Clause 13 - Recommendations to Office of Fair Trading

Groceries Code Adjudicator Bill [Lords] – in a Public Bill Committee at 2:00 pm on 13th December 2012.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives 2:00 pm, 13th December 2012

I beg to move amendment 16, in clause 13, page 5, line 3, at end add—

‘(2) In considering such changes, the Adjudicator shall review the territorial extent of the Groceries Code, especially in relation to the activities of large retailers outside the United Kingdom, such activities to include supplier trading practices and activities undertaken by the subsidiaries of large retailers.’.

This amendment ought to be debated alongside amendment 40, which we debated with clause 4. In some sense, it is a pity that the amendment cannot be debated again in the context of extending the scope of the adjudicator’s responsibility to overview changes to and powers in the code to the order.

Amendment 16 would expand the scope of who has to comply with the code. I have raised the issue in the debates on amendments to clause 4. It is inevitable that over time, retailers will look at the regulations that apply to them and seek to evolve their supply chains to adapt to the circumstances that they find themselves in; it is, I suppose, the equivalent of tax avoidance. It is necessary for the adjudicator to be able to update who needs to abide by the code. It is also necessary for the adjudicator not to be caught in the straitjacket of dealing merely with the relationship between a final supplier and a supermarket. If the final supplier is effectively a subsidiary or company that has been set up by the supermarket in order to keep the supermarket’s own hands clean from how the subsidiary behaves, either in the country in which the supermarket is purchasing its food supply or in this country, that can rather undermine the very spirit of what the adjudicator is attempting to achieve.

The extraterritorial action of retailers need to be included; I have mentioned Asda’s subsidiary, IPL, and Tesco has an internal department called Group Food Sourcing. Sainsbury’s has independent companies such as Chingford that source products for and sell only to it. Fortunately, the order will contain a definition of buyer, which will, hopefully, include such entities, and I hope that the Minister will confirm that that is the case; the purpose of the amendment is to probe the issue. The adjudicator needs to be able to recommend new entity organisations to abide by the code.

Previously, some retailers would source from two or many more suppliers and therefore negotiate with a number of suppliers; for example, if retailer X used to source apples from suppliers A, B and C. Now, however, in many circumstances, it appears that retailers have set up subsidiaries to do that for them. When retailers outsource 100% the purchasing of a particular product, it is the supplier that sources on behalf of the retailer. That supplier now has the possibility to abuse buyer power by sourcing all the retailer’s requirements under the cloak of being a separate company. Such companies need to be included within the scope of the code. I hope that my hon. Friend the Minister agrees and will reassure me that mechanisms are available to avoid such attempts by supermarkets to avoid their responsibilities under the code, which I am sure will happen.

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills) 2:15 pm, 13th December 2012

The hon. Gentleman will not be surprised to hear that we support his important amendment. I am disappointed that he has tabled it merely as a probing amendment, because it gets to the heart of some of the issues that are still outstanding in the Bill. We are pleased that third parties’ anonymity is now in the Bill, but we need to deal with the intermediaries and the setting up of subsidiaries by the major supermarkets. There is a strong international perspective and the adjudicator has to have the powers to be able to look at that. The territorial extent of the Bill needs to at least be kept under review to enable some of the issues to be resolved.

Perhaps the Minister has the figures for the UK supermarkets; I do not know what proportion of their buying is overseas. I imagine that at certain times of the year they import a substantial amount of the goods that we buy in the shops. The code itself came from the Competition Commission report in 2008, which stated that large retailers were known for transferring excessive risk to suppliers. Such risk is amplified for a third party in a developing country. ActionAid has been vociferous in its lobbying of the Committee on that issue and looking after developing countries and third-world suppliers. It has provided data on case studies, one of which concerned a cashew nut grower in India who had packaged an order for one of the major supermarket clients in the UK. The client then decided that they wanted different packaging and the grower was stuck with the order.

Cashew nut growers in India do not seem to me to be the type of supplier that can withstand supplier arrangements being changed at the last minute. That case was one of the major pieces of evidence that went to the Competition Commission, which led it to conclude that large retailers were known for transferring excessive risks to suppliers. That then feeds into progress in the supply chain and the pay and conditions and innovation that third world and developing countries are able to put in place. ActionAid has given us examples of labourers being pretty badly treated. There could be a number of reasons for that, but one of the reasons given is that supermarkets have driven down costs so much that the workers who are producing and supplying the supermarkets are not able to have breaks and are not treated properly because of the terms and conditions. It is hugely important to look at the territorial extent of the clause and to give the adjudicator some power to examine the issues and take them forward if necessary.

The subsidiary issue is also worth exploring. I raised that issue directly with the British Retail Consortium. A large retailer can set up a subsidiary in this country or in another to do all the buying for particular items, or indeed for all its items. The relationship would therefore be between the large retailer and the subsidiary, rather than between the large retailer and anyone who was supplying any of their goods. The British Retail Consortium said that that would already be covered by the code and that it would be unlikely that that would happen. However, the hon. Member for St Ives has given examples where that might not be the case. The adjudicator will be refereeing the relationship between the large retailer and the first-level primary producer. That first-level primary producer or supplier could be a subsidiary based in another country and would not be able to be covered by the code.

If the large retailer were to set up a subsidiary in another country, which might not even be in Europe, to buy apples from Apple X Ltd, the relationship with Apple X Ltd would be through the subsidiary to the supermarket or the large retailer, and not the supplier of apples sitting below Apple X Ltd. So territoriality and whether the subsidiary element of large retailers would be covered by the code is important. Hopefully, the Minister will say that the code allows the direct supply chain to be covered by the code and that the hon. Gentleman’s very good probing amendment allows us to look at some of those issues. Or perhaps she will come back on Report not with an amendment to the Bill, but certainly with some analysis on how the measure would work in practice. The large retailers are wily old chaps who will do anything they can—not to circumnavigate the legislation; I would not be that cruel to them—to affect the impact on their profitability and efficiency. They may decide that this is a good way for them to go.

On the point about subsidiarity and the large retailers, there is an issue on the other side. Many of the primary producers and first-level supply chain suppliers involved in that direct relationship are sometimes bigger than the retailer. Coca-Cola and Kraft are probably bigger than most of the retailers, if not all of them put together. We are legislating for that relationship as well. That is a relationship whereby the very large supplier may be powerful in conjunction with smaller large retailers as defined in the Bill. Given the subsidiarity requirements, in that case we would be protecting Coca-Cola’s relationship with Iceland, for example, but we would not be protecting the Indian cashew nut grower in relation to Sainsbury’s. There is a bit of a dynamic shift in the Bill. I would welcome some comfort from the Minister on the point of the subsidiarity and territoriality of the Bill.

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

There has been a little discussion about intermediaries, but I am sure, Sir Roger, that you would not want me to stray on to that territory until later in our proceedings—perhaps on Tuesday morning—when we reach the relevant provisions. I shall therefore focus my remarks on subsidiaries.

The amendment tabled by my hon. Friend the Member for St Ives would require the adjudicator, when recommending changes to the code to the OFT under clause 13, to consider the territorial extent of the code and the activities of the large retailers outside the UK. I do not think that the amendment is necessary. Importantly, article 4 of the Groceries (Supply Chain Practices) Market Investigation Order 2009 already requires large retailers to procure that their subsidiaries—whether or not in the UK—comply with that order, which includes incorporating the code into their supply agreements. Article 4(4), which is in part 2 of that order, states:

“Each Designated Retailer will procure that its subsidiaries comply with this Order as if they were themselves bound by them”,

so such protection is already in place. In addition, article 5 of the order requires that the code is incorporated into supply agreements, so any subsidiaries involved in buying activities would be required to have the code incorporated in such agreements.

There is further protection in clause 22 of the Bill, which makes it clear that

“‘large retailer’ means a designated retailer as defined by Article 2 of the Groceries Supply Order or a subsidiary of a designated retailer”.

Subsidiaries are therefore covered by the code, regardless of whether they are based in the UK.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to my hon. Friend for highlighting those points. Perhaps I should have expanded on the word “subsidiary” when I was moving the amendment, but how does she define “subsidiary”? We suspect, as the hon. Member for Edinburgh South suggested, that these are wily people who have the bottom line very much in mind. If they think there is a way of redefining this issue and finding a way around it, I am sure that they will.

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 2:30 pm, 13th December 2012

My hon. Friend posits the suggestion that some of the supermarkets might be tempted effectively to use another company that is not their subsidiary. He gave an example involving apples and suggested that a company that was not the subsidiary would do all the buying, and therefore be able to put the thumbscrews on the next stage in the supply chain. The definition of “subsidiary” is clearly set out in law in Companies Acts, so the key point is whether the company at the top controls the subsidiary, which would ultimately be tested in law. During the two years for which the order has been in place, there has been no evidence that such practice has been happening, but if there was evidence that that type of thing was going on, the OFT and the Competition Commission could consider whether the order needed amending. They could do that independently, without any recommendation from the adjudicator, but we do not anticipate that being necessary.

It is important that this clause on recommendations is clear and broad, and that it covers absolutely everything that the adjudicator may want to include. It states:

“If the Adjudicator considers it appropriate for any changes to be made to the Groceries Code, he or she must recommend them to the Office of Fair Trading.”

The power proposed by my hon. Friend’s amendment is certainly not prohibited by that wording, and singling out one specific aspect of the code would place that on a different level and highlight that we might expect a problem in that particular area, which could give it more prominence than any other aspect that the adjudicator may suggest.

It was helpful that my hon. Friend said that subsidiaries could cause a problem—his hypothetical has been posited—but that is not necessarily something that we are expecting. It is ultimately for the OFT and the Competition Commission to decide whether, having looked at the facts, a change is appropriate in the context of their competition powers under the Enterprise Act 2002.

I hope that my hon. Friend is reassured that the adjudicator will be able to make recommendations as it sees fit and that the OFT will have a responsibility to consider those recommendations in line with its duties under the 2002 Act. If a change is needed, that can certainly happen, and I hope that that explanation is sufficient for him to feel able to withdraw his amendment.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I have such admiration for the Minister that if she is reassured, I am reassured. I am also reassured that there is no method by which the supermarkets might sidestep their responsibilities under the code by setting up bodies or organisations, or by using their relationship with other companies—be they subsidiaries under defined law or otherwise. The fact that she believes that the amendment is unnecessary is reassuring.

As I have done following our consideration of my other probing amendments, I will leave the Minister with a couple of thoughts on which the Government might wish to reflect. First, she has referred on several occasions to wishing not to constrain the adjudicator, but rather to give it as much discretion as is reasonable. It might be useful for the Government and their lawyers to enable the adjudicator to be given sufficient discretion so that it is nimble, capable and able to chase down any attempt by supermarkets to sidestep their responsibilities. At this stage in the Bill’s passage—this is the case for any legislation, but certainly for legislation such as this—we are attempting to anticipate circumstances in which those who have sought to resist the imposition of these regulations are able to employ the highest paid lawyers to avoid working under it. We need to ensure that we have anticipated their attempts to avoid their responsibilities by being as clever as they are, or wish to be.

My hon. Friend highlighted importance of the recommendations that the adjudicator can make to the OFT. My attempts on amendment 40 have not been successful—at least not so far—but given that she is saying that the adjudicator should have discretion, will she will reflect on whether it would be reasonable for it to be given the authority to make recommendations in relation to the order, as well the code itself? I do not think that anything would be lost by giving such discretion to the adjudicator. Indeed, it would further strengthen the Bill and reassure many of us who are concerned that this is an area in which we need to be ever vigilant and watchful that the code can be effectively enforced and not sidestepped by the supermarkets.

Having said all that, however, I did appreciate the Minister’s response, as I appreciated what the hon. Member for Edinburgh South said. There may be some issues to consider on Report, which I urge my hon. Friend to think about, but we have had a good debate, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment 51, in clause 13, page 5, line 3, at end add—

‘(2) The Office of Fair Trading shall be required to respond to the Adjudicator and Secretary of State on the recommendations as set out in subsection (1) explaining whether they will be acted upon or not.’.

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

With this it will be convenient to discuss amendment 56, in clause 14, page 5, line 14, at end insert—

‘(3A) The Adjudicator must consider in advance of each annual report whether to recommend changes to the Groceries Code to the Office of Fair Trading.’.

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

First, I should confess that I will not be speaking to amendment 56. Although I tabled it, on reflection, I have absolutely no idea what it means. I  looked at it yesterday to try to come up with an argument in its favour, but I think we have already covered the relevant points.

Photo of Stephen Mosley Stephen Mosley Conservative, City of Chester

That has not stopped you with previous amendments.

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

The hon. Gentleman is very cruel, but I shall take his point in the spirit in which it was intended. I hope that he will see fit to support the amendment that I do understand.

Amendment 51 would put a requirement in the Bill for the OFT to report back to the adjudicator about any recommendations made under clause 13 and what actions will be taken. As the hon. Member for St Ives said in the previous debate, it is important that we keep the code as live as possible. The adjudicator is only as effective as the code; if it is refereeing an ineffective code, the whole process is undermined.

I welcome the thrust of clause 13, which allows feedback about the code to be given to the OFT, but I refer back to amendment 40, which would have been quite useful, as it would have said that the referee of the code would be involved with both the code and the groceries supply order. If the adjudicator had the ability to amend both, even by recommendation, it might keep the whole system live and up to date to reflect what is happening in the industry.

There is little point in an expert such as the adjudicator making recommendations if the OFT or the Secretary of State do not act upon them. There might be perfectly good reasons for not acting, but it would be appropriate for the OFT—and the Secretary of State, if it goes to that level—to report back to the adjudicator publically so that the process is as transparent as possible.

The National Farmers Union has set out clearly its belief that the Bill should be amended to ensure that the regulator is required to make a regular assessment of the effectiveness of the code. Clause 13 hints at that process, and we support that. Some feedback probably will be given under clause 13, but the Bill does not mandate a formal mechanism for assessment. New clause 2, which we will debate on Tuesday—probably early on Tuesday—would bring intermediaries into the scope of the code. Although we will not discuss intermediaries now, and the Minister has given us a hint about that, the issue is closely related to this clause. Indeed, new clause 2 was originally drafted as an attempt to amend clause 13 to allow for the code to be extended to intermediaries.

We have heard that the adjudicator is the referee for the code, but the adjudicator must be able to identify when the code is defective and to recommend a remedy to ensure that suppliers and retailers are protected. I said on Tuesday that we have a focus on suppliers, but the code has to be kept live for the benefit of the retailers. If an aspect of the code is defective, we may find that retailers breach it more regularly than would be practical. It is important to stress that making the relationship work better is a two-way street.

The adjudicator might recommend to the OFT that the code should be changed in such a way as to improve the relationship, but the OFT might decide not to do so. When we were debating fines, I used the analogy of a football referee issuing a red card, and we talked about how convoluted the old process was—admittedly, it has  now been amended—and how long it took for the ultimate sanction to be issued. That is now sorted, because the Bill covers fines. To continue with my analogy, however, the referee might decide that a yellow card was too little punishment for a certain offence, but that a red card was too much, and thus recommend that the OFT should amend the code to include a green card that would sin-bin a player for a certain amount of time, rather than going to extremes. The adjudicator might recommend year after year in its annual report that the OFT and the Secretary of State should look at that matter, but those recommendations might be completely ignored and simply disappear into the ether. If there was no feedback from the process, there would be a question of whether the code was staying live.

If I may extend my sporting analogy a little further, referees sometimes recommend changes to the rulebook to make it work better. There was a prime example in tennis, for which the challenge rule was introduced because the pace of the modern game made it difficult for referees and umpires to tell whether a ball was in or out. McEnroe had been throwing his rackets around for 20 years—he became famous for doing so—but following a recommendation from the referees, a diktat came down from the governing body to say that the rules could be changed, with an explanation of why. Equally, governing bodies give explanations of why things cannot be changed all the time. The public would appreciate such transparent, two-way dialogue.

We can envisage the OFT making adjustments to not only the code, but the supply order itself. It might decide to make some changes to the order without a recommendation from the adjudicator, because the adjudicator does not have the power to make one, and there could then be a two-way dialogue about what approach would be most appropriate.

We want to ensure that there is transparency and accountability. We have discussed at length the need to place the adjudicator on a credible footing, to ensure that large retailers are confident that it can do its job properly, and to ensure that suppliers are confident that their complaints will be dealt with properly and transparently. If the adjudicator recommends changes to the code under clause 13, any feedback from the OFT about its decision would provide transparency and credibility, and that would inspire confidence in the system and give it more teeth, although I do not know whether it is possible to magic up a tiger with two sets of teeth.

We really wish to probe the Minister on this point. We appreciate that the adjudicator will have wide-ranging powers, that it will make recommendations and that the OFT, in all its wisdom, will probably act on those recommendations. However, unless the OFT reports back, there is no way of knowing whether that will happen, so the requirement to report back should be in the Bill. There needs to be transparency in the process whereby reports and recommendations go to and from the adjudicator and the OFT so that the code is live, and it is kept live.

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 2:45 pm, 13th December 2012

I thank the hon. Gentleman for his honesty on amendment 56. We have possibly all been in that situation from time to time, and I welcome  his recognition that the duty and requirement on the adjudicator in clause 13 already means that it will need to make recommendations to the OFT if it thinks changes ought to be made to the groceries code. That will be a duty upon it at all times, not just in advance of producing the annual report. I welcome his recognition the amendment is therefore unnecessary.

My task is now to persuade the hon. Gentleman that amendment 51 is also unnecessary. As he said, the amendment would explicitly require the OFT to respond to any recommendations made by the adjudicator. I understand the logic behind the amendment, but I do not consider it strictly necessary because of a range of other requirements on the OFT that are already in place, which would require it to respond appropriately.

As a public authority, the OFT has a general duty to act reasonably, which includes a duty to respond, where appropriate, to members of the public and to other public authorities. More specifically, it has a duty to keep under review the groceries supply order—we heard of that earlier today, and indeed I brandished the book in which it is contained at my hon. Friend the Member for St Ives—in accordance with section 162 of the Enterprise Act 2002. If it considers that a change is appropriate because circumstances have changed, it will advise the Competition Commission accordingly. It is worth drawing to the Committee’s attention that such changes would need to be related to the material adverse effect originally identified and reported on by the Competition Commission when it performed its initial investigation.

The OFT will need to consider its actions in accordance with its duties under the Enterprise Act and its broader statutory functions and duties. I certainly do not think that a situation such as has been mentioned, whereby it just ignored recommendations that were put to it, would come to pass. It will not always act on the adjudicator’s recommendations, because it is the competition authority responsible for examining in detail whether a further change may be required. However, it would be reasonable for it to consider the recommendation, at least.

I can almost hear the potential intervention: what if, year after year, the OFT ignored the recommendations? In that extreme circumstance, if it did that without giving any rationale or reason, it would still be possible to challenge it. Select Committees would have a role to play, and it would even be possible for a supplier to take out a judicial review against the OFT if it had failed to act according to its reasonable behaviour duties and the Enterprise Act duties.

It is unnecessary to add the amendment’s wording to the Bill, as it would not provide any additional force to what the OFT would have to do. I hope that the hon. Member for Edinburgh South is reassured by the legal position and the duties that are already on the OFT.

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

I appreciate the Minister’s comments. The amendment was not intended to undermine the OFT in any way; it does a good job, and in many instances it acts reasonably. The amendment was intended to suggest not that the OFT would not act reasonably, but that a formal mechanism for reporting back to the adjudicator should be put in place so that it can assess how any recommendations that it has made have been considered and whether any action will be taken.

I mentioned that the OFT might ignore recommendations. I am not suggesting that it would, but it may choose not to address them, or it might address them but choose not to act upon them because it does not feel that is required. Putting a formal reporting process in the Bill would say to the adjudicator that we have a mechanism for it to recommend changes to the code, that the recommendations will be addressed and that the adjudicator will be told whether they will be acted on, and if not, the reasons why not. That would keep the whole process transparent.

I understand that there are already mechanisms in place for the OFT to be taken to task if it is felt that it is not carrying out its duties correctly, but I feel that there should be a mechanism in the Bill that allows a transparent approach of reporting back to the adjudicator what could be pretty substantial recommendations, to keep the code live. However, because I feel as generous today as the Minister felt on Tuesday, I will not press the amendment to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.