My Lords, the order sets the maximum financial penalty that may be imposed by the Groceries Code Adjudicator, and completes the set of regulatory powers available to the adjudicator to ensure that the large supermarkets deal fairly with their suppliers.
Before moving on to the purpose and effect of the order, it might be helpful if I talked a little about how the adjudicator came to be created. The genesis of the Groceries Code Adjudicator regime is to be found in the market investigation into the supermarkets conducted by the then Competition Commission between 2006 and 2008. The commission found that the problems in the sector were concentrated in the commercial dealings between the largest supermarkets and their direct suppliers. It therefore used its powers under the Enterprise Act 2002 to introduce the Groceries Supply Code of Practice in 2009.
The scope of the code is precisely defined. It governs the commercial relationships between the 10 largest UK supermarkets—those with a turnover of more than £1 billion a year—and their direct suppliers of food, drink and household products. The code requires the supermarkets to deal fairly with their suppliers and it includes specific provisions, among other things, governing terms of supply agreements; the timing of payments; marketing and promotional costs; and payments as a condition of being a supplier. It does not cover indirect suppliers further down the supply chain. Nor does it govern questions relating to pricing, which are the responsibility of the Competition and Markets Authority under general competition rules.
The Competition Commission required the appointment of code compliance officers by the supermarkets. It discussed the possibility of a regulator to enforce the code, but did not go so far as to recommend one at that time. I appreciate that many felt that the absence of a regulator was an unsatisfactory arrangement from the start. The Commons Select Committee on the Environment, Farming and Rural Affairs, for example, described it as akin to setting the rules of the game but then failing to appoint a referee.
Ministers shared that view. That is why they legislated for the creation of the adjudicator to enforce the code. Christine Tacon took up her post as the first adjudicator in June 2013. Ministers were also determined that the adjudicator should have the enforcement powers necessary to ensure compliance with the code. Those powers are extensive. The adjudicator has a duty to arbitrate any dispute that is referred to her by a supplier, and she
has the discretion to arbitrate if the referral is by a supermarket. The adjudicator may also launch an investigation where she judges that there are reasonable grounds to suspect that a supermarket has breached the code, or has failed to comply with earlier statutory recommendations made by the adjudicator.
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I shall take a moment here to clarify some of the confusion that has grown up around the adjudicator’s powers of investigation. This was highlighted most recently by the EFRA Select Committee, which recommended in its report on dairy prices that the GCA be given the power to launch proactive investigations. The Government will respond in detail to the committee shortly. But to be absolutely clear, there is nothing in either the legislation governing the adjudicator or her statutory guidance that means that the GCA must simply sit and wait for evidence to be brought to it. Far from it—the adjudicator has wide powers to investigate, and the Government expect her to rely on them to be an active and visible guardian of the code.
I know that Ministers are pleased that Christine Tacon has quickly established her profile and authority through her extensive engagement with the sector, not least by requiring the various internal and external investigations in the Tesco case to include the groceries code in the terms of reference. This is surely proof of the adjudicator making good use of the proactive powers of investigation that the legislation already grants her.
Where the adjudicator conducts an investigation and finds that there has been a breach of the code, currently she may take one of two forms of enforcement action. She may issue the supermarket with recommendations as to its future conduct to ensure compliance with the code, or she may “name and shame” the supermarket by requiring it to publish information about the adjudicator’s investigation. However, it was the will of Parliament that the adjudicator should also have the power to impose a financial penalty. Provisions to introduce a fining power by secondary legislation were therefore added to the Groceries Code Adjudicator Bill during its parliamentary passage. These required the adjudicator to consult on the method for determining the maximum penalty, which she did between July and December 2013, and to make a recommendation to the Secretary of State. This recommendation was for a maximum penalty of up to 1% of UK turnover, which Ministers accepted. These regulations implement that recommendation.
I should put on record that these regulations cannot have retrospective effect. That means that the adjudicator will not have the power to impose a penalty in respect of any breach of the code that predates the making of the regulations. I know that some of the supermarkets have expressed concern about the level of the maximum. They have pointed out that, for the largest retailers, 1% equates to hundreds of millions of pounds. On the other hand, suppliers who responded to the GCA’s consultation tended to favour a much higher maximum, in some cases up to 5% of turnover.
On balance, Ministers consider the recommended 1% to represent an appropriate and proportionate maximum. It is modest compared to the figures of
10% and more in the competition regime—and it is a maximum. The adjudicator’s published guidance makes it clear that the GCA will adopt a proportionate approach to its enforcement powers and will seek voluntary compliance wherever possible. The agreement that she has secured from most of the supermarkets to limit their forensic accounting exercises to the previous two years, when six had been common, is an excellent example of her ability to get results without the need to pursue formal proceedings.
Where the adjudicator relies on her formal enforcement powers, her guidance makes it clear that she will do so by applying the well established Macrory principles on regulatory penalties. These state that a sanction must be proportionate, must deter further non-compliance and must aim to eliminate any financial benefit from non-compliance.
On the latter point, we have seen recently that, by manipulating the timing of payments to and from suppliers, supermarkets can very quickly accrue huge sums. That makes the 1% maximum in this order essential if a full and proportionate range of sanctions is to be available to the adjudicator. The Government appreciate that some noble Lords may still have concerns about the level of the maximum. I hope that they will be reassured to know that there must be a statutory review of the GCA’s performance next year, during which this order may be looked at again.
I have said that the order is about giving the adjudicator all the tools that she needs to do her job—but powers are only half of the picture. The adjudicator must also have the necessary resources and the capacity to be an effective regulator. That is why Ministers were pleased to approve an increase of almost 40% in the GCA’s levy funding—from £800,000 this year to £1.1 million next year.
In closing, I repeat that in debating this order today we are reflecting Parliament’s will to give the Groceries Code Adjudicator access to the full range of enforcement options that she needs to do her important job as effectively as possible. I am confident that granting the adjudicator this additional power will strengthen her ability to deliver fairness in the commercial relationships between the supermarkets and their suppliers. A fair and transparent market is good news not just for suppliers but for the sector as a whole and for consumers. It will promote competition and foster innovation. I hope therefore that noble Lords will support the order.