator to retailers will be a minuscule proportion of the turnover of the 10 largest supermarkets involved. Only those supermarkets with a turnover in excess of £1 billion are covered by the adjudicator, meaning that the cost will represent 0.02% of turnover at most and usually much less.
Another myth is that both famers and the Government argue for less regulation, whereas an adjudicator simply adds red tape to business—the point that I made in my opening remarks. However, some regulation is necessary. Indeed, some is desirable to ensure that markets function fairly. It is worth remembering that the Competition Commission recommended the establishment of a statutory adjudicator only when it became clear that no voluntary solution was forthcoming. The retail sector was given the opportunity to provide its own solution to monitoring and enforcing the code of practice but was unable to do so. Regulation is being brought forward now because we see it as the only solution after all other avenues have failed.
I support the legislation coming forward. It is a unique situation, since all parties agree in principle. Therefore, I hope that we will not spend too much time in Committee arguing between ourselves. Let us have some action and get on with the job.
Lord Haskel
My Lords, I thank the Minister for explaining this Bill because, for once, I am able to say that I welcome a government Bill—with some scepticism, I might add. Nevertheless, it is a big day when I can say that. As my experience is not in food, I am hesitant to speak about the food business, especially after someone as experienced as the noble Lord, Lord Plumb. Like him, I am in favour of codes in business because, like him, I think markets need rules.
When I first started in business—many, many years ago—one of my first tasks was to go and sell our new flame-retardant fabric to the contracts department of John Lewis. It has a big business in furnishing theatres, hotels and restaurants. I went to its buying offices in New Cavendish Street, did my presentation and they were quite interested. On the way out there was a sign telling you who to contact if you did not think you had had a square deal. “That is a company I would like to do business with”, I thought, and I did for 30 years. Waitrose is part of John Lewis and I imagine the adjudicator operated there too; so it has been doing this for a long time. I entirely agree with the point in its briefing—a point my noble friend Lord Grantchester made—that the costs should be allocated according to the number of complaints, instead of a flat levy. In this way you reward compliance.
We were a tiny company then dealing with a large one, and the fact that there was a dispute adjudicator encouraged us to bring all our new products to John Lewis. It benefited and so did we. This is why I welcomed the grocery code Labour introduced in 2009. This Bill enforces that code because presumably it needs new powers of enforcement. This is fine but my concern is that if you go too far enforcing a code it ceases to be a shared interest—the noble Lord, Lord Plumb, implied this. It will then deliver more hope than reality. If you have a serious argument and want compensation you want an arbitrator, not just an adjudicator. From what the Minister said, I think the Bill leaves suppliers and supermarkets to get their own compensation from each other unless the Secretary of State intervenes, and that is a big step.
Another difficulty is that modern business can become so complicated, it is hard for an adjudicator to apportion blame. As my noble friend Lord Grantchester explained, there are now numerous intermediaries creating grey areas all along the supply chain who will be outside the code. It is also very difficult to assess competition up and down the value chain. It is easier to assess between firms selling similar products.
As ever, the devil is in the detail. Does the Minister recall the regulation about extended warranties? Everybody thought it was a wonderful idea that the cost should be clearly displayed to the consumer on the shop counter—simple. The arguments that ensued about where the notice should be put, the wording, the print size and the type face were such that a simple idea became ineffective. Looking through this Bill, to me it looks too complicated and could benefit from simplification.
The noble Lord, Lord Razzall, used the word cumbersome, and I think he is probably right. I imagine that the Bill steers clear of arbitrating claims because of the difficulties of establishing costs. Again, there are so many complications: intangible costs, allocating overheads, hidden commissions, intermediaries, grants, hidden marketing and financial costs, and all the other surprises that we learn about through experience. As I said, to be effective it has to be kept simple.
At the end of the day the adjudicator will settle the dispute by interpreting the contract within the code. In practice, that is probably as much as one can expect. The Secretary of State will be very cautious about imposing a financial penalty, because researching all these details and costs makes it difficult and time-consuming to establish a loss. The noble Lord, Lord Plumb, said that this will make for less red tape, but the Minister will be aware of the calls from the Benches behind her for less regulation and freer markets to make British business more efficient and more competitive. With this Bill, their Government are introducing more red tape and a new quango. The noble Earl, Lord Sandwich, mentioned this. What is the Minister’s response to their concerns?
I am less troubled, so I welcome the Bill. Sorting out grievances between retailer and supplier will eventually benefit the consumer. It will also benefit the supplier and their communities. But it has to be kept simple. My scepticism concerns the value of this Bill in assisting to arbitrate financial compensation. At the end of the day, if the matter is serious, that is what most disputing parties seek. This reminds me of the Bill that the Labour Government introduced regarding prompt payment. It did not solve the problem, but it made things better, and there is nothing wrong with that. That is what this Bill will do, and that is why in general I wish it a fair passage.
Baroness Parminter
My Lords, in the 1940s it was typical for people to spend between one-fifth and one-third of their income on food. Now it is only about one-tenth, but much of what we spend on food, in retail shops such as supermarkets, does not make it back to the producer. Companies and growers chase greater and greater volume to cover the overheads imposed by the all-powerful customers. Commercial unethical practices are commonplace in the food chain, but with the level of dominance achieved by the supermarket it is an invidious process and prospect for a supplier to complain. Moreover, as margins become thinner, there is a worrying resulting underinvestment in creating sustainable and resilient farm businesses. For these reasons, I welcome the announcement in the Queen’s Speech of an independent adjudicator to act as an ombudsman with authority and confidentiality to investigate and hold large retailers to account, as has been promised.
The Competition Commission has highlighted widespread examples of abuse, but this is not just limited to the usual suspects, with cases being reported of even the most socially responsible supermarkets demanding hundreds of thousands of pounds from suppliers. Take just one sector: horticulture. Vegetable and fruit growing is intensely competitive and the market is dominated by the oligopoly supermarkets. These major customers have been very successful in passing overhead costs back up the chain to suppliers, and margins are dangerously thin—with 1% on turnover being typical. This is contributing to a major and worrying underinvestment in horticultural research. With the rising tide of obesity and health problems, we want more people to eat more fruit and vegetables, but if we are to make fresh produce more comparable in cost to calorific and less healthy food we must have good research funding.
We know that more people want to buy British fruit, which is convenient and affordable. Indeed, one major retailer is looking to source 50% of its fruit from the UK by 2020, when presently it sources only 10%. We know that rising temperatures in the UK, as identified in the UK 2012 climate change risk assessment, could be an opportunity for growing more blueberries, apricot, grapes and peaches here.
However, how can you invest for the future when margins are that tight? It is to be hoped that the groceries code adjudicator can play some part in overcoming some of the abuses in the system and thus help deliver some of the necessary research and investment to secure resilient farm businesses. To do that the groceries code adjudicator needs strong powers. I find it disappointing that the Government have decided against putting the powers to impose fines into the Bill. To do so would have echoed the views of the 2011 report by the House of Commons Business, Innovation and Skills Select Committee. I am sure that we will debate during the passage of the Bill the holding back of automatic powers to fine, although I accept that the Bill gives the adjudicator the power to impose fines if Ministers agree that other remedies are not working.
In the absence of such an automatic power to fine, the ability to name and shame is the most potent stick that the adjudicator has. It must be used well. The adjudicator’s annual report needs to be transparent about which businesses it has found wanting, and to do so in a way that allows for meaningful public scrutiny. The Explanatory Notes to the Bill make it clear that the annual report should contain information that is useful to the Office of Fair Trading in monitoring the groceries supply order and to the Secretary of State in reviewing the adjudicator and the users of the groceries code generally. I would like to see added clear information of the use to consumers and to the groups that champion their rights so that consumers can make informed choices about where they choose to shop.
I welcome the Bill and the proposals that the Government will regularly review the performance and effectiveness of the adjudicator in undertaking its role. This is a complex industry with a non-binary food chain in many cases, and the Government are right to keep the door open to amending the scope, power and function of the adjudicator in future.
One area that I hope might be looked at in such a review is more incentives to reward compliance with the code. This issue has been echoed across the House by the noble Lords, Lord Grantchester, Lord Razzall and Lord Haskel. Forcing supermarkets that burden the office of the adjudicator with a large number of complaints to play a larger proportion of the adjudicator’s fixed costs could be a very valuable way to incentivise supermarkets to adhere to the code and minimise the number of complaints made. This is surely what everyone on all sides of the House wants.
Lord Palmer
My Lords, in principle, I do not think that we need more quangos. However, I, too, welcome the Bill and congratulate the noble Baroness on her fluent and succinct introduction, which was done with her usual charm and flair.
From my earliest memories I have been involved in the food chain, initially as a prime producer and then as a biscuit manufacturer. I have now done a full circle; I farm in one of the most beautiful parts of the country, the Scottish Borders. I am delighted to see that the Bill applies to Scotland. I also own a shop, mainly selling souvenirs and biscuits, with a tiny turnover of approximately £4,000 per annum. I also declare an interest as a member of the National Farmers’ Union of Scotland.
It is important to realise how incredibly cheap food is today. The noble Baroness, Lady Parminter, made this point: 45 years ago, 40% of the national wage went on food; today, it is just under 8%, which is a huge difference. Twenty years ago, as a farmer I was selling malting barley for £160 per tonne, the same as I got two years ago, despite the price of fertiliser tripling from 20 years ago and the price of fuel nearly quadrupling. These are grim statistics that emphasise the huge powers that the supermarkets have. Perhaps more importantly, however, prime producers are being squeezed, and hopefully this is where the Bill will make a difference.
While not wishing to throw a spanner in the works, I would be interested to know why the noble Baroness thinks that “groceries code adjudicator” is the correct term. Some influential organisations have said that perhaps a better and more understandable title would be “supermarket ombudsman”. I am sure that that would make more sense to those who shop in supermarkets and to those who supply them. When the noble Baroness winds up the debate, will she inform the House of the exact logistics of how this very important person will be appointed?
As other noble Lords have mentioned, the adjudicator must have real teeth. He, or she, must be able to levy realistic financial penalties from its very inception. As other noble Lords have also mentioned, in that all the main political parties believe in its conception I wish the Bill all speed and hope that it can become law before the end of the year rather than, as rumour has it, not until next year.
Baroness Byford
My Lords, I am happy to follow other noble Lords in saying how much I welcome the Bill. I remind the House of my family’s farming interest. Indeed, we used to supply pigs to Waitrose but we no longer have them. Many suppliers have good working relationships with supermarkets. I would hate anybody reading this debate to think that that was not true. However, there are circumstances in which those relationships break down and are abused. Therefore, it is right that the Government have quickly brought forward this Bill.
The Bill has been eagerly awaited for months by many hardworking and dedicated food producers. They feel, rightly or wrongly, that large retailers make a significant portion of their considerable profits by browbeating smaller suppliers into paying for a variety of selling techniques used in the stores, by failing to honour orders they have placed and by altering purchase prices downwards without notice.
As others have said, the groceries code was established by the 2009 groceries supply order, which itself arose from work carried out by the Competition Commission between 2001 and 2008, so the measure has been a long time in gestation. That at least tells us that the allegations made by producers have some validity and that the issue has been “live” for a long time.
I am hopeful that the role of the adjudicator will be self-limiting and that eventually he or she will not be needed. Either it will be found that the large retailers have reorganised and trained their staff to observe the code so that there is no longer a problem or the adjudicator and his staff will rapidly ensure that such reorganisation, training and observance will become the established way of working.
The EFRA Select Committee sent seven recommendations to the BIS committee, four of which I have highlighted as the Government have listened and taken them on board. First, the ability of suppliers to make anonymous complaints is fundamental to the success of the groceries code adjudicator. Secondly, the adjudicator should have the power to launch proactive investigations. Thirdly, third parties such as trade organisations should be able to make complaints to the adjudicator on behalf of suppliers, but appropriate restrictions would need to be included in these provisions so that they are not abused. Fourthly, the adjudicator should have the power to levy financial penalties without the need for an order from the Secretary of State. I am grateful that the Government have taken on board some of these recommendations but we shall return to these issues in Committee.
I wonder whether it is just me but I was struck by the rather “folksy” way in which the contents of the Bill are set out. That worries me. Why are the headings between each clause in the form of questions? For example, the question: “How does the Adjudicator arbitrate disputes?” appears before Clauses 2 to 13. The question: “What are the Adjudicator’s reporting requirements?” appears before Clause 14. Other questions follow in the same vein. For example, “Will this law mean other changes to the law?” appears before Clause 21. I hope that when she responds, my noble friend will say that this approach will not give the impression that the Bill, as law, is open to doubt or dispute. It is unusual. Having dealt with many Bills over the years, I found it slightly strange.
I must reinforce what other noble Lords have said on the need for the Bill. Over the years there has been a real climate of fear among some suppliers. I am very grateful that the Government have recognised this and are enabling third parties to bring forward evidence. It is impossible for suppliers to do this themselves because they feel cut off at the knees and there is nowhere else to go. They run the risk of losing a contract—even one that has been reduced—and probably not getting it again in the future.
There have been few changes from the draft Bill and most of my detailed questions will come up in Committee. However, I feel that there are—or may be—issues of principle involved in the significance of some of the alterations as well as in the basic content. The Minister may therefore wish to comment on the following points. In the draft Bill there was a clause titled “Investigations: information” which introduced Schedule 2—then titled “Investigation Powers”. In this Bill, the clause has gone and Schedule 2—now titled “Information Powers”—is first introduced through Clause 4, “Investigations”. These are significant changes in terms of the detail of the work the adjudicator will be empowered to do. I would be grateful for some clarification.
The nature of the adjudicator’s staff is vague, with a reference in Schedule 1 to,
“staff working for the Adjudicator”.
Schedule 1 also states that the Office of Fair Trading,
“may provide staff, premises, facilities or other assistance … (with or without charge)”.
There is also reference to a “Deputy Adjudicator” and “acting Deputy Adjudicators”. All of this seems to indicate a very small establishment and yet the adjudicator is charged, under paragraph 15 of Schedule 1, with keeping proper accounts, with preparing an annual report, under Clause 14, and with receiving both financial penalties and costs. Will the Minister supply more detail on the adjudicator’s establishment?
Clause 15 held my attention for some time. There is a potential imbalance between the large retailers, all of which have to be consulted by the Secretary of State, and those representing the interests of the suppliers, where he is required to consult only one. How does the Secretary of State intend to proceed with such consultations? Will the Minister also expand on the reasons for and the intention of the introduction of a new Section 4A, to which other noble Lords have referred, by Clause 15(10) of the Bill?
Clause 18 allows for the disclosure of confidential information,
“for the purpose of an EU obligation”.
I am not the only one to have referred to this. Who will decide what is obligatory and how and when will this decision be communicated to the adjudicator?
I do not wish to go into any greater detail at this stage, but there are some basic questions to which responses from the Minister would be enormously helpful. All of us welcome the Bill. We want to see fair trade for UK producers and overseas producers. We also want to make sure that financial penalties do have an effect on the way in which those who do not currently honour the code will in future honour it.
Lord Borrie
My Lords, I must declare an interest as a former director of the Office of Fair Trading. Unusually, I am able to thank the noble Baroness, Lady Williams of Crosby, who is in her place today, because she appointed me to that post when she was Secretary of State for Prices and Consumer Protection back in 1976.
Lord Borrie
I ceased to be director in 1992, and I need not therefore disclose my current interest—I do not have one.
I generally welcome the Bill because it is designed to deal with a real problem, many of the details of which have been mentioned by previous speakers, and provides a remedy to limit the market power of the top 10 major supermarkets—a power that they have over the supplier, whether the supplier is a farmer or a food producer of some other kind, who normally has, or often has, much less bargaining strength at their elbow. A groceries code was promoted by the Competition Commission and agreed to some years ago by supermarkets, requiring them to deal lawfully and fairly with their suppliers. However, it was not until 2008 that the commission proposed an adjudicator to enforce the code.
The Bill is the Government’s welcome and positive response to the commission’s proposal. It is intended that the adjudicator will be appointed by the Secretary of State and operate from within the Office of Fair Trading, sharing premises and back-office facilities. Under another Bill that is imminent and will come before us soon, the Office of Fair Trading is to be merged with the Competition Commission. No doubt, it will be then that the adjudicator will be housed within the new combined Competition and Markets Authority.
Perhaps it is too late to raise the following point, but I do so in part because my noble friend Lord Haskel spoke of the cumbersome nature of some of the provisions in the Bill. I am not at all sure why there was a need at all to go to the lengths of creating an adjudicator under a special statute as a separate so-called “corporation sole”, plus a deputy adjudicator, as the noble Baroness, Lady Byford, mentioned, instead of simply giving the power and responsibility under the Bill to the Office of Fair Trading or its successor organisation. Why have a completely separate organisation with apparently separate back-up facilities? I certainly see no case for adding further to this special statutory creation by providing for a right of appeal, as some organisations, such as the British Retail Consortium, have been arguing.
Under the Bill, the supplier will be enabled to make a confidential complaint to the adjudicator and, more controversially, third parties such as trade associations— be it the National Farmers’ Union or the British Retail Consortium—may also make complaints. If the adjudicator finds on investigation that a breach of the code has occurred, he may make recommendations. As we have heard several times, he may name and shame as appropriate, but he may not impose fines unless the Minister agrees that other remedies are not working. If that is the case, the Minister then has to introduce secondary legislation afresh, which requires the affirmative resolution of both Houses of Parliament before the financial penalties can be exercised by the adjudicator. I do not think that I am the only person who feels that such a power is, unfortunately, not provided in the Bill. Why not? If it was provided for in the Bill, why should not the adjudicator, who surely we are meant to trust from the outset—it would surely be a good appointment, and all the rest of it—be able to decide from day one of his statutory existence whether a fine is justified in a particular case?
One limitation on the adjudicator’s powers made me wonder. The noble Lord, Lord Palmer, who is not in his place at present, thought that “ombudsman” was a suitable alternative word for the adjudicator. That is not at all appropriate on the basis of what is in the Bill. The serious limitation on the adjudicator’s powers is that if on investigation he finds that a large retailer has broken the code, and the breach affects a particular supplier, the finding will not constitute a determination of liability of the retailer to that supplier. That is specified in the Explanatory Notes and seems to be perfectly clear. It therefore seems odd to refer to the adjudicator as an ombudsman because ombudsmen decide complaints between two businesses, or between one individual and one business. Under the Bill, if the supplier wants a civil remedy—if he wants damages or compensation for some behaviour of the supermarket—he must make his own claim in the courts or by way of arbitration. As I read it, although I would be happy to be corrected, the person who cannot do the arbitration is the adjudicator; he would be regarded as having a conflict of interest, having previously done the investigation.
I am assuming that, under the Bill, the price the supplier has to pay for being able to make his complaint anonymously is that he cannot bring a civil claim. There would be a serious disadvantage in the whole system envisaged in the Bill if the complaining supplier had to identify himself in the complaint right at the start. That would seriously jeopardise his ongoing relationship with the supermarket, as others have said. However, if the identity becomes known in the course of the adjudicator’s investigation, would not the basis of disallowing the adjudicator from determining the supermarket’s civil liability to the supplier disappear? Certainly, there are some disadvantages in having not only the adjudicator but some civil court or third-party arbitrator going over the same ground, the same evidence, all over again, preventing the adjudicator from dealing with the civil claim and, indeed, behaving like an ombudsman. That would be unfortunate.
Finally, I add a point which has been referred to by others. Under Clause 19 the adjudicator may request a levy on all large retailers to cover the expenses of the new office. Would it be more appropriate to make such a levy mandatory?
Baroness Randerson
My Lords, I join with other speakers in supporting the principle of this Bill and the vast majority of its content as well. Indeed, the cross-party support here has been exceptional. The processes that the draft Bill went through have definitely assisted that support.
It is a rare cause that unites both trade unions and small business organisations in its support. It is important to remember that this Bill is not just about the small suppliers, which are most obviously immediately affected; it is also about consumers. The excessive risk and costs that have been forced on occasions on suppliers by some supermarket chains have deterred investment and innovation. It is innovation that helps consumers in the long run.
Seventy-five per cent of the groceries market is in the hands of the top five retailers. That market is just about the most reliable and stable market imaginable. It has all the conditions of monopoly power, and that monopoly power has increased dramatically over the years. The Competition Commission statistics show that the major chains account for 98% of grocery sales. Tesco is the giant of them all, accounting for 30%. The spider’s web of street-corner shops, as well as the large supermarkets, has of course increased and reinforced that power. Possibly most astonishing is that, despite the recession, there are still 44 million square feet of projected new supermarket developments in the pipeline, so the expansion has not stopped.
The Competition Commission has identified the adverse effect on competition of grocery retailers passing unexpected costs and excessive risks down the supply chain. Ultimately, the extra costs of this are imposed on producers, whether or not they deal directly with the retailers, and that is an important point in this debate. As many noble Lords have pointed out, this is not a new issue; it has been debated thoroughly over the past 15 years. I was a Member of the Welsh Assembly for 12 years, and the NFU and the FUW were very vocal in their support for the need for a supermarket ombudsman, as they called it.
The impact of the dominance of large retailers has been phenomenal—on the way we live, on what we eat and on the shape of our towns and villages. The large retailers have given us cheap food but they have also created out-of-town shopping, with its impact on the number of cars on the roads and the distance we have to drive, as well as its social impact on those who have no car. In many places, it has led to empty shops in our town centres, which can be desolate in some poorer parts of the country. Very importantly, it has led to the delocalisation of our food shopping and, hence, of our diet. This is all part of a very fundamental movement in the way we live our lives, and the adjudicator is an important part of that picture.
In the Explanatory Notes, several references are made to the small scale of the adjudicator’s office and the low budget that it will have. I greatly support and appreciate the need to save money and I am not trying to argue with that principle. However, given that there are more than 300,000 farmers in the UK and more than 6,000 food and drink manufacturers, I would welcome some information from the Minister about the basis for this calculation and the assumption that the budget will be low. Because the costs will be covered by a levy on the retailers—and several noble Lords have pointed out how small that levy is proportionately—it seems that the total budget for this office will be some £2 million a year. However, because the climate of fear will be removed, we can confidently expect a big increase in the number of complaints as a result of the Bill becoming law, and I wonder whether the office will have the capacity to deal with them.
I share the concerns of many others that fines will be introduced only as a second step and even then by a rather cumbersome process. I will listen carefully to what the Minister has to say on this point, as at the moment I feel that it would be better to have fines from the start as one of a range of actions—not necessarily the only action—that the adjudicator can take. I share the concerns about a flat-rate levy. Although a mechanism is built into the Bill to enable the adjudicator to order culpable retailers, or indeed vexatious complainants, to pay costs, I believe it is unlikely to create a truly fair system that would financially encourage retailers to avoid breaches of the code.
Like other noble Lords, I have received briefings from a variety of organisations. I have to say that they are mainly unusual in their fulsome praise for the Government in the action they are taking in this Bill. Not surprisingly, the British Retail Consortium argues that this Bill is not necessary and that everything now works well. In fact, I believe that once the adjudicator is in place we will see a big increase in complaints, so the British Retail Consortium should see the writing on the wall and, instead of arguing with the principle of the Bill, it should do what Waitrose has done in its briefing to many noble Lords—attempt to raise issues that may help to create a fairer and more effective system.
In conclusion, I believe that this is a very sound Bill. I have concerns about some small details but its principle is definitely right.
Lord Howard of Rising
My Lords, I must declare two interests: I am a farmer. Even more relevant to this debate, I am landlord to a tenant who is a direct supplier to supermarkets. I therefore have first-hand knowledge and experience of what we are discussing today. I shall deal with the general points rather than the detail, which will probably be more appropriate in Committee.
Generally speaking, I find it difficult to understand why there should be a code at all, let alone an adjudicator to police it. There is no obligation on anyone to supply a supermarket. People and businesses do so because it is a commercial decision that benefits them. In my own case I delay the rent due from my supermarket-supplier tenant to tie in with when he is paid by his customer. It is an agreement freely entered into; if I did not like it, I would not have to do it. I could let the land to someone else and be paid more promptly.
Leaving aside the pointlessness of trying to interfere in markets, with all the unintended consequences that inevitably crop up, there are other faults in this Bill. There is no doubt that, as drafted, the Bill will impose substantial costs on the supermarkets, which in turn will be paid for by their customers. There is no cap on what the adjudicator may spend for which the supermarkets and their customers will then have to pay. Complaints are not limited to parties to a contract. Anyone—even someone with no involvement in a transaction—can complain to the adjudicator. It is almost incredible that someone with no connection to either side of an agreement can complain about that agreement. As no one knows what the adjudicator will regard as reasonable grounds for a complaint, it opens the door to more costs with the possibility of complaint upon complaint, with the supermarkets and ultimately their customers, again having to pick up the bill.
Major supermarkets already employ departments to deal with the Groceries Supply Code of Practice. On top of that they are being asked to pay for the adjudicator and his staff. If the adjudicator resembles any other office of a similar type it will grow exponentially. Can your Lordships imagine the self-discipline required to control costs and limit activities when all that is required to pay for expansion is to say, “Hey you—a bit more this year please”? What is it all for? The guidance notes tell us of “potential improvements” in quality and price. Do not the Government know that there is a cut-throat business out there where any supermarket not offering the best quality and choice soon suffers? We need only to look at how quickly the results of the large supermarkets can deteriorate to see that. How did the supermarkets get to where they are today? Guess what? They offered choice and quality at attractive prices with no government interference.
Lord Vinson
Would the noble Lord be kind enough to give way? If supermarkets sell milk for less than the price of water, does not that indicate that the price structure is not exactly working properly?
Lord Howard of Rising
It indicates that people are buying milk very cheaply. Lucky them.
Ultimately, there is only one person who will pay for all this expense, and that is the supermarket customer. I look forward to hearing from the Minister why the poor shopper should be clobbered in this way so that I can get paid earlier, and possibly increase the rent I receive.
Baroness Sherlock
My Lords, I add my voice to those who, unlike the noble Lord, Lord Howard of Rising, want to see this Bill go further, rather than backwards. I listened to his contribution with interest.
I am grateful for briefings from various sources including Traidcraft and the Grocery Market Action Group, as well as various retail bodies, including more supermarkets than I knew existed hitherto. Like many—indeed, almost all the noble Lords in this debate—I am delighted that we are where we are. I am thrilled that the previous Labour Government brought in the code. I am very pleased that the Government are introducing the adjudicator, and I commend them on that. However, I encourage them to think hard on this question. If it is worth doing, it is worth doing properly. I suspect that the critics of the Bill—and there are some even in this Chamber—would not be satisfied even if this were done in half stages. Therefore, if the Government are going to do it, they may as well take a step out and do it with some gusto.
I would like to make a few specific suggestions. First, I am delighted that the adjudicator will consider evidence from all sources, but will the Minister say what signal she intends to send by the ease with which that power could be revoked? What is that intended to say to the world outside?
Secondly, will the Minister tell us why there is not in the Bill a clear description of the purpose of the adjudicator? I assume, having reread recently the 2008 Competition Commission report, which the Minister cited earlier, that this is addressed directly to the second of the problems it found—the transfer of excessive risk and unexpected costs by groceries retailers to their suppliers. If that is the aim, would it not be helpful for that to be specified in the Bill? I know the Minister said that the only purpose of the adjudicator is to enforce and oversee the groceries code in the ways described in the Bill, but she may remember that she also said in her opening remarks that the adjudicator would be tasked with recommending changes to the code. If he or she is to do that, on what basis will that be done if they have not got a statutory objective for the organisation in the first place?
Thirdly, I am another person who believes that the GCA should have the immediate power to fine people who are in breach of the code. This makes it almost all of us, now, who believe this—a full house. I have heard no convincing argument against this at all. If the power is never needed, it need not be used, but the fact that the adjudicator has the power must surely concentrate the minds of those who are tempted to sidestep the provisions of the code. Like the right reverend Prelate the Bishop of St Edmundsbury and Ipswich, I read the report from the British Institute of International and Comparative Law, and very interesting reading it made. I commend it to the Minister, if she has not had the opportunity to read it. It would be very good bedtime reading, and I encourage her to look at it. Very usefully, it went through all the types of mechanisms used by different countries, and what was effective, and it produced a category of characteristics of favourable means, of which financial penalties—in other words, teeth—were firmly up there.
I also agree with noble Lords who have mentioned how important it is that the adjudicator should function well from the outset. That will be essential to give it credibility from the beginning. I suggest that it needs to flex and to respond to the scale of the task. We simply do not yet know what that will be. I hope the Minister will consider that quite carefully.
How did the Minister reach her decision about the nature of the financing? I, too, read the brief from Waitrose which expressed concern with the generalised nature of financing. I declare an interest as the senior independent director of the Financial Ombudsman Service. While I am not in any way suggesting a comparison, that and other adjudicators of various kinds often have a two-part fee. There may be a general levy of some sort on all those within the jurisdiction, and then either a case fee or a specific fee which is related in some way to the degree to which the firm is engaged in or is triggering the work of the adjudicator. Will the noble Baroness look at the fee systems employed by others making similar decisions in making a final decision on this?
Finally, I am concerned about whether the Government are being too hesitant in doing this. They have decided to set up an adjudicator but are retaining the power to shut it down by negative resolution. They are open to the idea of fines—but not yet—and it will take a rather complicated Heath Robinson mechanism to enable that to happen at all. They want to allow the power to take evidence from third parties but, again, want to threaten to withdraw it. Is the Minister concerned that she is taking the right step but that, in hedging it around so much, she risks undermining the good work that I know she is trying to do?
Lord Teverson
My Lords, I declare an interest in that I chair a modest company that supplies supermarket retailers who will not be affected by the Bill.
I enjoyed the speech of the noble Baroness, Lady Sherlock. She asked why we need an adjudicator. Clause 1 says, in a completely Book of Genesis style:
“There is to be a Groceries Code Adjudicator”.
What more do we need? It then carries on with a rather less biblical “(see Schedule 1)”, but that does not help us much.
I agree in many ways with the noble Lord, Lord Howard of Rising, on his philosophy about the market. However, this is the one area in the UK economy where there is a huge concentration of buyers and a fragmented base of suppliers. The purist answer would be that the supermarket chains should not only be further referred to the Competition Commission but have their market dominance broken up. I do not suggest or advocate that, but it may be the alternative to this. As my noble friend Lady Randerson said, 75% of the groceries market is controlled by five suppliers. That is indeed some market concentration and it is why we need supplier protection in this sector rather than the consumer protection that we have in most others.
As many other noble Lords have said, there has been a gradualism over the past decade. In 2001 the groceries code was invented, if you like; it was written and then put into contracts between suppliers and supermarkets; and now we are moving towards an adjudicator. That is why I, too, think that after 11 years of experimentation we should surely do the deal and go ahead with the fining side as well. For example—again this is not directly applicable—the Financial Services Authority, which is to do with customer protection, is perhaps a mirror image of what we are doing, and one of its great strengths is that it can fine the large organisations with which it deals.
There are many hurdles at the end of the Bill, which states:
“Before making an order, the Secretary of State must consult … the Adjudicator … the Competition Commission … the Office of Fair Trading … the large retailers … one or more persons appearing to the Secretary of State to represent the interests of suppliers … one or more persons appearing to the Secretary of State to represent the interests of consumers; and … any other person the Secretary of State thinks appropriate”.
So we are up to 9 billion at that point. The Government are really saying, “Guys, we are not interested in this at all. We are going to put it in there because we want to give ourselves a backstop, but it is not very applicable”. The Government should be courageous here, move ahead and do it now. That would be a good thing. Having said that, I welcome the fact that the adjudicator can impose costs on both supermarkets and vexatious complainants. That is very good.
I particularly welcome the fact that—although it is not in the Bill, this is a part of what business has been saying—this applies not only to UK suppliers but to world-wide suppliers. That is important, not because I am championing French farmers but because it will stop supermarkets avoiding this obligation by importing even more food. It stops, if you like, regulatory hedging beyond the United Kingdom.
I congratulate the Government on getting on with this. However, it is very important that this is not a supermarket-bashing Bill. I am often surprised to read that supermarkets and multiple retailers have restricted choice to consumers. Frankly, it is because of our retail organisation, our retail management and efficiency in this country that we are able to go out and buy tens of thousands of products, normally within only a few miles of where we live. Having said that, yes, I shop in supermarkets and I am pleased to do so, but I also get a local food box from the Cornish Food Box Company, and I think that is a good balance. I am sure that organisations such as that one will be championing competition with supermarkets as well.
Viscount Eccles
My Lords, I have no current interests to declare, but for 49 years I was a supplier of goods to businesses larger than my own—in particular, for a long time, to Marks & Spencer. I was also, for a time, on the Monopolies and Mergers Commission, the predecessor of the Competition Commission, and the noble Lord, Lord Borrie, used to receive reports that I had signed. Fortunately he never sent any of them back.
I have doubts about the Bill, quite complicated doubts, and I hope that the House will indulge me as I go through them. Before I start on the doubts, I would like to talk about anonymity. When someone is accused of something, under our system—whether it is codes of practice or law—we would assume that they had a right of reply. I simply do not understand how a serious complaint, which might lead to some enforcement, can be handled without the retailer knowing who made it. I would also say, just as a practical matter, if there had been a complaint about something, for example a line of clothing, that Courtaulds had supplied to Marks & Spencer and Courtaulds had wanted to remain anonymous, we would never have been able to do so. There is far too much knowledge within the buying organisations about whose product is being talked about. If we try to pursue anonymity, there will be endless bickering. I thought that we lived in an open and transparent society.
I am not at all clear that the Bill is in the public interest or what the public reaction will be. The public are largely disengaged from the Westminster village and its lobbyists, and this is a Westminster village and lobbyists’ Bill. I think many people who shop in supermarkets would conclude that the theory of how you deal with difficulties in competitive markets precludes the exercise of common sense. I have been struck by the way in which several noble Lords have dismissed £200,000 as a sum of no importance. Well, I do not know how your Lordships have lived, but to me £200,000 remains quite an important sum of money.
It has been a habit of many people to hate supermarket power. That has gone on for a long time and indeed 30 years ago, when I was a member of the group in the MMC, we did a very long report on differential discounts to retailers and we studied supermarket power. Exactly as the 2008 Competition Commission report concluded, we found that they were not abusing their market power per se. That has been the conclusion of all the inquiries into supermarkets: they do not make monopoly profits. They do not charge prices that are higher than they should be, which is the classic way of making monopoly profits.
Now we have to look at what happened in 2008 in some detail. My noble friend on the Front Bench referred to the finding that is the base of the pyramid of what we are talking about. It is worth quoting again what the commission said:
“we found that the transfer of”,
economic risk,
“and unexpected costs by grocery retailers to their suppliers through various supply chain practices if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers.”.
That was not a conventional Competition Commission adverse finding. It was quite a complicated one, being conditional and about the future—there will be an adverse effect but it has not happened yet. The commission concluded that there was no declining trend in innovation and, at the same time, no shrinking of suppliers’ margins. Could my noble friend on the Front Bench provide us with any precedent for a finding of this type about an adverse effect on competition that would enable us to think about what happened previously?
It is worth noting that one member of the commission dissented from the remedy that came up. The commission of 2008 was not unanimous but it decided to beef up the code of practice. I see no objection to that; it seems an entirely sensible thing to do. The commission drew up a rather humdrum list of things that should be remembered when—as I think has not been said this afternoon, although my noble friend Lord Howard came close to it—the terms and conditions of purchase and sale were being freely agreed between the supermarkets and their suppliers, and would become legally enforceable. Of course, a code of practice is not legally enforceable.
I will refer to just two of the humdrum things. One is shrinkage. A supply agreement must not include provisions under which a supplier makes payments to a retailer as compensation for shrinkage. However, the question of shrinkage would turn on when, for example, the property passed. If the shrinkage happened while the goods were still in the possession of the supplier, that would be one thing. If the goods are in the possession of the retailer, that would be another. All that the code of practice does is, quite properly, to remind the supermarkets and their suppliers that they must have a proper clause about shrinkage in their legally enforceable contracts. It is exactly the same with payments for wastage. You might have some yogurt on the shelf that, for some reason, goes off two days before the sell-by date. That cannot be unambiguously set out in a legal document, because it would probably depend on who left it out on the pavement when the temperature was 26 degrees, on what day, and so forth. As the noble Lord, Lord Haskel, said, these matters can become very complicated when you are dealing with detailed disagreements under terms and conditions of purchase and sale.
From February 2010, the beefed-up code of practice has been the subject of self-regulation. I am sorry that there is such a unanimous opinion that we should give up on self-regulation. I have read the compliance reports of several of the big supermarkets—the first ones that they wrote, as they were required to, in their annual report and accounts. Marks & Spencer recorded that it has had two; one it has settled and one it has not. Sainsbury’s reported that it had a small number; they were all settled and none of them had to go to the compliance officer. Morrisons reported much the same and Lidl very much the same. Close attention should be paid to how this self-regulation has so far worked. What is the evidence that tells us that it is not working and that the adverse effects predicted by the Competition Commission about innovation and investment are actually taking place? I do not think that they are. I have asked a lot of the representative bodies to give any evidence that innovation and investment are being damaged, as predicted. I have had none back at all.
We seem to depend on this climate of fear. Because suppliers might lose a contract if they put their heads above the parapet, they are prevented from providing evidence. Several people have been quite complimentary about Waitrose. Do your Lordships really believe that a supplier would not be brave enough to raise a complaint about the code of practice with Waitrose? It is supposed that if we appoint an adjudicator and let anybody talk to it—that seems fine, as we have freedom of speech—in some way this climate of fear will disappear and we shall get to know all sorts of things that we do not know now. I seriously doubt it. This is a highly competitive industry. There are 10 big retailers. If you have a row with one, there are nine others. Innovation and investment interests are held in common. The supermarkets have progressed in what they offer because of what their suppliers have done to enable them to offer it. There is no shortage of investment or innovation that I can detect.
As the noble Lord, Lord Borrie, said, the Office of Fair Trading is already there, monitoring such things as the code of practice. What is the purpose of setting up another cost centre? I do not think the public will understand why we need another one. Do we want to exacerbate the disengagement of the public from the political system? If we believe that common sense, shared interests and fair dealing under the law are not enough, I do not know what the public will conclude. I have not heard a case made for the Bill today. If there is one thing that it needs, it is a sunset clause.
Lord Myners
My Lords, I declare an interest as a former chairman of Marks & Spencer. Unlike many other Members of the House, I have not been lobbied on this Bill. That may well be because I never open my parliamentary e-mail box and therefore do not read the e-mails that other noble Lords have been receiving. Perhaps I am in error in doing that.
As my noble friend Lord Grantchester said, the Bill has the fingers of the previous Labour Government all over it, although the right reverend Prelate the Bishop of St Edmundsbury and Ipswich also claimed some credit for the General Synod. The Bill was promised in the manifestos of the three main parties, but I am not persuaded of the need for it. I am certainly unpersuaded that the Bill as presently constructed will deliver the outcomes that the Government promise. In short, I believe that the Government are strong on assertion and light on evidence. The Bill shows a profound distrust of markets to produce good outcomes, which is extraordinary coming from a Minister who is a Member of the Conservative Party. The Government’s hesitancy in putting this Bill forward is evident in the fact that it has taken two years for it to appear. Its most effective sanctions are in reserve powers that are initially not going to be actioned. The Bill is quite explicit in creating an ease of repeal that suggests a half-hearted adoption of its central intention by the Government.
I propose to make half a dozen or so points. I think the voters of this country might reasonably ask whether this is a priority. The challenges facing our economy now are those of inadequate demand, a lack of available credit, both in amount and in cost and terms, and a loose monetary policy and consequent financial repression that is clearly not working.
There is no overarching coherence to the Bill as presented to your Lordships’ House today by the Minister. Grocers have delivered on customer expectation. We have a choice of goods now of a quality that would simply have been beyond the belief of the parents of most Members of this House. I remember when salmon was a luxury in our home, and my father was a fisherman. It came in a John West tin. Salmon and exotic fruits from hot climates are now available at incredibly attractive prices to the consumers of this nation. There is no evidence that voters or consumers have any sense that they are not getting choice, quality and value for money from a highly competitive retail industry and a highly efficient market as well.
I have a number of questions for the Minister. Perhaps the noble Baroness will answer the questions now. If she does not, I hope that she will answer them by writing to all Members of the House who speak in this debate and that we will receive that answer before the Bill goes to Committee.
I start by asking why we are focusing on groceries. Why, for instance, are we not asking the questions that the Bill asks about banking? This would surely be what voters would like us to do. They would like us to ask questions and to introduce an adjudicator to an industry that by any definition is highly concentrated, operates with cartel-like pricing and is generally typified by poor service and an absence of differentiation and a dearth of innovation. Surely these are the prima facie symptoms of poor competition, on which voters would expect the Government to be taking action. However, as we know, this Government have been supine in the face of the banks, with the failed Project Merlin now being followed by a policy known as credit easing, which does not actually benefit the end borrower at all; it benefits the banks by reducing their cost of borrowing.
I ask your Lordships’ House whether, if there is a case for a grocery industry adjudicator, there is not an even stronger case for a banking industry adjudicator. Is there not an equally strong case for an adjudicator of the energy industry, where people of this country again feel themselves at the wrong end of abusive industry practices by a very concentrated industry that is expert at absence of transparency in pricing and product differentiation?
The Minister, in her opening address, said that the need for financial penalties was unlikely because grocers would recognise the reputational risk of being found at fault by the adjudicator. This is a woefully optimistic assessment of how business operates, and it is certainly not borne out by the way in which the banking industry has responded to regular and constant criticism by various regulators and consumer bodies of its own behaviour. Indeed, if the House is invited to focus on an area in which there is a potential abuse of the weak by the strong—the supermarket suppliers by the supermarkets—how does the Minister reconcile that with Mr Adrian Beecroft’s proposals to allow employers to dismiss at will? On one hand we are reducing the legislative and regulatory protection for the weaker party in a market-based transaction. On the other, we are seeking to introduce even greater regulation.
The Bill cites no evidence that a regulator or adjudicator of the sort proposed has been successful or necessary in other countries. Nor are any arguments cited to suggest that there is something about the grocery trade in the United Kingdom, such as excessive concentration, that means that we need an adjudicator where other geographies do not. In comparison with most markets, we have a relatively fragmented grocery market, with very intense competition among the top 10 or so firms in the business. As the noble Viscount, Lord Eccles, said, if a supplier is not happy with one of the 10 firms to be covered by the adjudicator, there are nine other potential customers to whom they can turn for business.
The Minister also asserts that supermarket behaviour at the moment reduces the incentives and abilities of suppliers to innovate in new product lines and production processes. Where is the evidence for that assertion? How has the Minister concluded that markets do not lead to appropriate innovation and investment? The impact assessment says that the proposal “could ultimately”—in brackets, I would add, “Civil Service: most unlikely”—
“lead to improvements in quality and choice for consumers, as well as lower prices in the long run”.
No evidence is cited to support that conclusion. However, the impact assessment says that the Government will monitor improvements in investment and innovation. Am I correct to say that we will see civil servants opining on whether a competitive market has led to improvements in investment in innovation? If so, will the Minister tell us how civil servants will form that view and what experience they will bring to that task?
Next, there are some very woolly words in the detail of the proposed Bill. Setting aside for the moment the fact that the term “grocery” is not defined, there are terms such as “deal fairly” and,
“pay suppliers within a reasonable time”.
Will the Minister tell us how a market process does not lead to fair outcomes? Can she explain why reasonable times are not part of the agreement reached between the supplier and the supermarket, which is entered into openly and willingly by both parties? Which civil servants will agree on fairness as a judgment on market outcomes, or on the reasonableness of terms of payment?
On reasonable behaviour, am I not correct in my recollection that Sir Philip Green recommended, in his report on government procurement, that the Government should do many of the things that the supermarkets are being accused of doing here by applying pressure to suppliers? Sir Philip Green’s report was for the Department for Business, Innovation and Skills, so no doubt the Minister will be fully informed and able to explain how Sir Philip Green’s recommendations lead to acceptable behaviour while the behaviour of the supermarkets is not acceptable.
I do not expect the Minister to speak on defence matters, but I note that last week the right honourable Philip Hammond, the Secretary of State for Defence, also suggested that the Government would seek retrospectively to amend agreements with suppliers. My point is that there is a complete absence of consistency in the Government’s thinking. Why do the Government not have confidence in the market to produce the right outcomes?
The Bill also evidences a very poor understanding of the supply chain, particularly the activities and presence of intermediaries within it. This will need a lot of attention in Committee. I agree with the noble Viscount, Lord Eccles, that anonymity is almost certainly one issue about which we deceive ourselves. As for major suppliers, the specificity of the terms of a contract is such that, when an issue is raised with the adjudicator, the identity of the supplier will almost certainly become evident in a very short period, so it is hogwash for the Government to suggest that anonymity in some way gives this Bill some superior attraction.
There are many other areas that the Committee is going to need to spend a lot of time examining. The Bill as proposed suggests an adjudicator who definitely will not be independent of government. It is quite clear and is in the explanatory document that the intention is that the adjudicator’s department should be staffed by people from the Department for Business, Innovation and Skills and should be collocated with the OFT. As the noble Lord, Lord Razzall, said in his contribution, the process as described is inordinately cumbersome.
I also fail to understand, and perhaps the Minister can explain, why the penalties imposed by the adjudicator, if penalties are to be activated, should be paid to the consolidated funds while the penalties paid to the Financial Services Authority are paid to the FSA. Can the Minister explain why the Government appear not to have consistency?
Finally, the Explanatory Note to Clause 15 says:
“The Secretary of State”,
may,
“restrict the information the Adjudicator may consider to four specific classes of information, which are those that might be expected to be most useful in determining whether or not a breach of the Groceries Code had occurred”.
To be clear, the Minister will be setting the criteria and will set the criteria to four. Again, no reason or explanation is given as to why it should be four and how those would be narrowed or broadened; nor is any understanding given of the basis of expectation or the criteria of utility. What one can clearly see here, tucked away towards the end of the Bill, is that this adjudicator will have very little independence at all.
When we get to Committee we are going to have to look very closely at this Bill, because I do not think it is going to achieve the purpose that has been set out. If we have done our work in Committee and conclude that the Bill will never deliver the purposes intended, it should be withdrawn, otherwise we have a recipe for further bureaucracy and red tape, which is the last thing the country needs at the moment.
Lord Razzall
The noble Lord quite properly disclosed his interest in Marks & Spencer at the beginning of his remarks. Bearing in mind his attack on the coalition Government’s policy on the banks, would it not have been appropriate to disclose that he was a senior Minister between 2008 and 2010, with responsibility for banks?
Lord Myners
My Lords, I think the House is aware of that. The noble Lord, Lord Razzall, has often impressed me with his skill on the Floor of this House —his debating approach and his wit. Today he has fallen well short of the House’s expectation.
Lord Knight of Weymouth
My Lords, we have had a largely good-natured debate until just now about this important issue for consumers, producers and retailers. As my noble friend Lord Grantchester said, we have a sense of ownership of this Bill since we first advocated it and since the adjudicator refereeing the code was brought in by us in 2009. On that basis we are keen now, as the Opposition, to work with the Government as the Bill goes through Parliament to make sure that the adjudicator has the best possible chance of success and perhaps prove my noble friend Lord Myners wrong in respect of its chances. As has been said, we brought in the code following the 2008 report by the Competition Commission which talked about the “climate of fear” among suppliers in relation to disputes using the code in force at the time. The commission recommended using a new code and an adjudicator to give it teeth.
I was delighted when I met representatives of the large retailers through the British Retail Consortium last week. They told me that they were not opposing the principle of establishing the adjudicator in this Bill. Given that it was in all three party manifestos, they are bowing to the inevitable. This was reinforced by the e-mail from Waitrose, which claims to have supported this move from this outset. This attitude from the large retailers is positive and constructive and reflects what will I am sure be helpful engagement from all stakeholders as the Bill goes through its legislative journey.
On that constructive basis, I hope that we can get this Bill on the statute book as soon as possible so that the adjudicator can get on with this important job and offer suppliers the comfort that not only is the playing field a little more level, thanks to the code, but—to borrow the phrase that the noble Lord, Lord Plumb, attributed to Peter Kendall—there is now a referee to ensure that the game is played according to the rules. However, my noble friend Lady Sherlock is right to look for a statutory purpose. I was amused by the noble Lord, Lord Teverson, raising the possibility of schedules to the Bible. I bet Michael Gove is volunteering to write them.
Before I move to a more wholly constructive mode, I make one criticism of the Government in this regard. Why has it taken them two years? Back at the beginning of 2010, the shadow Environment Minister Nick Herbert went to the Oxford farming conference and said:
“While the government dithers the Conservatives are clear: we will introduce an ombudsman to curb abuses of power which undermine our farmers and act against the long-term interest of consumers”.
At the same time, Labour MP Albert Owen introduced a Private Member’s Bill on the same issue in the other place. Clearly, the policy was worked out and work was going on in legislation. In Opposition, the Minister’s party was ready to go with this measure. So why did we have to wait for two years? Is it the fault of their coalition partners being lukewarm? From what we have heard, that is not the case. Was it her Secretary of State not managing to make the case for the Bill in the legislative timetable? Or was it that Defra, the real policy lead, was not being listened to by anyone and farmers were being taken for granted by the coalition? We shall see—but I am glad to get that off my chest, and I can now be more positive.
The Bill has enjoyed support across the House, with the notable exceptions of the noble Lord, Lord Howard of Rising, the noble Viscount, Lord Eccles, and the noble Lord, Lord Myners. I very much respect their purity of free-market thinking, but I disagree, as there are times when markets need regulating when agreements are not entered into as freely as some think. The noble Viscount, Lord Eccles, and to some extent the noble Lord, Lord Myners, asked what the public would think. I do not know if noble Lords tweet, but I do, and when I have asked Twitter and Facebook about this, the overwhelming response is, “about time”. Even though they are like me all customers in supermarkets, they believe that at times they overuse their power.
My noble friend Lord Grantchester set out the tests that we will use in opposition as to whether the adjudicator will be effective. First, is it good for growth? I was delighted to go to the briefing for parliamentarians last Monday, which the Minister and her ministerial colleague Norman Lamb MP kindly offered. I was even more delighted when Norman described the Bill as a growth measure. My delight knows no bounds when the Minister in her peroration confirmed that this Bill to establish a quango and a regulator is good for growth. This feels somewhat discordant with the rhetoric we hear from the Prime Minister about deregulation being the key driver for growth. But maybe on this, as on Beecroft, the Minister’s Secretary of State has won the argument. Perhaps she could pass on our regards to Vince Cable, because of course there are times when a market needs intervention to make competition work well, if players in that market become overmighty. I note that my noble friend Lord Myners wanted a similar arrangement in this Bill to apply to banks. I am sure that he is making the same point to our friend Ed Balls—and I wonder whether Vince agrees.
Agriculture and food processing, worth more than £80 billion to our economy, are our largest manufacturing sector. Some 3.6 million people are employed in food production in this country, and to make competition in that market function more fairly is ultimately good for growth and for those jobs in the food sector. Then it can also be good for consumers if it is working well. As the noble Baroness, Lady Randerson, told us, a healthy market will allow new entrants in and innovation in the supply chain; it will offer choice and competition and will thereby push up quality and push down prices.
This takes us to another of our tests. Will the adjudicator be able to act on the right things? The question is about updating the code. Much of what we have heard today concerns issues for the code and not always issues for the adjudication of the code. My noble friend Lord Grantchester and the noble Earl, Lord Sandwich, talked about recent worries in the dairy industry. The noble Baroness, Lady Parminter, talked about the fruit industry. Some of the remedies for these problems depend on renewing the code and potentially extending its reach. While the code is out of scope for the Bill, the role of the adjudicator in reviewing the operation of the code is not. We think that it is in the interest of all stakeholders that the code is kept a living document and that it should be reviewed regularly and updated by Parliament accordingly. We will therefore explore in Committee whether the adjudicator should include in the annual report any recommendations on improving the code so that it is an act of consideration rather than—as the Bill stands—a passive one.
I will also be seeking a commitment from the Government to commission a serious look at the whole supply chain to the large retailers. It is worth noting that when the Competition Commission reported in 2008, it had only been asked to look at the immediate suppliers to supermarkets. Some of these, such as Kraft and Coca-Cola, are bigger businesses than some of the supermarkets they supply. We need to look at their suppliers and the whole chain to see if this process will create a fair deal for small producers. In winding up, will the Minister give an indication of what consideration the Government are giving to looking at this so that a better code can be developed? I note that, in her opening speech, she hinted that she might view it as overregulation. Is she willing to ask the Competition Commission to research and test that view?
Our next test is whether suppliers will risk using the adjudicator. I applaud the Government for listening to stakeholders and the two Select Committees who did some excellent work in pre-legislative scrutiny of the Bill. It is much improved around anonymity, which we support. It also allows third parties to make complaints, as we have heard, which is also welcome. I will, however, want to explore whether the Bill needs a halfway house if third parties do not work consistently when the operation of this system is reviewed.
Finally, is this measure strong enough to force change where needed and will it be seen to be fair on all parties? This leads to the three key issues to debate as the Bill progresses: appeal, independence and fining. Before talking about these, it would have been helpful to have an impact assessment. Is there one beyond that for the draft Bill? If not, why not? Is it not a requirement these days to have one? Currently, there is no appeal for retailers. If financial penalties are subsequently brought in, the Bill specifies the courts as the means of appeal. In the interests of fairness, we may want to debate whether the potential damage of naming and shaming is serious enough for retailers to have a straightforward appeals process. Although the informed opposition to this from my noble friend Lord Borrie has probably persuaded me, we may need a quick debate to be sure.
We will also explore the independence of the adjudicator, an issue raised by my noble friend Lord Myners. The adjudicator will be appointed by and accountable to the Secretary of State. We will explore whether it is better to have the independence and transparency of accountability to Parliament. I know from contact with Members from the other place who serve on the BIS Select Committee that they would like a say in the appointment of the adjudicator. Equally, there is merit in an annual report to Parliament, including reporting on the operation of the code and the operating costs of the adjudicator. The latter would provide some comfort to retailers who will be funding the operation through the levy which they regard as something of a blank cheque.
Then there is the biggest issue of them all, mentioned by most of the speakers in this debate today—that of fining. Within this, there are two issues to debate. There is the principle of whether the adjudicator should have this power from day one and, if not, whether the process for introducing fining is, as the noble Lord, Lord Razzall, described it, cumbersome. I will certainly draw on the experience of my noble friend Lord Haskel when bringing forward amendments in Committee to Schedule 3 to deal with the latter. However, first, I will try to win the argument on the principle of fining. Like the right reverend Prelate the Bishop of St Edmundsbury and Ipswich, I think that the adjudicator should have teeth from day one. His comments were echoed by many other speakers. The referee should have the red card to help enforce the rules. I hope that there will never be sufficiently serious breaches to invoke the use of these powers, but just having the powers there and ready to go may prevent such serious breaches.
This raises the question of what success for the adjudicator looks like. I hope that the Minister will not abolish the measure by order in a few years’ time if it has been used to instigate not much more than low-level arbitration and investigation. As a football fan, I do not like it if the ref keeps stopping play, but I would always want one there to enforce the rules of the game. I also think that the power to abolish this new quango should replicate the new processes that we are starting to get used to in the Public Bodies Act and not follow the simple negative procedure in the Bill. Like others, I am keen for the proceeds of fines to be used in an imaginative way, ideally in investing in innovation in the supply chain. Unlike the noble Baroness, Lady Byford, I like the clarity conferred by questions punctuating the Bill’s wording, however homely it may seem to her. Unlike the noble Lord, Lord Palmer, I like the name of the adjudicator. I understand why the Minister might not want to call it the regulator given the sensitivities around that issue.
This is broadly a good Bill and has been warmly welcomed by most speakers this afternoon. My promise to noble Lords is to engage openly and constructively across the House to improve the Bill as it goes through its journey. I am sure that the Minister will do the same. We look forward to helping her get an effective adjudicator up and running as soon as possible.
Baroness Wilcox
My Lords, today’s debate has cast a great deal of light on the important issues addressed in the Bill. I thank all noble Lords for their contributions. I recognise the strength of feeling and depth of experience that we have heard in the debate. I have been asked far more questions than I thought I would on a Bill on which we all seem to agree, with two or three exceptions. I will do my best to answer as many questions as I can.
The noble Lord, Lord Myners, seemed to ask me 100 questions. I am grateful to him for telling me that I can reply to him in writing as long as I copy the response to everyone else. As I said in my opening remarks, the Bill has undergone substantial consultation and pre-legislative scrutiny. Wherever possible, the Government have attempted to find approaches that ensure that the adjudicator’s powers will be adequate while also keeping them proportionate. We intend to keep the costs to business minimal while ensuring that the adjudicator is fully equipped to fulfil his or her role. However, I will, of course, reflect on the comments of the noble Baroness, Lady Randerson, the noble Lord, Lord Teverson, and others, who have expressed their concerns about both those statements. We think that we have allowed tough powers to name and shame from the outset. We have kept back the last resort of financial penalties as a reserve power. I note that many, including the noble Lord, Lord Knight, have questioned this. I have no doubt that we will debate these questions further in Committee.
The noble Lord, Lord Knight, commented on the impact assessment of the draft Bill. That remains valid; hence there is no requirement for an updated impact assessment. The noble Baroness, Lady Byford, did not approve of the Bill’s “folksy” drafting and noted that the style of writing was unusual. I reassure the House that this is not a mistake. The Bill is one of the pilot plain English Bills that are intended to be easier for everyone to understand. That is what it is intended to be. However, I am happy to write to the noble Baroness on her question about the changes in clause headings and on the consultation.
My noble friends Lord Howard of Rising and Lord Eccles, and the noble Lord, Lord Myners, said that the supermarkets are currently bound by the Groceries Supply Code of Practice and questioned whether an adjudicator was needed as well. The Competition Commission has found clear evidence that the excessive use of buyer power could lead to adverse effects on consumers. The code has the commission’s recommendation, when it first introduced the code, that an adjudicator be set up to uphold it. At pre-legislative scrutiny, the BIS Select Committees in the Commons also concluded that a groceries code adjudicator was necessary. The code allows only individual cases to be resolved and only if a supplier is prepared to raise the issue with the large retailer involved. The adjudicator will be able to investigate suspected breaches involving many suppliers, not just adjudicate individual cases.
The noble Lord, Lord Myners, wishes to intervene. He did make a promise, and I have a lot of questions to answer.
Lord Myners
Is it the Minister’s belief that the supermarket sector is securing monopoly profits? If so, on what basis do the Government derive that conclusion?
Baroness Wilcox
I am sure I did not say that they were securing monopoly profits.
Lord Myners
My Lords, I did not say that the Minister said that, but the assertion that there is excessive use of buyer power over a diffuse supplier community would be evidence of monopoly profits. Do the Government believe that our grocers are evidencing monopolistic behaviour through excessive returns on equity or sales?
Baroness Wilcox
We are basing this on the Competition Commission’s evidence.
A concern was raised about the creation of a new regulatory body and I mention in particular the noble Lords, Lord Haskel and Lord Plumb. The Government are committed to reducing the overall burden of regulation on business. We are not creating a new bureaucracy but appointing an individual to be the adjudicator. I hope I can reassure the right reverend Prelate the Bishop of St Edmundsbury and Ipswich and my noble friend Lady Byford that the small, agile staff will be effective. We will, however, be watching all the way through—this also relates to the point made by the noble Baroness, Lady Randerson—to see that the office has the capacity to work with such large supermarket chains.
The noble Lord, Lord Haskel, thought that arbitration was more vital than the adjudicator’s investigations. I can reassure him that the adjudicator will be able to arbitrate disputes concerning individual suppliers as well as investigate complaints.
In response to the concern of the noble Lord, Lord Borrie, it is correct that the adjudicator probably would not arbitrate himself or herself where he or she had previously carried out an investigation into a similar issue, due to the risk of a conflict of interest. However, in that case the adjudicator would simply appoint a different arbitrator, and the Bill provides for this in Clause 2.
My noble friend Lord Eccles suggested that the Competition Commission was lukewarm in its support for the adjudicator. The commission said clearly in paragraph 11.375 that all but one member of the investigation panel considered the adjudicator to be essential for the monitoring and enforcement of the code, but all six members of the Competition Commission group who investigated groceries agreed that,
“the transfer of excessive risks or unexpected costs by grocery retailers to their suppliers is likely to lessen suppliers’ incentive to invest in new capacity, products and production processes … if unchecked, these practices would ultimately have a detrimental effect on consumers”.
Viscount Eccles
I nearly accept the Minister’s description of what I said, but this Competition Commission finding was made in 2008. It is now 2012. I asked, and will ask again, whether there is any evidence that the adverse effect which they predicted in 2008 is in fact coming about.
Baroness Wilcox
I do not have the answer before me, but I will most certainly write to my noble friend.
The noble Lord, Lord Palmer, suggested that the adjudicator should more accurately be called an ombudsman. Such a description is not to be used in this case because it would be contrary to the guidance of the ombudsmen’s society, because ombudsmen deal with business-to-consumer disputes.
The noble Lord, Lord Knight, asked whether there should be a further investigation into the practices of intermediaries. A decision to refer a market to the Competition Commission for investigation is a matter for the Office of Fair Trading, and any concerns would be raised with it. However, the question of keeping the code a living document is a matter that I should like to continue to explore in Committee, if the noble Lord is happy with that.
We heard complaints, including from the noble Lord, Lord Knight, that the Bill has been delayed. I know that it has been keenly anticipated and I recognise noble Lords’ eagerness for it to have been introduced. However, we have not delayed in this. The 2008 report did not lead to an immediate Bill, but I would not criticise the previous Government for that because they were attempting to get the retailers themselves to create the adjudicator. That is why there seems to have been a delay—it was not in our time. Since the election, we prioritised this measure for pre-legislative scrutiny during the first Session, and introduced it on the first day possible of this new Session. I hope that noble Lords will work with us on the Bill and that we will see an adjudicator in place next year.
The noble Lord, Lord Grantchester, and my noble friend Lord Razzall suggested that the way in which the levy to fund the adjudicator is divided between retailers should be reconsidered by annual review. The Secretary of State will be able to assess, as the evidence unfolds, how the levy should be divided to ensure that those who create most trouble pay more.
Concern was raised by my noble friends Lord Razzall and Lady Byford about the few instances where confidentiality might not be completely guaranteed. We believe that confidentiality will be vital to the adjudicator’s investigations. The circumstances in which the identity of a complainant might be revealed without their consent are strictly limited by Clause 18. We believe that this would happen in exceptional circumstances. That will perhaps become more apparent when we go through the Bill in Committee. The Government will be engaging with suppliers to ensure that they understand the rules on confidentiality. We are confident about their ability to complain.
The noble Lord, Lord Grantchester, expressed concern over the Secretary of State’s power to restrict the sources that can complain to the adjudicator. We believe that it is important that trade associations are incentivised to act responsibly for the sake of both suppliers and retailers. I will be happy to discuss this further in Committee.
Noble Lords, including my noble friend Lord Plumb and the noble Lords, Lord Palmer and Lord Grantchester, demonstrated a close interest in the question of sanctions. I agree that getting right the sanctions available to the adjudicator is critical. I know that we will continue to explore this issue.
The noble Lord, Lord Grantchester, the noble Earl, Lord Sandwich, my noble friends Lord Razzall and Lady Randerson, and the right reverend Prelate the Bishop of St Edmundsbury and Ipswich suggested that the process of consultation on fines could be streamlined. Our intention is for the fining power to be introduced promptly, if necessary, but also to ensure that its introduction is based on proper consideration of the evidence. I shall be very happy to discuss with noble Lords how the details of the Bill can ensure that such a power is delivered.
I seem to be answering a lot of questions from the noble Lord, Lord Grantchester, and my noble friend Lord Razzall. Perhaps it is because they asked them early on. I have a lot of answers here. I shall try not to respond to them too much again because I am not responding to some other noble Lords.
An important question was asked about what consumers think of the adjudicator, I think by my noble friend Lord Eccles. A poll by War on Want last year found that 84% of consumers support the establishment of the adjudicator. The general public have a keen sense of fair play and do not like to see farmers and suppliers being exploited in any way by anyone. At the same time, they, too, wish to see fairness in our dealings. Consumers are, of course, the ultimate beneficiaries from a stronger and more competitive groceries market.
Many thoughtful and incisive points were raised today, and I hope that I have been able to address some of them. Obviously, I will write to noble Lords on any of the questions that I have not been able to answer. I am sure that we will continue to explore these and other issues in Committee and on Report.
I have in my time supplied supermarkets with chilled food, before any code or the prospect of an adjudicator. In those days, the 1980s and 1990s, there was no written contract for chilled food, and I had no written contract to go to the banks to raise money. It was not easy to get them to say that they would buy something for you at that time, so I would have loved to have had a code and an adjudicator. Yet it was very exciting to supply to a large supermarket group. We were only a small to medium-sized company. At that time the supermarket groups were very worried about having very few suppliers, and they did the best they could to make sure they had a large range of suppliers and to help us to overcome the barriers to supplying so much.
However, I also remember the dreaded special offers. When they arrived, it was extremely difficult for us to fulfil them without having to work through the night and putting on extra shifts. Any profits that we made in those two weeks went out of the door with all the staff we had to engage. That was the price of having contracts, not even written ones, with very large supermarket groups. If I had to give any advice to a company starting to deal with them, I would say that the excitement of a contract should be resisted until you fully recognise the terms and conditions and the implications of what they mean to you, because they are very big contracts that you are taking on and they happen regularly every week.
This Bill appeared in three major parties’ manifestos. I hope that those of all parties and noble Lords on the Cross Benches will wish to ensure that the adjudicator protects suppliers, including farmers, from any unfair dealing, and does so without needless disruption to commercial arrangements. I look forward to my noble friends Lord Howard and Lord Eccles and the noble Lord, Lord Myners, taking part in Committee so that together we can ensure that this Bill delivers on our aims and achieves the best possible outcome for the grocery supply chain as a whole. Fair market practice from the supplier through the retailer to the consumer is exactly what we want from the biggest industry in this country.
Bill read a second time and committed to a Committee of the Whole House.