Groceries Code Adjudicator (Permitted Maximum Financial Penalty) Order 2015

Monday 2nd March 2015 Grand Committee

Motion to Consider

15:41

Moved by

[Lord Popat]

That the Grand Committee do consider the Groceries Code Adjudicator (Permitted Maximum Financial Penalty) Order 2015.

Relevant document: 22nd Report from the Joint Committee on Statutory Instruments

[Lord Popat (Con)]

My Lords, the order sets the maximum financial penalty that may be imposed by the Groceries Code Adjudicator, and completes the set of regulatory powers available to the adjudicator to ensure that the large supermarkets deal fairly with their suppliers.

Before moving on to the purpose and effect of the order, it might be helpful if I talked a little about how the adjudicator came to be created. The genesis of the Groceries Code Adjudicator regime is to be found in the market investigation into the supermarkets conducted by the then Competition Commission between 2006 and 2008. The commission found that the problems in the sector were concentrated in the commercial dealings between the largest supermarkets and their direct suppliers. It therefore used its powers under the Enterprise Act 2002 to introduce the Groceries Supply Code of Practice in 2009.

The scope of the code is precisely defined. It governs the commercial relationships between the 10 largest UK supermarkets—those with a turnover of more than £1 billion a year—and their direct suppliers of food, drink and household products. The code requires the supermarkets to deal fairly with their suppliers and it includes specific provisions, among other things, governing terms of supply agreements; the timing of payments; marketing and promotional costs; and payments as a condition of being a supplier. It does not cover indirect suppliers further down the supply chain. Nor does it govern questions relating to pricing, which are the responsibility of the Competition and Markets Authority under general competition rules.

The Competition Commission required the appointment of code compliance officers by the supermarkets. It discussed the possibility of a regulator to enforce the code, but did not go so far as to recommend one at that time. I appreciate that many felt that the absence of a regulator was an unsatisfactory arrangement from the start. The Commons Select Committee on the Environment, Farming and Rural Affairs, for example, described it as akin to setting the rules of the game but then failing to appoint a referee.

Ministers shared that view. That is why they legislated for the creation of the adjudicator to enforce the code. Christine Tacon took up her post as the first adjudicator in June 2013. Ministers were also determined that the adjudicator should have the enforcement powers necessary to ensure compliance with the code. Those powers are extensive. The adjudicator has a duty to arbitrate any dispute that is referred to her by a supplier, and she has the discretion to arbitrate if the referral is by a supermarket. The adjudicator may also launch an investigation where she judges that there are reasonable grounds to suspect that a supermarket has breached the code, or has failed to comply with earlier statutory recommendations made by the adjudicator.

15:45

I shall take a moment here to clarify some of the confusion that has grown up around the adjudicator’s powers of investigation. This was highlighted most recently by the EFRA Select Committee, which recommended in its report on dairy prices that the GCA be given the power to launch proactive investigations. The Government will respond in detail to the committee shortly. But to be absolutely clear, there is nothing in either the legislation governing the adjudicator or her statutory guidance that means that the GCA must simply sit and wait for evidence to be brought to it. Far from it—the adjudicator has wide powers to investigate, and the Government expect her to rely on them to be an active and visible guardian of the code.

I know that Ministers are pleased that Christine Tacon has quickly established her profile and authority through her extensive engagement with the sector, not least by requiring the various internal and external investigations in the Tesco case to include the groceries code in the terms of reference. This is surely proof of the adjudicator making good use of the proactive powers of investigation that the legislation already grants her.

Where the adjudicator conducts an investigation and finds that there has been a breach of the code, currently she may take one of two forms of enforcement action. She may issue the supermarket with recommendations as to its future conduct to ensure compliance with the code, or she may “name and shame” the supermarket by requiring it to publish information about the adjudicator’s investigation. However, it was the will of Parliament that the adjudicator should also have the power to impose a financial penalty. Provisions to introduce a fining power by secondary legislation were therefore added to the Groceries Code Adjudicator Bill during its parliamentary passage. These required the adjudicator to consult on the method for determining the maximum penalty, which she did between July and December 2013, and to make a recommendation to the Secretary of State. This recommendation was for a maximum penalty of up to 1% of UK turnover, which Ministers accepted. These regulations implement that recommendation.

I should put on record that these regulations cannot have retrospective effect. That means that the adjudicator will not have the power to impose a penalty in respect of any breach of the code that predates the making of the regulations. I know that some of the supermarkets have expressed concern about the level of the maximum. They have pointed out that, for the largest retailers, 1% equates to hundreds of millions of pounds. On the other hand, suppliers who responded to the GCA’s consultation tended to favour a much higher maximum, in some cases up to 5% of turnover.

On balance, Ministers consider the recommended 1% to represent an appropriate and proportionate maximum. It is modest compared to the figures of 10% and more in the competition regime—and it is a maximum. The adjudicator’s published guidance makes it clear that the GCA will adopt a proportionate approach to its enforcement powers and will seek voluntary compliance wherever possible. The agreement that she has secured from most of the supermarkets to limit their forensic accounting exercises to the previous two years, when six had been common, is an excellent example of her ability to get results without the need to pursue formal proceedings.

Where the adjudicator relies on her formal enforcement powers, her guidance makes it clear that she will do so by applying the well established Macrory principles on regulatory penalties. These state that a sanction must be proportionate, must deter further non-compliance and must aim to eliminate any financial benefit from non-compliance.

On the latter point, we have seen recently that, by manipulating the timing of payments to and from suppliers, supermarkets can very quickly accrue huge sums. That makes the 1% maximum in this order essential if a full and proportionate range of sanctions is to be available to the adjudicator. The Government appreciate that some noble Lords may still have concerns about the level of the maximum. I hope that they will be reassured to know that there must be a statutory review of the GCA’s performance next year, during which this order may be looked at again.

I have said that the order is about giving the adjudicator all the tools that she needs to do her job—but powers are only half of the picture. The adjudicator must also have the necessary resources and the capacity to be an effective regulator. That is why Ministers were pleased to approve an increase of almost 40% in the GCA’s levy funding—from £800,000 this year to £1.1 million next year.

In closing, I repeat that in debating this order today we are reflecting Parliament’s will to give the Groceries Code Adjudicator access to the full range of enforcement options that she needs to do her important job as effectively as possible. I am confident that granting the adjudicator this additional power will strengthen her ability to deliver fairness in the commercial relationships between the supermarkets and their suppliers. A fair and transparent market is good news not just for suppliers but for the sector as a whole and for consumers. It will promote competition and foster innovation. I hope therefore that noble Lords will support the order.

[Lord Young of Norwood Green (Lab)]

My Lords, we do support it. I welcome the introduction by the Minister but I have a couple of points to make. I welcome the Government’s decision to reject the retailers’ view that somehow the maximum penalty should be much more complex, and to keep it simple at 1% of turnover. The question of whether this is absolutely the right figure is something that we can look at in the review next year.

I also welcome the point about the wide powers of investigation and the increase in resources. It must have been a coincidence but, as I was flicking through the pages of the Sunday Times business section, I happened to notice a little article about a German supplier to a company complaining that the company had a four-month payment regime, whereas, interestingly, Germany has a one-month regime. I have not been able to verify that but the Groceries Code Adjudicator commented that she did not propose to launch an investigation into this. I was a bit surprised at that, as I thought the area would be worth some investigation. Four months seems a significant period of time for a company to withhold payment to its direct suppliers. I would welcome the Minister’s response to that.

[Lord Popat]

I am grateful to the noble Lord, Lord Young, for his contribution and for accepting this SI. He mentioned the penalty of 1%. In many ways, he is right; I think it is best to keep it simple. One per cent is a maximum. Bearing in mind that the turnover of large supermarkets can exceed £1 billion, 1% can be a substantial sum of money. Again, if we find that this is not the correct amount, we can always review the legislation.

The noble Lord mentioned the article in the Sunday Times. I have a copy of it attached to my file. Lidl was the supermarket in question. I am sure that this matter will be investigated by Christine Tacon. The payment period is longer in the UK than in Germany, but there has been no Grocery Code Adjudicator investigation. The Grocery Code Adjudicator is independent. The Small Business, Enterprise and Employment Bill, which is having its Report stage tomorrow, is looking at prompt payment and will probably incorporate what Lidl has done to its suppliers by delaying payment for as long as four months. It might come under that jurisdiction rather than the Grocery Code Adjudicator.

[Lord Young of Norwood Green]

That might be the case, but the Grocery Code Adjudicator made a public statement that she did not intend to investigate it—so it is an important decision. There ought to be some dialogue with the Grocery Code Adjudicator to find out why this does not merit at least something, even if it is not a formal investigation. It is quite an important issue, and I would have thought that it merited some investigation. I cannot say that I am completely satisfied with the reply. I am not expecting the Minister to respond now, but when he has had further opportunity to reflect, perhaps he will.

[Lord Popat]

My briefing states that the GCA is independent and the small business Bill will look into it. I will certainly write to the noble Lord. The article states that the company pays its suppliers in Germany in 30 days but takes four months to pay in the UK—so it is something that we must look at.

The GCA’s published guidance commits her to a stepped approach to enforcement. The adjudicator has said that wherever possible, she will rely on informal regulatory actions to secure compliance with the code. For example, the adjudicator has secured the agreement of most of the supermarkets to limit forensic audits of transactions with suppliers to the previous two years, rather than six years. The GCA meets Ministers regularly and its performance will be reviewed by Ministers in 2016, so I think it is best if I write to the noble Lord on this matter. I read the article in the Sunday Times and have a copy with me. I will refer it to officials and write to the noble Lord.

Motion agreed.