UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1224-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

Draft Groceries Code Adjudicator Bill

Tuesday 14 June 2011

Chris hopkins, Jane Swift, richard lewis, david saunders and peter barron

Evidence heard in Public Questions 1 92

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 14 June 2011

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Rebecca Harris

Margot James

Dan Jarvis

Simon Kirby

Mr David Ward

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Chris Hopkins, Competition Policy Advisor, Jane Swift, Director of Consumer and Competition Policy Directorate, and Richard Lewis, Legal Advisor, Department for Business, Innovation and Skills, David Saunders, Chief Executive, and Peter Barron, Senior Business Advisor, Competition Commission, gave evidence.

Q1 Chair: Good afternoon and thanks very much for agreeing to help us with our inquiry, and welcome. Could you just start by introducing yourselves so that we can check voice transcription levels and so on? Then we will go into the body of questions. We will start with you, Richard.

Richard Lewis: I am Richard Lewis and I am in the Legal Group at the Department for Business.

Jane Swift: I am Jane Swift and I am Deputy Director of Competition at BIS.

Chris Hopkins: Chris Hopkins, Policy Official at the Department for Business.

David Saunders: David Saunders, Chief Executive of the Competition Commission.

Peter Barron: Peter Barron; I am Business Advisor at the Competition Commission.

Q2 Chair: Thanks. Can we just start with what I suppose is the obvious one? Given the lack of enthusiasm for this in the retail trade, why do we need an Adjudicator?

Jane Swift: If it would be helpful, I will ask the Competition Commission to set out the history to the point of the Bill and then I will say something about the role of the Adjudicator. David, would you like to lead off?

David Saunders: Yes, thank you. Chairman, the Competition Commission investigated competition in the UK groceries market in a pretty thorough inquiry that took a couple of years between May 2006 and April 2008. That investigation followed an earlier one that we had done in 2000. When we are asked to investigate a market, what we are required to do is identify whether there are features in the market that prevent, restrict or distort competition. In the statute, they are called "an adverse effect on competition".

In the groceries investigation, we found that in most respects competition in the UK groceries industry was effective and delivered good outcomes for consumers, but we concluded that there were some features of the market that caused adverse effects on competition, one of which was the way the groceries supply chain operated. To provide some context to that, I will just say that we look at consumer benefits not just in terms of price but in terms of quality, range and service when we are considering retail markets. What we found was that the larger grocery retailers have buyer power in relation to most of their suppliers-not the very big, branded group of suppliers, but many of the others.

On the whole, buyer power is a good thing to the extent that it leads to lower prices for consumers and our primary interest is in protecting consumers rather than protecting suppliers as such. What we found was that the way certain retailers were using their buyer power with grocery suppliers, such as by demanding retrospective adjustments to supply agreements, would if unchecked have an adverse effect on competition because it would affect suppliers’ willingness to invest in new capacity, products and production processes. We thought that that reduced investment and innovation on the part of suppliers would in the longer term be detrimental to the interests of consumers.

Of course, in looking at this, this is a relatively longstanding issue of concern because it is something we also looked at in our 2000 report. Following the 2000 report we put in place a supplier code of practice that affected the four largest grocery retailers. In our most recent investigation we found that while that appeared to have had some positive impact, it was not being fully effective, partly because it regulated practices rather than prohibiting them. So our first remedy, which is one that we have implemented ourselves, was to tighten up the code of practice to prohibit the harmful practices that we identified and to extend the coverage of the code of practice to the 10 largest grocery retailers-all of those with a turnover of over £1 billion. We enacted that by order and it came into effect in February 2010.

But the other issue that we identified was that many suppliers complained that the arrangements in place for monitoring and enforcing the previous code were inadequate. Smaller suppliers were particularly concerned that, if they complained, their identity would become known to the retailer they were complaining about and that they would therefore suffer commercial consequences. So we decided that we needed someone to police and enforce the code, and hence the recommendation to establish an ombudsman, now called the Groceries Code Adjudicator.

We concluded that the Adjudicator ought to have two main roles. The first is to resolve disputes between retailers and suppliers under the new code of practice. The second, to deal with the concerns about confidentiality, was to act as an active investigator of retailers’ behaviour in respect of particular practices, sectors or types of supplier in order to identify where the breaches of the code had occurred. The Adjudicator would be able to receive confidential complaints from suppliers, including primary producers that may not have a direct trading relationship with the retailer, and if as a result of those complaints they saw a pattern of behaviour that indicated a possible concern, they would be able to launch an investigation. That would be an investigation into the practices and would be done in such a way that they would not have to identify the people complaining. Hopefully, it would get over that difficulty that particularly smaller suppliers had about their names becoming known to the grocers.

We did not ourselves have the powers to introduce the body, the Adjudicator, by order. We sought to agree undertakings with the grocers, the 10 retailers covered by the code, but that proved not to be possible. We therefore made a recommendation to the Department to take the necessary steps to introduce the Adjudicator.

Chair: Thanks. Can I emphasise that I welcome full and comprehensive replies, but just remind you that we have a minimum of 34 questions-probably quite a few more-and so I would add "brief replies" as well, otherwise we could be here for an awfully long time.

David Saunders: Apologies, Chairman.

Q3 Chair: I know Mr Binley is jumping up and down because he has strong feelings on this, but could I just probe a couple of issues before that? I think the supply code is known as GSCOP within the trade. This has actually been in place for some time now. Have you found any evidence that any breaches of that code might have gone to the Adjudicator in the meantime?

Jane Swift: Shall I?

David Saunders: If you want to. I do not mind.

Jane Swift: The OFT, who have the responsibility for enforcing the order rather than the code, did engage with the retailers in August last year to see how many complaints had been raised under the code, and at that point there had been 21 between February and August. The compliance reports that retailers are required to make to the OFT under the terms of the order are now just starting to come in.

Q4 Chair: These are by the compliance officers, are they?

Jane Swift: Yes, the compliance officer of each of the 10 major retailers needs to make a report about their arrangements and observance of the code. They make that to the OFT and they are required to publish a summary in their annual report. Two summaries have been published so far, both of which record two complaints being raised by suppliers, and the OFT is expecting a range of other reports in the course of this month.

Q5 Mr Binley: Can I ask you first a general question? Is the real reason for doing this is because it is an easy hit for the Government and it ticks off one of their manifesto promises?

David Saunders: The short answer to that is "no", with respect.

Q6 Mr Binley: How do you know that? We are the politicians; how do you know that?

David Saunders: The Competition Commission is an independent competition investigator. The group that looked at this, as I say, spent two years doing it and they took on board huge amounts of evidence. They went all around the country; they had lots of submissions, lengthy discussions with suppliers, retailers and other interested parties in order to reach the conclusions that they reached. So I promise you it had no political link whatsoever.

Q7 Mr Binley: Oh, I wish I could believe you. Let us move on. GSCOP only came into being in February of last year. We know from our experience that it takes quite a time for a new code of practice-and this one was a highly improved code of practice-to become effective. You have to train people; you have to get them properly equipped to deal with all the requirements. It seems to me that your argument suggests that results were that there was an improvement from the early period to the later period. Is that true?

Jane Swift: There have certainly been a number of complaints that are reported to have been resolved. I am not able to comment on how much of an improvement that was compared with the early period.

Q8 Mr Binley: So there could well have been an improvement that this Bill does not give proper time to assess.

Jane Swift: I agree that there might have been some encouragement to suppliers to actually raise complaints, although I think in comparison to the number of comments that were made to the CC during the course of the inquiry, these were quite a small number of complaints. The Government sees the GCA as supplementing the code, by giving him or her the role as arbitrator, so appointing the GCA as arbitrator under the terms of the order. Secondly, it gives him or her the ability to conduct investigations. The Government’s rationale there is that many people said in response to the Competition Commission’s inquiries that they felt inhibited from bringing forward complaints. The arrangements for the GCA will allow him or her to investigate on the basis of a number of complaints and investigate practices in general around the operation of the code, and to make recommendations.

Q9 Mr Binley: I am amazed at your response. I started two businesses that supplied larger customers in the trade. I found that I was never intimidated to make a complaint if I was being treated unfairly by those customers. I am just surprised that that point is so heavily made in the evidence we have. Might I ask which sector-because groceries covers a very wide spectrum-are we mostly talking about when we talk about complaints of this kind?

Jane Swift: Can you comment on that, Peter?

Peter Barron: I can pick up on that one. To give you some idea of the scale of the information we have received, we received 800 submissions from retailers and suppliers.

Mr Binley: Excuse me-800 complaints from retailers and suppliers?

Peter Barron: No, 800 submissions in total during the investigation, some of which-in fact a large proportion of which-came from suppliers. Those suppliers were of varying sizes, from primary producers-i.e. farmers-through to quite large, multinational organisations and they covered the entire spectrum in that. From our point of view, we were particularly concerned about the smaller suppliers. It is worth putting into perspective that only 15% of suppliers to the grocery retailers have a turnover of over £50 million. If you look at the total size of the grocery retail market, which when we were looking at it had a turnover of over £110 billion, and the largest retailer has a share of over 25%, there is a real difference in bargaining power between those small suppliers. Not all of them; some of the larger suppliers can look after themselves, thank you very much, but there is a real difference in the bargaining power of those small suppliers.

Q10 Mr Binley: You have not been very specific in answering my question. I asked from which sectors did they come? Give me a percentage breakdown. How many came from the agricultural sector?

Peter Barron: This is a complete guess; it is very difficult for me to speculate on that. I would guess about half, but that is a guess.

Q11 Mr Binley: Are you telling me that one of the strongest trade unions in this country, the NFU, is not doing their job in protecting the interests of their members?

Peter Barron: I am not sure you can put it like that. I do not think that an average supplier who is dependent on a retailer for all his business is going to feel in a position to put all his complaints through to the NFU and have them follow them up with the grocery retailer.

Q12 Mr Binley: Okay. Final question, Mr Chairman, you will be relieved to know. Are most of people you were talking about indirect suppliers?

Peter Barron: No, we talked to both direct and indirect.

Mr Binley: But aren’t most of the people you are talking about in terms of the complaints in agriculture indirect suppliers?

Peter Barron: Most agricultural producers are indirect suppliers.

Mr Binley: Okay.

Peter Barron: What they do is supply intermediaries, who essentially act as buying groups and sell on.

Mr Binley: Absolutely. Thank you.

Q13 Chair: That really touches on the question I was going to ask. In fact, I would assume that most small suppliers operate through consortia. What was the position of major consortia in different product areas?

Peter Barron: In terms of their relationship with the retailers?

Chair: Yes.

Peter Barron: We had a look at a number of sectors to understand what proportion of the price the primary producer held compared with the intermediaries and the retailer. Those tended to vary between different sectors. For instance-over the period we looked, which was some time ago now-in terms of pig producers, we found that the share of the primary producer was increasing. But on the whole what we tended to find was the position of the intermediary tended to remain reasonably static. They took a fairly constant share to essentially cover their costs and their operations. Generally, the primary producers’ share was declining and the retailers’ share was increasing, but that was not in all sectors.

Q14 Chair: Is there any evidence of small-scale suppliers with complaints against the intermediaries actually assuming the problem was with the major retailers rather than the intermediaries?

Peter Barron: We had incomplete evidence on that. We found in a number of cases we did get a complaint from a primary producer and the intermediary had effectively blamed the retailer, whereas the retailers were emphasising that often that is not the case, and it is the intermediary that is passing on the effect or blaming the retailer for what the intermediary is doing with the primary producer.

Q15 Chair: And are you satisfied that the provisions outlined in the Bill will address that specific issue?

Peter Barron: One of the key reasons for the Adjudicator is that the Adjudicator will be able to hear complaints and concerns from those smaller primary producers. That is not the case for the GSCOP; the GSCOP regulates the agreement between the retailer and the supplier. It does not go up to the primary producer and, generally, anyone that supplies via an intermediary. So that is one of benefits of the Adjudicator.

Q16 Chair: Right. Has anyone come forward confidentially with reports of infractions of the code that they had not been prepared to pursue under the code?

David Saunders: We had a lot of evidence of that sort during our investigation. We had some 380odd instances of concern given to us, some of which we had to dig out by insisting on people giving us information.

Q17 Chair: Could you give a timeframe for that investigation?

David Saunders: This is over the course of our twoyear inquiry; this is the information we got from the suppliers. It is set out in our report in chapter 9.

Chair: Yes, can you just refresh my memory what timescale it was?

David Saunders: This was between May 2006 to April 2008.

Q18 Chair: Can you quantify the number?

David Saunders: Of instances?

Chair: Yes.

David Saunders: We document 380 issues that were raised with us by suppliers.

Q19 Mr Binley: A quick supplementary there, Chairman. You have made my point that in fact much of your evidence is based before GSCOP came into being. I do, however, take your point that GSCOP does not cover the primary supplier as opposed to the direct supplier. What evidence have you got that many of those 380 were connected with the intermediate or the prime supplier to the supermarket and were, therefore, not the supermarkets’ fault? What work did you do on that to understand that relationship between primary supplier, intermediate supplier and the customer?

David Saunders: We did do some work on that.

Peter Barron: Yes, we were under severe confidentiality issues with the primary producers and with suppliers generally-not just primary producers. We had to use our information-gathering powers to require that information to be produced. We therefore dealt with that information sensitively, but we did do a number of other things to supplement the information. The most interesting was where we did an email trawl of two retailers over a sixweek period with all their suppliers, so we got details of every single email sent between the retailer and the supplier. That information bore out a lot of our concerns; we saw in practice what was happening. We were seeing emails being sent asking for a response within the next few minutes. We saw a number of emails threatening fairly severe consequences.

Q20 Mr Binley: But that was between 2006 and 2008; GSCOP came in in February 2010. What work have you done in that respect since then?

Peter Barron: Well, we have not-

Mr Binley: Thank you.

David Saunders: Our investigation concluded in April 2008.

Q21 Mr Binley: Thank you. So GSCOP really has not had an opportunity to prove itself.

David Saunders: The recommendation for the Adjudicator was because we were persuaded that without someone to perform that role, given the experience with the previous code of practice and given the concerns that the suppliers had about confidentiality, the remedy would not be fully effective.

Q22 Mr Binley: So it was an assumption.

David Saunders: Even the tougher code-

Mr Binley: You are making an assumption.

David Saunders: But a reasonably wellevidenced assumption based on what-

Mr Binley: I am not sure that is true.

David Saunders: -suppliers were saying to us.

Mr Binley: I am not sure that is true.

Peter Barron: Could I add one point? There has been a code of practice in existence-

Mr Binley: Yes, there has.

Peter Barron: -since 2000. Between 2000 and 2006, the OFT received 17 complaints, of which around half were ultimately not proceeded with by the supplier. So there was a significant issue with that code of practice and the GSCOP attempts to improve that, but the GSCOP only addresses relationships between the retailer and the direct supplier and, therefore, did not go further up the supply chain.

Mr Binley: So we might have a mismatch here. You will find out, I am sure, when you start your work of investigation.

Q23 Dan Jarvis: What will happen if the preliminary compliance reports, which I believe are due from the OFT in August, show an increasing degree of compliance? Might the Bill be put on hold?

Jane Swift: The first point to make is that the concept of an Adjudicator did get strong support when the Government consulted on it last year. I am sure Ministers would want to take into account what has happened between the introduction of GSCOP and the introduction of the Bill. But according to the OFT’s inquiries of retailers, there have been 21 complaints that have come forward, which is a relatively low number. So I would suggest that the Government will probably want to go ahead with the Bill, bearing in mind that the Bill does provide for the Adjudicator to be reviewed every three years and it provides for a power to bring the Adjudicator to a close if it is not felt to be having an impact.

Q24 Dan Jarvis: If, however, the Bill does not come into force until 2013, or later as some people have predicted, how will the Department take into account the developments in the meantime, such as possible higher compliance?

Jane Swift: The Department will be able to take into account the reports that are made to the OFT by retailers each year. That would be the core source of evidence that the Department would have.

Q25 Dan Jarvis: Finally, can I ask you to summarise for the Committee the different statuses of the large retailers, other retailers, direct suppliers and indirect suppliers under the code and under the Bill.

Jane Swift: The code applies to large retailers, which are retailers with a turnover of over £1 billion, and there are 10 of those who are set out at the back of the order. Suppliers are suppliers who have a direct contractual relationship with those retailers. I am sorry, I have lost track of your categories.

Dan Jarvis: The indirect suppliers.

Jane Swift: Indirect suppliers will be suppliers who supply the direct suppliers, in effect.

Richard Lewis: The indirect suppliers have a right to complain, as was mentioned, to the Adjudicator, and their complaints will be taken into account by the Adjudicator. Because they do not have the direct relationship with the retailer, they will not be able to arbitrate, so, formally speaking, the indirect suppliers are relevant to the investigation power, but not to the arbitration process.

Q26 Chair: Can I just clarify because we can get bogged down here? If I gave an example, could you tell me if it is correct? If you had a supplier that supplies yoghurts to a supermarket chain, would the indirect supplier be the dairy that supplies milk to the yoghurt maker?

Nadhim Zahawi: No, the other way round.

Richard Lewis: Yes.

Chair: Thank you.

Q27 Rebecca Harris: Yes, it is confusing; I was getting a little bit confused earlier on when we were talking about direct suppliers and indirect suppliers, and that of course I think is part of the problem in trying to work out, for example, how the price of milk gets to the consumer. It is transparency in the supply chain that was part of the problem. Given that the code is only covering the relationships between the suppliers and large retailers, what are your views on where the risk could be moved through the supply chain? Could the Code of Conduct be having an adverse impact in the supply chain?

David Saunders: We would not expect the grocery code of practice to have an adverse effect in the supply chain. If anything, it should help because to an extent it makes the relationship between the suppliers and the grocers work better and more effectively. That should have knock-on benefits for the people further up the supply chain, because it would rule out some of the rather arbitrary practices that had been going on, which had had an adverse impact right the way up the supply chain. A concern that the Competition Commission investigation identified was about that negative impact with the direct suppliers, but a feeling that also, although we were not asked to look at the supply chain further back, that there would be a benefit further back up the supply chain as well.

Q28 Rebecca Harris: How easy would you think it would be to adapt the Bill if the Code of Conduct expanded to cover indirect suppliers?

Jane Swift: One route would be for Parliamentary Counsel to provide that the code applied to contracts between the direct supplier and the intermediate or primary supplier so that that the GCA had a role in ensuring compliance with the code in that relationship. But the Government’s current position is that they would want to see evidence that the GSCOP and the Adjudicator’s role in enforcing compliance with it at the top level is insufficient. As David has explained, one would expect that, if the Adjudicator supports the removal of any adverse practices that transfer cost and risk inappropriately at the top layer, then you also remove the incentive for the direct supplier to pass that down the chain.

Q29 Rebecca Harris: And that is your view: that this is going to work.

Jane Swift: Yes, that is where the Government is at the moment. It wants to see evidence that that does not work-it ought to work-before considering extending the code.

Q30 Margot James: Before I ask my questions, I just wanted to say that I feel very differently from my colleague about the work that you have been doing in the Competition Commission, and I feel that the farming industry, or certainly parts of it-the pig sector and the dairy sector-are under relentless pressure from all sorts of directions. Milk, in particular, is commonly sold at about three pence per litre less than its cost of production. So, in general, I really welcome this measure, although normally I would be right on side with my hon. Friends against increased regulation.

Having said that, I was wondering why you expected so few arbitrations? I gather you are predicting about two per year; it does not seem very many, given the level of complaints that the Competition Commission unearthed in its previous work.

Jane Swift: Shall I make a prior point? Arbitrations are the route that we would expect to be taken by suppliers who are seeking a direct remedy and do not have a problem with exposing their identity. Part of the reason for the investigation power was to enable suppliers who want to protect their confidentiality to bring issues forward and have the Adjudicator investigate practices across market. The position is that there have not been any arbitrations. Dispute resolution has been raised as a possible route in discussions between retailers and suppliers, according to the compliance reports that have just been published. But, as far as we are aware, there have not been any complaints that have gone to arbitration, hence the relatively low assumption.

Q31 Margot James: What if there were more? How would the Adjudicator cope with an increased workload?

Jane Swift: The Bill gives the Adjudicator the power, if he or she is not able to conduct the arbitration adjudication, to appoint another to do that.

Q32 Margot James: And how do you see the level of activity being split between investigations and arbitrations?

Jane Swift: Do you want to say a bit about investigation activity?

Chris Hopkins: Yes, I will talk a bit about investigations. We have estimated between two and four investigations a year and I suppose the first point to make is about the principle of investigations-what they are designed to do. They are very broad ranging and high level to look at practices over a period of time, which would help to alleviate any issues with confidentiality-i.e. he would not get a complaint and focus in on something very specific because it would be very difficult to protect the identity. In terms of the mix, because there are two different functions-there is a dispute resolution function and the investigation function-we are saying there may be up to two arbitrations a year and somewhere between two and four, so that is how we viewed the mix.

Q33 Mr Binley: A very quick question, really. The confidentiality concerns me immensely. I believe in an open society and I think to have tough and burly farmers hiding behind confidentiality does not seem to me to be quite the picture that I normally get of farmers in my constituency, but let us proceed. How, in a confidential situation, does the retailer track an audit trail with regard to a given complaint, bearing in mind that we are talking, in the areas you are talking about, largely about indirect retailers requiring that degree of confidentiality?

Richard Lewis: I will try to answer that, Mr Binley. It is important to bear in mind the investigation will not be for the purpose of investigating and resolving one complaint. If a supplier has a major problem with a retailer and they feel able to take it to arbitration, they will take it to arbitration. The Adjudicator will probably only conduct a relatively small number of investigations each year, and they will not commence an investigation unless they are satisfied that there have been quite a lot of complaints from quite a lot of different people that indicate a pattern of behaviour by the retailer. Having got the information that indicates a pattern of behaviour, they will then be able to follow that up by getting information from the retailer but maintain the confidentiality of the people who have complained-unless they get their agreement. If the burly farmer is happy to have his identity revealed, that is absolutely fine, and the Adjudicator will then be able to name the complainant. Where the complainant is not happy to have their identity revealed, you are quite right that the Adjudicator will have to be very careful how they go about the investigation, because there is a danger of unfairness in the procedure to the retailer. In order to deal with that, the important thing to bear in mind is that the scope of the investigation, although triggered by particular complaints, need not then be limited to those complaints. It can be broadened out to cover the relevant pattern of behaviour.

The Adjudicator will then get, through these investigation powers, the relevant information, broadly speaking, from the retailer itself. Bearing in mind it is a contractual relationship we are talking about between each retailer and each supplier, there should be, broadly speaking, the same sort of information held by the retailer and the supplier. So if the Adjudicator asks the right questions in a careful way, they should get the information that they need from the retailer without needing to reveal the name of the supplier. Then the findings of the investigation should, broadly speaking, be able to be based on the information obtained from the retailer, and that should not give rise to a complaint by the retailer that they have been treated unfairly because the information has come from them.

Q34 Mr Binley: Y ou hinted that that process could be used advantageously by an organised number of complainants from the indirect supply chain. Are you w ary of that?

Jane Swift: I did not hear that hint myself, but both the direct and indirect complaints have to relate to the code as it applies to the contract. So the Adjudicator would be expected to take into account public evidence and look at complaints when deciding whether to initiate, but in terms of evidencing what he or she was going to do, we would expect the Adjudicator to want to look very closely at how far the submissions are general complaints and how far they are specific and evidenced in relation to the breach of a contract.

Richard Lewis: It all has to be rooted in breaches of the code. Unless there have been breaches of the code, an investigation cannot commence.

Q35 Mr Ward: This is all completely new to me up until about three weeks ago. I did not even know this thing existed. I think we all know the ditty about big fleas, smaller fleas, the even smaller fleas and so on ad infinitum. I just assumed this was part of the world where the pressure was exerted by a very big and influential customer-the retailers-on suppliers. I was at a small manufacturing business a few weeks ago that supplied refrigeration equipment to a very big supermarket chain. It was just told all of the outstanding work would have 10% slashed off it-"Just cut 10% off all of the work that you do for us"-and he just shrugged his shoulders. No w , it was not grocery, but would that be in breach of a code if it were grocery products ?

Peter Barron: Yes, that would amount to a retrospective agreement. That is one of the problems that we identified. We actually did a survey of suppliers and only 50% were confident that the price would not be reduced by retrospective contributions or by the retailer. That is typical of the sort of problems that we saw. Just for a hypothetical example-it might help-where a supermarket agrees a price with a supplier and effectively overorders, and it then wants to do a promotion to shift that material, we saw cases where there were deductions from the supplier’s invoice to account for the cost of that promotion, even though the terms between the supplier and the retailer had been agreed up front. Your example of a 10% reduction is along those lines.

Q36 Chair: Can I just pick up on this? The example that David gave, if I heard it right, was actually a manufacturer providing-

Mr Ward: It was, yes.

Chair: Are you saying that this code could in theory apply to manufacturers?

Jane Swift: No.

Chris Hopkins: No.

Richard Lewis: No.

David Saunders: No.

Mr Ward: No.

Chair: That is what I could not get my head around.

Margot James: I think my question has been asked. I can well understand the requirement for confidentiality, given the experience of the complaints in the past and the intimidation and threatening nature of so much of the contracting in this area. I do not think there would be any point whatsoever in proposing an Adjudicator if complaints were not confidential. So I do not have any further questions on this point because you asked my question.

Q37 Chair: I think there is a point. Could the suppliers actually use the threat of complaint to provide a level of intimidation of the retailer? In theory at least, the penalties for an investigation and a negative outcome for the retailers is quite high in terms of reputational damage. Do you think it is possible for suppliers to play upon that and organise a systematic complaints process?

Peter Barron: Richard, do you want to talk about vexatious complaints?

Richard Lewis: Yes, thank you. Can I just make two brief points? First of all, the investigation does not commence unless the Adjudicator has reasonable grounds to suspect that the retailer has breached the code, so it cannot be based on nothing; there has to be evidence provided. Because we are talking about breaches of contract, that will have to be rooted in breaches of contract by the retailer. Unless there is prima facie evidence then the Adjudicator simply will not commence an investigation.

You are right in the sense that there is some risk of an organised campaign just to cause trouble for a retailer and the Bill does cater for that in one sense, which is that when it comes to the costs of investigation being awarded-and this is under Clause 11 of the Bill-the Adjudicator has certain power to award costs in his or her discretion. If a retailer is found at the end of the investigation to have been in breach of the code then there is the possibility of a costs order against that retailer. The only possibility of a costs order against a supplier, direct or indirect, is where there has been a complaint that has been vexatious or wholly without merit. That is the disincentive for a supplier or a group of suppliers not to make complaints just for the sake of causing trouble. They would then be at risk on costs, potentially for tens of thousands of pounds, so it would be quite a big risk for a supplier to take just to cause trouble.

Q38 Chair: So the confidentiality issue would not apply in such a case. Is that the situation?

Richard Lewis: That is right because that would be a matter between the Adjudicator and the supplier. It would not come to the retailer.

Q39 Nadhim Zahawi: A lot of my questions have been answered. In terms of investigations, we are looking at two to four a year. Is that based on the evidence, the research over the two years? On what do you base the idea that you will only be conducting two to four investigations?

Chris Hopkins: It is from discussions with the OFT around the work this type of body might do. I think we also considered how much resource it has and how much it could actually do with that, and the nature of the types of investigation, i.e. the high level and looking at patterns of behaviour. It is something in that; that is why we came to that assumption.

Q40 Nadhim Zahawi: In terms of the trigger for investigation, Mr Lewis, you have just said that there has to be evidence. Is there a threshold for that to trigger an investigation? How do you start an investigation?

Chris Hopkins: There is a threshold, but it is quite broadly expressed one: reasonable grounds to suspect that a large retailer has broken the code. That would have to be assessed by the Adjudicator case by case.

Q41 Nadhim Zahawi: Obviously, this is designed as a Plain English Bill. Did you consider simplifying the definition of suppliers so that it covers indirect suppliers expressly rather than indirectly, as in Clause 23?

Jane Swift: I am sure we could think about that with Parliamentary Counsel later.

Q42 Nadhim Zahawi: Thank you and just a final one, very quickly back to Mr Saunders and Mr Barron. By the way I am loath to disagree with my colleague, Mr Binley-

Mr Binley: I have been on my own before, never mind.

Nadhim Zahawi: -because I know he is a great champion of less regulation, but I am afraid I am with Margot James in terms of the incentive being in the wrong place because the retailers are so big and the suppliers are so small. When you actually did your research and your investigation, you mentioned that you saw bulk emails where they were asking the supplier to respond within 10 minutes otherwise there would be repercussions. Do you, in your gut, think that we should go beyond just groceries on this, as my colleague David Ward mentioned? I have certainly had instances in the clothing industry in the past where retailers were felt to be acting in a severe way against suppliers.

David Saunders: I think we would be hesitant, frankly, to generalise from a particular inquiry. We feel that the circumstances in the groceries market are such that this has been a bone of contention and much debated for quite a long time. We did look at it in 2000 and clearly the remedy we put in place at that stage was not wholly effective, which is in a way why it has come back to us and we have been asked to look at it again. It has not cropped up in the same way in other sectors and it would be a bit rash to generalise from one particular investigation because, as you say, the disparity in this particular market is so huge.

Q43 Nadhim Zahawi: Could it be that other sectors are less well organised or more fragmented so that you do not get the same resonance?

David Saunders: Possibly. I do not know. We clearly have no evidence on it in other areas.

Peter Barron: I think we can only comment on what we have investigated.

Q44 Chair: This may seem an oversimple question, but can we just get an idea of exactly what an investigation would look like: how it would start, what activities would be involved, who will be contacted and how the Adjudicator will basically report on that?

David Saunders: Do you want to kick it off or do you want us to?

Jane Swift: By all means.

Peter Barron: Do you want me to go? I think one of the first tasks of the Adjudicator will be to publish guidelines, and those guidelines will set out just those issues in terms of what it will investigate, what sort of things it will consider, how it will gather information and-

Chair: We will come on to that issue in a minute, actually. I suppose I invited you, but that is a separate issue about the delay in guidelines, so if you could just proceed from there.

Peter Barron: It is, from that point of view, quite difficult to comment. I can give you, for example, some examples of what might happen, but it is all clearly very hypothetical. For instance, you could see the Adjudicator receiving a number of complaints about cancellation of orders or return of orders due to product quality problems. That may be because there is actually a clearly set out procedure in the supplier agreement for the quality of products and the consequences of not delivering to quality that the retailer is following. On the other hand, it may be something entirely different. It may be that the retailer is simply saying, "I have overordered. I need to find a way of sending this shipment back".

If the Adjudicator sees a pattern of this happening and, say, 10 or 15 examples of this and he thinks, "Hang on, there is something strange going on here", he may then launch an investigation where he wants to look at the criteria that the retailers use in supplier agreements to specify quality and specify how they will reject shipments. That will be a general investigation. It may be across a number of sectors, and it may not necessarily be directly related to the sector in which the initial problem arose, but he will investigate that practice and he will follow his guidance in terms of gathering information from the retailers and, potentially, suppliers as well. Then there is the issue of how he is going to report it. There is a lot of guidance around that the Adjudicator could use, but it really depends on how that guidance is structured that will set out for all parties how that investigation will be followed.

Q45 Mr Binley: You touched upon a question that I think we have coded to come later, but I am not sure that we can probe the other questions without asking that question now. It is the question about the complication of guidance notes. It seems to me to be a bit odd to be expecting people to follow a procedure where guidance notes are needed when guidance notes are not going to be produced until six months into the start of the Act itself. That seems to me to be a bit of a catch-all to people. I am sure that is not why you are doing it, but you might tell us first of all why you are delaying? It seems very odd indeed.

Jane Swift: The point is that the Adjudicator will develop the guidance and then consult on it, but will not be able to start investigations until that guidance is-

Q46 Mr Binley: But, forgive me, I just pursue this because I think people are genuinely in the dark about this and deeply concerned about it. Here you are, basing a Bill on evidence that could well have been superseded by a new code of contract. You have fully admitted that your major evidence was taken during 2006 and 2008. You produce a Bill to deal with that situation, but you are unable to produce the guidance notes for the people who are going to have to abide by the Bill and the law that is created. Is that a fair situation? Should you not delay the publication of the Bill until you have the guidance notes?

Jane Swift: The thing that people are required to abide by is the Order and the code, which is already there of course. The point about the guidance that the Adjudicator will consult on, which is about his or her criteria for investigations, practices and procedures and criteria for enforcement, is that it is about creating transparency about how the Adjudicator will carry out his or her role around investigations before those investigations commence. So that seems to me to be in the right order.

Q47 Mr Binley: But those guidance notes have massive import for both the retailer and the supplier, don’t they?

Jane Swift: Yes, and that is why the GCA will consult.

Mr Binley: So it is cart before the horse then. I don’t understand that.

Jane Swift: I don’t understand why you think it is cart before the horse.

Mr Binley: Because the people will have to know how the investigator is going to do his job; the guidance notes will tell them that.

Richard Lewis: I don’t think that’s-

Mr Binley: Why don’t you produce the packet all at once? You have had the evidence, you have been doing it between 2006 and 2008 and it is there; you are using it to base your Bill on.

Jane Swift: Sorry, do you want to comment and then I will?

Richard Lewis: There are two things. First of all, there is no question of a retailer being prejudiced because Clause 4 is clear that no investigation can be commenced until the guidance has been published.

Mr Binley: I understand that.

Richard Lewis: And then secondly isn’t there a point about just doing things in the most logical order; that you want the guidance to be published by the person who is going to have to implement it, i.e. the Adjudicator. The Adjudicator is not appointed until you have the Bill through Parliament and so it would-

Mr Binley: It seems incredibly bureaucratic and not very efficient, and that is one of my major complaints, but thank you for your answer. Can I go on now?

Q48 Chair: Could I just intervene, actually? I can understand the logic of what you said. What I cannot understand is the timescale involved. Six months seems an excessively long time and if you cannot actually conduct any sort of investigation or adjudication until you have that guidance, effectively you are giving carte blanche for any abuse during that six month period.

Jane Swift: It depends how the timetable pans out. In principle, the Government can appoint the Adjudicator after Second Reading. That is my understanding, so if the Government were to proceed to do that then your Adjudicator-designate could be starting work on the guidance potentially before the Bill is through the House, and potentially be in a position to consult pretty smartly. It is not necessarily six months-it is within six months. If we manage things smartly, it need not be sequential in the way that you suggest. As Richard has set out, what we are seeking to do is put the onus on the Adjudicator, who will be responsible for these processes, to produce the guidance and to consult on it so people know what is going to happen-

Mr Binley: So he will consult.

Jane Swift: He or she will consult. Then the guidance will be there and the Adjudicator would be able to carry out investigations. So, it is trying to get a balance between transparency and clarity on how the Adjudicator will carry out its role.

Q49 Mr Binley: Let me follow this process: the Bill has to be passed before you can appoint an Adjudicator?

Jane Swift: Our understanding is we can do that on Second Reading-

Q50 Mr Binley: Are you going to take a risk on that then, and therefore Parliament’s voice is assumed?

Jane Swift: It is for the Minister to decide whether they want to appoint and I am sure they would take that point into account, but I was just explaining, in relation to the suggestion that the thing is completely sequential, that there are other ways of managing the process.

Q51 Mr Binley: Let me get the timeframe because I think that is a little bit concerning if you are saying that you are going to appoint before the Bill has been passed. It might not get through.

Jane Swift: No, I did not say they would; I said, as with every other public body, it is able to do that at Second Reading.

Mr Binley: Fine. Let me come onto the timeframe. You are going to have to appoint an Adjudicator; you could well take a bit of a risk and start the process of appointing earlier-I understand that-if you get the Second Reading or Committee stage out of the way. However, that process takes some time to get the right people. I would say that the gap between advertising and having somebody in place would be at least six months. You then say the Adjudicator himself is going to write the guidance notes on which you are going to consult, so in truth the guidance notes will not be ready, in their finished form, for at least 12 months, will they? That is the truth of the situation.

Jane Swift: From the start of the appointment process, that could be the case.

Q52 Mr Binley: I would argue that you are going to have more than six months to do that process. I have taken on senior executives: you know and I know how long it takes. You know and I know how long it will be for the Adjudicator-and this is a new role-to write the guidance notes, as you said it is important that he should do. Then you are going to have to do all the consultation process; one assumes that is another six weeks to two months at the very least. The six months is a bit optimistic, isn’t it?

Richard Lewis: It is a legal requirement to do it within six months.

Mr Binley: That is the problem.

Richard Lewis: It will be if it is-

Mr Binley: Okay, I will leave it to you, but it seems crazy to me.

Jane Swift: With the Adjudicator, when the person is appointed there are other bodies that investigate-the OFT and the CC-so there will be precedents for this sort of process.

Mr Binley: I will have a little bet with you that you do not beat the timeframe, but let us move on.

Chair: Could I-

Margot James: Chairman?

Chair: Yes, Margot.

Margot James: May I just point out that a couple of dairy farmers are going out of business every week, so the sooner the better.

Mr Binley: There are other means of approaching that problem, but never mind. Let us proceed.

Chair: Brian Binley, can I come back to you?

Q53 Mr Binley: Thank you. Can I ask how the Adjudicator will be able to recommend remedies for code breaches without going into the identity of the complainant? I do not think you can really ask that: I do not see how you can make those findings without at some stage giving up information about the complainant.

Chris Hopkins: I will start with the principle and then maybe go into an example. The principle is that, if it is a broad ranging investigation, the nature of the guidance or the recommendation he may give will have to be sufficiently high level to not be in danger of identifying the complainant; i.e. if he thought he had a duty to protect the identity of complainant suppliers, he would need to think about whether any recommendation he makes may well identify. Clearly, there could be instances where he has to balance up whether to make a recommendation versus protecting the identity of the supplier or group of suppliers. He would always have to be protecting the identity of the supplier or group of suppliers.

Mr Binley: It is a very complicated process, isn’t it?

Jane Swift: It will be a careful process.

Q54 Mr Binley: A very careful process; no, I am grateful for that. What safeguards will you put in place to prevent inadvertent disclosures? I don’t know about your office, but this is a very damp and leaky place indeed. What safeguards have you thought about putting in place?

Chris Hopkins: I think probably the place to start with this is to get a body like the CC, which undertakes a similar type of investigations, to maybe talk through some sort of process.

Q55 Mr Binley: Would you rather think about it and write to us? You might not have even thought about that process, bearing in mind you will not appoint an Adjudicator for some time.

Jane Swift: We will write to you, having consulted the CC.

Mr Binley: Would that be helpful, Chairman, to write to us in this respect?

Chair: I am sure it will be, yes.

Q56 Mr Ward: Maybe we can gather pace and merge some of these questions. It is about enforcement now. Can I just look at the three mechanisms, I believe, that were considered for dealing with this issue? Introduce those first and talk us through those and then, in particular, we will focus on fines and the penalties: why fines were not considered. I think there was a contrary view from the CC, so can you just cover that area please?

Jane Swift: In terms of the Adjudicator’s powers, the Adjudicator would be able to require information to be given during their investigations. In terms of enforcement powers, he will be able to make recommendations to retailers about how they change their practices. Secondly, he will be able to require a retailer, where he or she has concluded that there has been a breach of the code, to publish details of that breach. The Government has decided to take a reserved power on penalties, which in itself is intended to be a deterrent. However, it wants to see what the effect is of the Adjudicator’s general power and the recommendations that were made on behaviour before considering whether to commence that power.

Q57 Mr Ward: So it is suck it and see in terms of the power or the value of the naming and the shaming and the recommendations. Was there a contrary view in terms of the value of penalties?

David Saunders: Yes. Our recommendation was that the Adjudicator should have the power to levy a fine because we thought that that would be an important incentive on the retailers to abide by the code.

Q58 Mr Ward: Is there a concern that these organisations are just so big that they are beyond being ashamed; they will just take it in their stride?

Jane Swift: It is certainly not the Government’s belief that the power to require details of breaches to be published is going to be ineffective. We would expect that to have influence because there will be publicity around that. In fact, the retailers themselves would be creating the publicity because it would be the retailer who is required to publish. That is a negative thing, so we would expect the retailer to want to avoid that and for that to be a deterrent. Just to repeat though, in relation to the fining issue, there is a power to introduce but the Government wants to see whether these other means and deterrents have an effect, and how that goes, before considering whether to commence that.

Q59 Mr Ward: Is there a period of time on that?

Jane Swift : There is a general provision in the Bill that the Adjudicator would be reviewed every three years, so in general that is when I would expect the Government to look at it, but the Government could look at that point again at any time. It is not constrained by that.

Q60 Mr Ward: The reason I ask is following on from remarks made earlier about just how slow this process is likely to be, and then there will be a period of waiting to see whether the measures are sufficient. Bearing in mind that two or three milk producers are going out of business each week, or so we hear, we could be then talking about a two or three-year period before it is recognised that penalties are actually required.

Jane Swift: That is in principle so, but on the other hand it is known that the Government wants to introduce an Adjudicator and that that person will have a fairly unique expertise and certainly a unique role around the code and ensuring compliance. It will be known that these powers are coming and that role is going to be performed, so I would expect that to start to condition relationships and culture in advance of the Adjudicator having been in place for a decent amount of time.

Q61 Chair: What is the position of the Competition Commission at this point on whether fines should be available?

David Saunders: The conclusions of our report were that they should have been and that remains our position.

Chair: Sorry, say that again?

David Saunders: The conclusion of our report was that an ability to levy a fine should be available if the Government was introducing the Adjudicator by statute, and that remains our position. I can understand the Department’s position at the same time and clearly it is a matter for Ministers how they choose to implement our recommendations.

Q62 Chair: Why do you think the Adjudicator should have this power? On what sort of basis do you think the Adjudicator should apply this right?

David Saunders: Our feeling was that the power to levy a fine would be a reasonably powerful incentive that the Adjudicator would have to persuade the grocery retailers to behave well and to not breach the terms of the code of practice.

Q63 Chair: Okay. Under the explanatory note-I believe it is paragraph 37-it says there will be no express sanction for failure to comply with a recommendation, other than it being taken into account in a future investigation. Did you consider backing up future compliance by allowing the Adjudicator instead to escalate to another remedy, such as naming and shaming, if there is noncompliance?

Richard Lewis: That is a possibility and you are right, at the moment there is no such power to escalate. We would expect that the retailer would want to comply with the recommendation, which is likely to be forward looking, and that they would not want it to be reported on subsequently that a recommendation had been made and they had failed to follow it because that would be reputationally bad for them potentially. You are right though: there is no power at the moment to escalate merely because a recommendation has not been followed. However, as the note says, if there were then a subsequent investigation, particularly in relation to a similar area or perhaps another area, then the fact that the retailer had not complied with a previous recommendation could be taken into account and at that point it might be more likely that there would be a requirement to publish or a penalty, if the penalties existed by then.

Q64 Chair: Can I just go on to another detail at paragraph 35 of the explanatory notes? It states that, "Relying on an investigation finding to establish liability for breach is not possible". Can you explain why it was decided not to allow direct reliance on a finding?

Richard Lewis: I think there are two different things here. One is the contractual relationship between the supplier and the retailer. The other is an investigation into a general pattern of behaviour. It is quite possible that an investigation might find that a retailer had acted in breach of the code in particular ways, such that some sort of sanction ought to be imposed, but without having gone into the detail of evidence taking and the hearing of witnesses and so on that you would find in an arbitration. Even if it found that a retailer had been in breach-bearing in mind that there might be scores of complaints considered as part of an investigation-we did not think it was right that the mere finding in an investigation that there had been breaches should automatically be a finding of liability on which a particular supplier could rely. That supplier would still need to take their case to some form of dispute resolution, probably arbitration, and prove damages in the normal way.

We thought it would be shortcutting the normal legal process that you would have to go through in order to give the supplier the remedy. For example, there might be counterclaims; there might be arguments about whether the supplier had mitigated their loss; there might be arguments about the amount of damage suffered, etc. The investigation where the Adjudicator is both the investigator and the decision maker is not the right forum for that. The right forum for that is legal proceedings with an arbitrator or a judge.

Q65 Chair: You have mostly answered my supplementary questions on that, but just one point: would a supplier have access to the evidence obtained by the Adjudicator?

Richard Lewis: I am not certain of this; that is a good question. Insofar as the evidence obtained concerned that supplier’s claim, of course, broadly speaking they should have it anyway because it is their information; it is a contractual relationship and both parties are likely to have the information relating to that relationship, so they will have it. They will also have the published report by the Adjudicator, which is required as a matter of every investigation ending, but they will not have access to information, for example, provided by other suppliers because that would be confidential to those suppliers. Therefore, they would not be able to say, "By the way, the retailer has been committing these breaches against other suppliers as well" because obviously that information would have to be treated as confidential.

Q66 Chair: Under Clause 11, "Retailers can be liable in any circumstances, whereas suppliers are liable only if their complaint is vexatious or wholly without merit". That seems a little biased in favour of the complainant. Can you explain the reasoning for that?

Richard Lewis: Yes, I see what you mean, but the point is that the investigation relates to breaches by the retailer. It is not about breaches by the supplier, so there is no question of finding that the supplier was in breach-that could not be a finding of the investigation-and so there is logic to needing to have that sanction available against the retailer who is found to be in breach. After all, bear in mind, otherwise if the retailer who is in breach does not pay for those costs, then they are divided 10% each between all the retailers, so that sounds perhaps less fair than imposing the cost on the retailer who is in breach. Then you are right that, as we discussed earlier, there is a fairly high threshold to the ability to impose costs on the complainant supplier, but we felt there ought be some sanction against trouble-making but not something that would dissuade suppliers acting in good faith from making a complaint because that would defeat the object of the investigation power if people were nervous about complaining, providing they were acting in good faith.

Q67 Chair: Yes, there is a no man’s land between a complainant whose complaint is not upheld, but equally not found to be vexatious-

Richard Lewis: Yes.

Chair: -and incurs no penalty as a result.

Richard Lewis: Correct.

Chair: Has any consideration been given to that?

Richard Lewis: The cost in that case would fall as part of the general levy; broadly speaking, it would fall on all of the retailers equally. You might say that is unfortunate for the other retailers who are not involved at all, but that seems the only possibility unless you are going to make the retailer who was investigated pay all the costs even if they were not found in breach, which in itself seems unfair because you are asking someone to pay 100% unfairly rather than 10% unfairly.

Q68 Chair: If fines do become available, how can you maintain supplier anonymity? Because there is this issue of natural justice and the ability of someone to defend themselves.

Richard Lewis: Yes, as I say, that is an important point and we have tried to take that into account. Remember that the Adjudicator is a public authority bound by the Human Rights Act and they will have to conduct the investigation in a way that treats the retailer fairly. We discussed earlier the ways in which they might be able to make their inquiries without revealing the name of the complainant, but also treating the retailer fairly, provided that they asked the right questions of the retailer and based their findings on the information obtained from that retailer.

However, if we are looking at financial penalties, there will be a full right of appeal for the retailer and there is also the possibility of judicial review if the retailer felt that there had been procedural unfairness committed by the Adjudicator. The Adjudicator will have to be very careful about that question. There is a close to absolute obligation to maintain supplier confidentiality and, at worst, if they felt that they could not conduct an investigation fairly whilst maintaining supplier confidentiality, and if the suppliers were not willing for their names to be revealed, that would affect the ability to carry out the investigation in a particular way or perhaps at all.

Q69 Chair: Just on the issue of appeals and judicial review: there is no provision for appeals against enforcement that does not involve money payment, on the basis that the Government envisages a judicial review being used instead. Do you see any disadvantage to a system of judicial review of the decisions? Could it become a de facto procedure for appealing on the merits?

Richard Lewis: The grounds for judicial review would not go as wide as your question suggests. Those grounds would not be as wide as the ability for a full appeal on the merits if there were financial penalties or costs imposed. The judicial review would be able to look at whether the Adjudicator had acted reasonably or unreasonably, or whether they had acted outside their powers and whether they had acted procedurally unfairly. There are quite a lot of things the judicial review could look at, but judicial review would not normally give an ability for the full merits of the matter to be heard in the sense of whether the retailer had actually committed a breach of the code, and getting into the detail of that. The Government’s position is that a full right of appeal is appropriate for financial penalties, as you say, but not for recommendations or the requirement to publish.

Q70 Mr Binley: An announced result of a case produced in the papers could be much more damaging to a retailer than a fine could ever be. Why do you make that separate distinction?

Richard Lewis: I see the point of your question.

Mr Binley: Well, that’s a start.

Richard Lewis: There are circumstances, I suppose, in which that might be correct. Please bear in mind though that the requirement to publish does not actually determine anything from a legal perspective. It is just a finding and it is published; it does not give the supplier any right in itself, as we discussed earlier, whereas a financial penalty is actually a clear payment of money. The other point to bear in mind is that the Adjudicator will have to be very careful and proportionate about the way that that requirement is imposed. There is obviously a balance there because it is supposed to be a deterrent, but on the other hand it must not be an unreasonable punishment on the retailer. So there will be some care taken over what has to be said, that it is properly evidenced and that it is not required to be unnecessarily widely published.

Q71 Mr Binley: We Members know to our cost what publicity can do to your standing. We have had a pretty torrid time in that respect and I therefore would feel for a business that was named, but not found important enough to fine, and the harm that can be done to that business. I just wondered whether you ought not to think about that again, actually.

Jane Swift: I think we will take that point away, as with all the Committee’s points, and consider it with the Minister.

Mr Binley: Thank you.

Q72 Margot James: If the team are going to take that back to the Minister they might like to consider this: I understand the reason from the briefing as to why the power exists for the Minister to introduce the fining mechanism if it is felt that it is required further down the line. However, I certainly would not want the power of naming and shaming to be removed and replaced by a fine. I think the naming and shaming mechanism is a very valid way to deal with the problem.

Richard Lewis: Indeed, but if I understood Mr Binley’s point, it was not so much that you would remove the requirement to publish, but that there might be a full right of appeal-

Mr Binley: Absolutely right.

Richard Lewis: -to bring it in line with financial penalties.

Mr Binley: I am not arguing that it should not be published, but the cost could be sizeably greater.

Chris Hopkins: I was just going to make the point: I do not think the thinking is that, if the financial penalties were introduced, somehow naming and shaming would be taken out of the deterrents available. It would be an added one. I think the point is that, if naming and shaming does not prove to be enough of a deterrent, then is a financial penalty?

Margot James: I think that is a good way of approaching it.

Chris Hopkins: But Mr Binley’s point is that we would consider it first.

Chair: I think the reality is that if you did not have naming and shaming but you just had fines, in effect the fines themselves would be an even worse process of naming and shaming than that on its own. My guess is that the preference of the sector would be to stick with naming and shaming if they could get away with it.

Q73 Mr Binley: Except, Mr Chairman-and we should not be debating this here; we should be debating it in the Chamber when the Bill comes before us-that the financial damage that is possible, even though you are not levying a fine, is considerable. In all sense of justice, bearing in mind that potentially considerable cost, there ought to be a right for appeal there too. That is the only point that I am making and that is the point I wish you to take back, as you rightly said.

Chris Hopkins: If I could just add to that, before naming and shaming we are proposing that the Adjudicator does provide the information to the retailer that has breached the code to let them know-

Mr Binley: Sure. I perfectly accept that.

Q74 Mr Ward: I just have a question on reporting. I think there is a requirement for the Adjudicator to produce an annual report and accounts, but it sits within the Department, which in itself has a responsibility to produce its own report. Will it be an independent report or be part of the OFT’s reporting system?

Jane Swift: The Adjudicator’s report will be his or her independent report.

Mr Ward: And there will be a full set of accounts supporting that as well as, obviously, a record of-it is stand-alone.

Jane Swift: Indeed, yes.

Q75 Rebecca Harris: I wanted to ask about the cost of the new Adjudicator and how it would be funded, but I wanted to first go back to one question. As I understand it, the big retailers will not themselves have a right to report on one another, will they?

Jane Swift: A right to?

Rebecca Harris: A right to report on each other if they know of wrongdoing? Is there a rationale for that because I would have thought that actually in many ways this is quite helpful for them; they all know they are on a level playing field; they know their competitors are not operating what we consider sharp practices anymore because they are abiding by the code. Actually, it might be that one of the main retailers would like to say that one of their competitors is doing something and they know about it, and they feel quite brave about telling you and one of the suppliers does not. At the moment there is no function for you to receive a complaint, is that right?

Jane Swift: That is essentially because we see the Adjudicator’s work being rooted in evidence about a particular contractual relationship and you are most likely to get that evidence either from the direct supplier or from people further down the supply chain, where they have been affected by that relationship as well.

Q76 Rebecca Harris: You could presumably have an occasion when a senior buyer from one firm moves to another and is therefore able to inform you of sharp practices that might be worthy of investigating.

Jane Swift: I think that there is another point to make: that the evidence on which the Adjudicator can initiate investigations we see as being directly around the contract and the supplier or the indirect supplier. The Adjudicator can take other information into account when he or she has decided to commence an investigation, so in principle that sort of information could come at that stage.

Chris Hopkins: The only other brief caveat is that the Adjudicator at the start can also take into account information that is in the public domain.

Rebecca Harris: Right-which covers everything.

Chris Hopkins: So I think the point is if a senior buyer or whoever it might be from another retailer wanted to bring it to the attention of the retailer, it would have to be out in the public. It could not be done privately and potentially could be used tactically.

Richard Lewis: That information is almost certainly going to be confidential to the previous employer, I would expect. It is unlikely that-

Q77 Rebecca Harris: Or simply if, by the course of their business, they find out about another company’s practices that they feel are undercutting them, in effect. The principal point that I wanted to know is if you would be able to outline for me how each of the functions and activities of the Adjudicator will be funded.

Jane Swift: Shall I start off on that and you can fill in the detail? The adjudication role of the Adjudicator, which he or she acquires in the Bill, is set out in the order that the Competition Commission made, and that order provides for the costs of the arbitrator to be met by the retailer and for other costs to be assigned at the Adjudicator’s discretion.

In terms of the investigatory function and the costs of the Adjudicator in general, those will be funded through a levy initially divided equally between the retailers, with the cost of investigation where the Adjudicator concludes there has been a breach of the code being borne by the retailer concerned. Everybody else’s levy would be adjusted retrospectively, in effect. Chris, did you want to add to that?

Chris Hopkins: No, I think that is the broad outline that essentially there is contingency for investigations built in up front. We have estimated that each investigation could cost around £100,000, so we have estimated at £400,000 based on conversations with the OFT around a market investigation being a lot more expensive. It may be proportional, but it is an estimation. For instance, if there were no investigations at the end of the year that money would simply be returned to the retailers.

Q78 Rebecca Harris: Right. There is really no mechanism then for maintaining costs and making sure there are not too many expensive investigations running that perhaps might not have as much merit in them. What do we have to control the expenditure on this, given that the retailers are paying for it? What could stop this getting into a very, very unwieldy organisation?

Jane Swift: The Secretary of State has to agree the levy, which is common practice with public bodies, so there is a brake in that respect. Are there any other points we can make, Richard?

Richard Lewis: I think that is the key point. There is also transparency in the sense that the Adjudicator has to publish details of how they worked out what the levy should be and accounts at the end of the year, so there is transparency at the beginning and at the end. As you say though, the key point is that the Secretary of State has a right to consent to any levy.

Rebecca Harris: Right, because that will be a concern-that this is something that could grow and grow.

Q79 Dan Jarvis: Can I ask how likely you think it is that the large retailers will pass on the costs of compliance under the Bill to consumers?

Mr Binley: Of course they will. That’s where they pass all their costs on.

Jane Swift: That is not something we have considered, particularly.

Dan Jarvis: Is it something you think-

Jane Swift: They will have to absorb it within their bottom line somewhere, of course, but beyond that I do not feel qualified to comment about where they might source the money.

Q80 Dan Jarvis: So are you saying you do not think it is likely that they will do that?

Jane Swift: There is clearly a risk that it will flow through to prices, but the role of the code itself, and the Adjudicator, is to help protect innovation in the supply chain, which is also ultimately to the benefit of the consumers.

Q81 Dan Jarvis: Indeed. If there is a risk, how great is that risk, do you think?

Jane Swift: We have not assessed that risk.

Q82 Dan Jarvis: Do you think that is something that is worth assessing?

Jane Swift: We could certainly think about that.

Q83 Mr Ward: I know that you have mentioned the contingency, but that is to fund the investigations and that will then be passed on to the guilty party if so found. Presumably, they would not take it to that level unless there was a pretty strong case against a retailer. What is the annual cost of the office of the Adjudicator?

Chris Hopkins: We have estimated £800,000.

Mr Ward: £800,000 in a normal year.

Chris Hopkins: And that is split between £400,000 for staff costs and office running costs, and £400,000 for central investigation.

Q84 Mr Ward: But out of a zillion pounds worth of turnover on the-

Jane Swift: £10 billion?

Chris Hopkins: It is about £70 billion.

Mr Ward: It is diddly squat in terms of being passed on to consumers.

Peter Barron: I do have a calculator and I make it 0.001%, because you are talking about a supply market that when we were looking at it was £70 billion.

Q85 Mr Binley: Can I ask a supplementary to that because as I understand it the Competition Commission gave an estimate of £5 million for this operation. Is that true? Secondly, isn’t it true that the Office of Fair Trading started off in pretty much one room and grew like Topsy? Aren’t you concerned that this will happen in this respect and that actually your evaluation is so way out as to be laughable?

Chris Hopkins: If I may start with the cost in terms of this £5 million. I think the £5 million we are talking about involves not just the costs that the retailers will have to pay directly to fund the Adjudicator, but also the costs for compliance with the Adjudicator.

Mr Binley: Of course.

Chris Hopkins: That is the overall impact.

Q86 Mr Binley: Of course. And Government needs to think about the cost in total terms of everything it does, particularly at a time when business is under so much pressure to pay our wages. So I repeat again: you know all the training they have to do; you know all the work that they have to do; are you genuinely sure that even £5 million will cover all of those costs and if you are, could you tell me where your figures come from?

Chris Hopkins: Do you want to start?

Jane Swift: Just to repeat that the figures are based on discussions with the OFT about the cost of their investigations. Obviously, they are an estimate, but I will say again, when it comes to the levy it will be the role of the Secretary of State to agree the size of that levy. We would not expect that that would be a constraint in itself on the breadth of the role that the Adjudicator can perform.

Q87 Mr Binley: I am really making a comment about impact assessment. I am sure that the impact assessment has not been properly undertaken. I think the whole cost element with regard to this project is sizeably understated and I do not think that that ought to be the purpose of Government when it comes to impact assessments. I ask again: where is your supporting evidence a) that this will cost only £800,000, and b) that the greater cost-the cost to our nation, as it were, from the instigation of this particular Bill-will not be sizeably more than £5 million? Have you done the work on that?

Chair: Could I just ask for you to take this away and perhaps send us a written breakdown of the calculation of these costs?

Jane Swift: We will do.

Mr Binley: Thank you.

Chair: Dan Jarvis, you have one question to finish off with.

Q88 Dan Jarvis: Thank you, Chairman. Can I ask what mechanisms are in place to ensure that large retailers comply, or what is there to prevent large retailers from complying for three years before then simply waving goodbye to the Adjudicator and then once that has happened ramping up the code infractions? Why might that not happen?

Jane Swift: Part of the point of the Adjudicator is to assist the dissemination of the right standards, culture and arrangements between it and its suppliers. When the Adjudicator is evaluated for the first time, the Government will want to take into account both the evidence for what the Adjudicator has done-the actual cases and achievements from that-but also the view of the suppliers. I cannot say what might happen at that first review and whether there would have been sufficient progress for the Adjudicator to be abolished altogether, but one would presume that the Government would want to see pretty stunning evidence from its evaluation in order to abolish. At that point, one would hope that the culture would be there of fair treatment on all fronts between the retailers and suppliers.

Q89 Chair: Can I just ask one question supplementary to that? The Adjudicator is to be appointed for five years and yet there is a review after three years and he can be kicked out. It seems a rather strange way of going about things to appoint somebody for five years and have the option of kicking them out after three years.

Jane Swift: It is up to five years, but the point about the potentially long appointment period is that it is one of the independence mechanisms, so the Secretary of State appoints and the person is in post, acting independently as independent arbiter, for a given period. The review mechanism is kind of on a different loop, so if the Government concluded that the Adjudicator, within his or her first three years, had done the job, then obviously the Adjudicator’s appointment would come to an end. The periods though are for different purposes.

Chair: Sorry, of what?

Jane Swift: The five-year period is one of the mechanisms for ensuring independence from the Secretary of State. The three-year period is what the Government thought was an appropriate point at which to review the general performance of the Adjudicator, which does not necessarily, of course, at all presume that the Adjudicator would be abolished at that point.

Q90 Chair: No, it does not presume it but it gives the option of it in my interpretation.

Jane Swift: It would give the option, in principle, yes.

Q91 Mr Binley: Can I just check that this Adjudicator is not signed on like a football manager and we will have to pay millions of compensation if on the review we find out that he is bloody useless, quite frankly.

Jane Swift: I am not a football person, so I don’t quite understand the analysis.

Mr Binley: Read the newspapers.

Mr Ward: Is that what happens at Northampton Town?

Mr Binley: Yes, it is.

Chair: Order, order.

Mr Binley: I think we have made the point.

Q92 Chair: Yes. I was going to say he might get the dreaded vote of confidence. Just one other quickie. Plain English: would you be prepared to write to us to say what parts of the Bill were amended to conform to the plain English requirements?

Jane Swift: We shall certainly do that.

Chair: Thank you very much. That concludes this particular session and I thank you for your attendance.

Prepared 22nd June 2011