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Clause 4 - Investigations

Groceries Code Adjudicator Bill [Lords] – in a Public Bill Committee at 10:45 am on 11th December 2012.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives 10:45 am, 11th December 2012

I beg to move amendment 19, in clause 4, page 2, line 5, leave out subsection (1) and insert—

‘(1) The Adjudicator may carry out an investigation where there are reasonable grounds to suspect that a large retailer has—

(a) broken the Groceries Code; or

(b) failed to follow a recommendation made under section 7; or

(c) failed to incorporate the Groceries Code into a supply agreement, as required under Article 5 of the Groceries Supply Order.’.

Photo of Hywel Williams Hywel Williams Shadow PC Spokesperson (Education), Shadow PC Spokesperson (International Development), Shadow PC Spokesperson (Work and Pensions), Shadow PC Spokesperson (Health), Shadow Spokesperson (Cabinet Office)

With this it will be convenient to discuss the following:

Amendment 20, in clause 6, page 2, line 26, leave out from ‘that’ to end of line 28 and insert ‘any of the grounds for launching an investigation under section 4(1) has in fact occurred, the Adjudicator may take one or more of the following enforcement measures—’.

Amendment 21, in clause 7, page 2, line 33, leave out subsection (1) and insert—

‘(1) If the Adjudicator chooses to enforce through making recommendations, that means—

(a) in the case that a retailer has been found to have broken the Groceries Code, or has failed to follow a previous recommendation made under this section, recommending what the large retailer should do in order to comply with the Groceries Code; and

(b) in the case that a retailer has been found to have failed to incorporate the Groceries Code into a Supply Agreement, as required under Article 5 of the Groceries Supply Order, recommending what the large retailer should do in order to comply with Article 5 of the Groceries Supply Order.’.

Amendment 40, in clause 13, page 5, line 3, after ‘Code’, insert ‘or the Groceries Supply Order.’.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I seek to continue the consensual nature of the debate so far with a well formed amendment that has both beauty and simplicity, which I hope will improve the Bill. Having said that, although this group of amendments would strengthen the Bill, I reassure my hon. Friend the Minister that they are intended to probe and to elicit what I am sure will be a helpful response that clarifies the points highlighted by the amendments. Unless the Minister alarms me, and I am sure she will not, my intention is to probe the issues.

Clause 4 is important, and it went through a number of iterations during the development of the draft Bill. I know the Department considered the clause over some time. Indeed, it is important that the clause refers to “reasonable grounds”, rather than stating that investigations would necessarily only be instigated on the back of complaints brought forward, either anonymously or otherwise, by suppliers. As previous Competition Commission reports have shown, because of what it has described as “a climate of fear” in the supply chain, complaints were just not likely and, indeed, under the previous voluntary code they were simply not brought forward. That was even though it was recognised that many improper and unacceptable practices had been carried out, which was why the Competition Commission held its inquiry—originally instigated in 2006—in the first place. The clause is therefore a watershed in moving the issue on, because the provision is vital in that context, and I warmly congratulate the Government on its introduction.

The purpose of amendment 19 is to ensure that recommendations are followed up, because a potential weakness in the Bill’s drafting is a failure to ensure that that will happen. The Bill currently provides the adjudicator with three forms of enforcement, namely recommendations, the publication of information—naming and shaming, or the reputational damage that the Government have previously said would be sufficient to bring the larger supermarkets to book and to contain the practices that many of us have criticised—and fines. We must congratulate the Minister on her wisdom in tabling amendments about fines.

Recommendations are intended to be the most light-touch of the three forms of enforcement. It is expected that recommendations will set out the action that the adjudicator believes a retailer needs to take to comply with the code. For instance, a recommendation might be to remove from supply agreements provisions for  shrinkage that would be a contravention of the code. Under clause 7(2), the adjudicator must monitor whether recommendations have been followed, and it can launch investigations if it believes that a recommendation has not been followed. However, even if the adjudicator subsequently finds that a recommendation has been ignored, no further action can be taken, or so it appears from the current drafting. Under clause 6, the enforcement mechanism can be used only if

“the Adjudicator is satisfied that a large retailer has broken the Groceries Code”.

It cannot be used if the adjudicator is satisfied that a retailer has ignored a recommendation.

It could be argued that the original breach—for instance, the inclusion of provisions for shrinkage in a supply agreement—might be the basis for further enforcement measures, but that would be extremely controversial. Due process demands that multiple or successive sanctions are not appropriate for a single transgression. Instead, the Bill should simply be amended so that, if required, the adjudicator could apply a further enforcement measure when a recommendation is ignored.

A failure to follow a recommendation need not always lead to further enforcement. The Bill would not require that, because it states that the adjudicator “may”, not “must”, use enforcement measures. For instance, if a retailer has remedied a breach through an action that was different from the one recommended, the adjudicator would have no interest in pursuing the failure to follow that recommendation, and that could be set out in the adjudicator’s guidance. Nevertheless, the adjudicator must be provided with some way of ensuring that recommendations are enforced where they have been ignored.

Photo of Huw Irranca-Davies Huw Irranca-Davies Shadow Minister (Environment, Food and Rural Affairs) 11:00 am, 11th December 2012

I commend the hon. Gentleman for the way in which he articulates his arguments. I have great sympathy with his amendments, albeit he said they were probing. One of those ingenious amendments would provide that after a failure to follow a previous recommendation the adjudicator could recommend what should be done. Where is the final backstop following that subsequent recommendation?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

The purpose of the amendments is to highlight the fact that there appears to be no further sanction available to the adjudicator, who can simply monitor and seek to ensure that the recommendation has been enforced. The group is intended to ensure that the adjudicator can move on to further actions. I am looking to the Minister to confirm that there would not be a separate cul de sac of recommendations, out of which the adjudicator could not move. They would have to be able to move on and take further enforcement action such as naming and shaming or, indeed, fines, in the event of a retailer’s persistent failure to follow recommendations.

Amendments 20 and 21 deal with the failure to incorporate the code in contracts or supply agreements, and are fairly straightforward and technical. Article 5 of the Groceries (Supply Chain Practices) Market Investigation Order 2009, the order that established the code of practice, requires:

“A Designated Retailer must not enter into or perform any Supply Agreement unless that Supply Agreement incorporates the Code”.

The order also requires that all supply agreements be recorded in writing, which, taken together, means that retailers are required to provide the code in writing to all suppliers.

That requirement, however, is part of the order and not the code, which is set out in a schedule to the order. Failure to comply with the order is enforceable by the Office of Fair Trading rather than the adjudicator, who is concerned solely with compliance with the code. That means that, should retailers fail to provide written supply agreements that include the code—something that has often been reported—the adjudicator will not be able to investigate. At least, some of those who have examined the clause believe that to be the case. Technically it does not constitute a breach of the code.

That is a major oversight. Inclusion of the code in supply agreements is crucial in ensuring that retailers observe its provisions, and is something that the adjudicator should clearly be able to monitor and enforce. The adjudicator will be much better placed than the OFT in that regard, and there are many who have concerns about the matter remaining the sole responsibility of the OFT.

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

The hon. Gentleman is making some super points about the way that the adjudicator operates. I wonder if I may ask two questions in one intervention. First, many suppliers have said to us that they have no supplier agreements at all and, indeed, no contracts at all. Perhaps we should be considering that. Secondly, if it were possible fully to enforce the inclusion of the groceries code in a supply agreement, would that allow a supplier to pursue a breach of the code through other legal mechanisms, as well as through the adjudicator?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

On the first point, with regard to retailers saying that they do not have any written or any supply agreements, that has always been a weakness in the past of the verbal nature of “contracts” between large retailers and their suppliers. Of course, such contracts suit the larger and more powerful of those engaged in that relationship, because they can always retrospectively change those arrangements or claim that suppliers might have misheard or misunderstood the verbal contract that was previously entered into. Recourse to law is available to either party and would, I understand, remain, but the purpose of the adjudicator is to avoid either side in that agreement seeking recourse to law. The purpose behind what the Competition Commission originally set out when bringing forward the code—and proposing that it should be backed up by an ombudsman, as it described it—was to ensure that there is a rules base and that everyone understands where they stand. Indeed, a written agreement should be attached to each written contract between supplier and retailer.

Photo of Mark Spencer Mark Spencer Conservative, Sherwood

It is important that the market can be flexible. I am sure that the hon. Gentleman understands that trying to tie down verbal agreements takes flexibility out of the market. The market can be warped by weather events, for example, or other market factors and it is vital that retailers and producers have flexibility, allowing them to rapidly fill that gap in a retail market.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I accept that. My experience in the agricultural trades prior to coming to the House demonstrates clearly to me that being flexible and being able to change arrangements at relatively short notice are important. The Minister may wish to comment on that, because the methodology by which written contracts or any amendments to those are established, particularly with the information technology available to us—my Committee colleagues are perhaps engaged in negotiating supply agreements or amendments to those, as well as listening intently to me—does not necessarily mean the use of quill pen and parchment with a wax embossment, delivered by courier. Changes to supply agreements can be recorded through electronic communication. I look to the Minister for reassurance on that point, because the last thing we want is to introduce something that means that those agreements are not flexible and cannot move forward.

It is important that suppliers are reassured and know precisely the nature of the contract between supplier and buyer that they are entering into, rather than face a great deal of uncertainty, as in the past, and a significant prospect that, in days or weeks, they may face retrospective change about which they have no say whatever. It is important that that happens.

Let me talk about the purpose of amendment 40, proposed and encouraged by the many non-governmental organisations that are interested in fair trade in developing countries. The amendment would cover enterprises buying for resale. It is another probing amendment. It would ensure that the adjudicator had power over enterprises that buy for resale on behalf of retailers and could recommend changes not only to the content of the code but its scope. It would reinforce the need for the code to apply to enterprises that are buying for resale products sold in retailers’ outlets covered by the code. For example, the adjudicator needs to be able to investigate the activities, if I may mention the name, of International Produce Ltd, a wholly owned subsidiary of Asda. It needs to be able to investigate where retailers have set up sourcing offices in supplier countries which they are using as a means of having arrangements that are outside the provisions of the code.

The Government need to reiterate that the code and the adjudicator apply to enterprises purchasing products that will then be resold by retailers which need to comply with the code of practice. If retailers outsource the buying of products to different entities, those new entities need to come under the scope of code. Although the amendments cover a range of contexts in which investigations take place and enforcement measures can be carried out, I hope that the Minister appreciates that they are intended to tease out the strength of the Bill as drafted, to maintain its beauty and form and ensure that the issues I have raised are taken on board by the Government. If reasonable points have been advanced, the Minister may wish to respond by introducing Government amendments on Report.

Photo of Jo Swinson Jo Swinson The Parliamentary Under-Secretary of State for Women and Equalities, The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I thank my hon. Friend for his constructive approach. He has been working constructively on this issue for many years. I am sure he is frustrated by the length of time he has had to work on this issue, but I hope he feels that his constructive approach with the previous and the current Government has paid off. I thank him for his congratulations on the wisdom of my  recent decision on fining. I am keen not to alarm him in my response and to give him the reassurance that he sought.

I should like to set out an overview of this group of amendments and then turn to the specifics in detail. The generality is about whether the adjudicator’s duties should go beyond enforcing the code as it stands; about incorporating the code into supply agreements; about whether the adjudicator should be able to enforce this obligation and enforce recommendations and sanctions if the recommendation is not followed; and whether they should be able to make recommendations to the Office of Fair Trading about changes in the GSCOP.

The principle that underpins all this, which was established by the previous Government in the Enterprise Act 2002 which set up the OFT and the Competition Commission, is basically that competition remedies are the responsibility of the independent competition authorities. That is an important principle because it ensures that the important economic remedies needed are made and enforced by the bodies that have the necessary independence and expertise to do so fairly and objectively.

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton 11:15 am, 11th December 2012

I think my hon. Friend the Member for St Ives was saying that the groceries code adjudicator should be much more proactive. Over the years, the Office of Fair Trading and all sorts of people have looked at the situation in the grocery trade and the general way that the market works. While there needs to be flexibility in the market, there also need to be, if the adjudicator feels that a case should be investigated, powers for it to do so. It would be a great shame if we missed this opportunity to get the issue right. Before we have tried and fiddled while Rome was burning. I think Rome still burns today.

Photo of Jo Swinson Jo Swinson The Parliamentary Under-Secretary of State for Women and Equalities, The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My hon. Friend referred to the Competition Commission, which looked at the issue. Indeed, it is because it has looked at the issue that we are here today proposing a Bill to enforce the groceries code.

The specific recommendation by the Competition Commission was that there should be an ombudsman, which we are now calling an adjudicator, to enforce the code, not the order. It is important to draw a distinction. The order is enforced by the Office of Fair Trading, while the Bill is focused on enforcing the code. It is important that the order is also enforced and that the OFT is able to do that. Duplication is not helpful, which is why the groceries code adjudicator will have the ability to make recommendations for changes to the code but not the order. That distinction is worth bearing in mind.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

As the Government have decided, rightly, that the adjudicator will sit in the OFT’s office, will the walls between the adjudicator and the OFT regarding compliance with either order or code make it more easy or more difficult to pursue a potential conflict by either body?

Photo of Jo Swinson Jo Swinson The Parliamentary Under-Secretary of State for Women and Equalities, The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I am sure that, should anyone become aware that the groceries supply order is not being implemented, they would want to draw the OFT’s attention  to that. The groceries code adjudicator may share premises with the OFT, but it will be fully operationally independent from the OFT. As I said, anyone who becomes aware that the groceries supply order is not being properly implemented should take that issue to the OFT, which is the right body to enforce the order.

The OFT has powers under the Enterprise Act 2002 to enforce the groceries supply order if it is not being properly incorporated into supply agreements. If suppliers believe that retailers are not incorporating that, they should ensure that they tell the OFT. Suppliers have further remedies available to them. Under section 167 of the 2002 Act, if they suffer losses as a result of a failure to incorporate the order, they can bring an action against a retailer. Existing remedies are available.

Regarding amendment 40, similar principles apply. The amendment says that the adjudicator should make recommendations to the OFT for changes to the order as well as to the code. However, the provision as it stands makes sense. As the adjudicator’s remit is specifically about the code, that is what it should consider in its recommendations. The code is what the adjudicator is responsible for enforcing and overseeing. Given that it is the OFT’s responsibility to oversee the order, the ability to make any recommendations to change the order should be reserved for the OFT.

Regarding the issue raised by the hon. Member for Edinburgh South in his intervention about supply agreements, we do not have robust evidence that shows that the code is not being incorporated. Where it is happening, I would urge people to take that to the OFT. Verbal agreements were mentioned. Article 6 of the groceries supply order is clear that supply agreements must be in writing. As it may be helpful to the Committee, I will quote paragraph 8 of article 6—“Duty to provide information to Supplier”—of the code:

“Where any subsequent agreements or arrangements made under or pursuant to a Supply Agreement are agreed orally between the Supplier and a Designated Retailer, the Designated Retailer must confirm the terms of such arrangements in writing with the relevant Supplier within three working days of such arrangements being agreed.”

Therefore, not only does such confirmation need to be in writing, but it needs to be made promptly after a verbal agreement is reached. In answer to the concern of my hon. Friend the Member for St Ives about whether that confirmation needs to be made on parchment with a quill and with an embossed wax stamp, it does not. We live in a digital age and e-mail is a perfectly accepted form of “in writing”, so I hope that provides some reassurance.

The main issue is not about the code not being incorporated into supply agreements; it is about whether the code is being followed and whether retailers are using their buying power to pass excessive risk and unexpected costs on to suppliers. That is what we hope that the adjudicator will be able to address.

Photo of Huw Irranca-Davies Huw Irranca-Davies Shadow Minister (Environment, Food and Rural Affairs)

As the focus is on the implementation and following of the groceries code, will the Minister explain why amendment 19, tabled by the hon. Member for St Ives, is an obstacle to the good functioning of the Bill and why she does not agree with it? I do not see it as an impediment. It is an advantage  in some ways, because if retailers do not incorporate the code, they cannot be following it. I may be misunderstanding it.

Photo of Jo Swinson Jo Swinson The Parliamentary Under-Secretary of State for Women and Equalities, The Parliamentary Under-Secretary of State for Business, Innovation and Skills

If they have not incorporated the order, that is a matter for the OFT. The issue is about not having duplication, so that we can focus the adjudicator on the things that are specific to the role. Duplication would ultimately take the adjudicator’s time away from focusing on the things that we want them to.

I turn to the other elements of amendment 19, especially around sanctions to ensure enforcement and whether recommendations are followed. Recommendations are deliberately intended to be non-binding. They are the lightest of the enforcement mechanisms available to the adjudicator. That is deliberate. If there is a severe breach of the code, we expect the adjudicator to reach for the further available sanctions, such as naming and shaming or financial penalties, in addition to making recommendations. The problem with sanctions for when a retailer has not followed a recommendation is that that would effectively make the recommendations binding and therefore remove them as a light-touch measure. That would be a real shame and not necessarily the right way forward.

When an adjudicator makes a recommendation that a retailer is no longer breaching the code, they may recommend a particular activity that would help to stop another breach of the code. I will give an example. There could be a scenario where an individual buyer at a retailer mistakenly issues an incorrect contract that causes problems for a supplier and technically breaches the code, but the adjudicator finds that it was a genuine mistake. The adjudicator could make a recommendation to ensure that the retailer does not accidentally breach the code again, but all of Bob’s—the individual buyer’s—contracts get signed off by the code compliance officer for the next six months. The retailer could take the view that a better way of ensuring that it does not happen again is to give Bob some more training, which then leads to the code not being breached again. In that situation, the recommendation will not have been followed, but I do not think that the Committee would deem it appropriate for enforcement action to be taken in that scenario. We want to ensure that the light-touch recommendations can be made, but if a retailer, which knows its business better, can find a better way of ensuring that it complies with the code, that can be done.

Photo of George Eustice George Eustice Conservative, Camborne and Redruth

My hon. Friend the Member for St Ives makes a good point. If one supermarket becomes a repeat offender and effectively ignores the code, how would that be handled? There is a need for some kind of escalating level of sanction to correct that. I understand the problem that the Minister highlighted about putting such a measure in this clause, but is it something that she could envisage being included in the guidance published by the adjudicator?

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.