Groceries Code Adjudicator Bill [HL]

Lord Grantchester Excerpts

Tuesday 22nd May 2012 Lords Chamber

[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.