DPRR/12-13/02
Groceries Code Adjudicator Bill [HL]
Memorandum by the Department for Business, Innovation and Skills for the Delegated Powers and Regulatory Reform Committee
Introduction
1. This Memorandum identifies each provision in the Groceries Code Adjudicator Bill [HL] which confers power to make delegated legislation. It explains the purpose of the delegated power proposed; why the matter is to be dealt with in delegated legislation; and the nature and justification for the choice of any Parliamentary procedure.
2. For completeness, the Memorandum also deals briefly with certain powers in the Bill to issue guidance, although in the Department’s view this guidance will not have the status of delegated legislation.
Background
3. Following its 2008 investigation into the supply of groceries in the UK market, the Competition Commission made the Groceries (Supply Chain Practices) Market Investigation Order 2009 (“Groceries Supply Order”) under its powers in section 161 of the Enterprise Act 2002. The Groceries Supply Order contains the Groceries Supply Code of Practice (“Groceries Code”). In its 2008 report, the Competition Commission also recommended establishment of an ombudsman or adjudicator to enforce the Groceries Code. This Bill implements that recommendation.
4. The Groceries Code currently applies to all retailers with a turnover of more than £1 billion in the United Kingdom (“large retailers”).
5. As well as establishing the Groceries Code Adjudicator (“Adjudicator”) as a statutory office holder, the Bill sets out the powers and duties under which the Adjudicator will enforce the Groceries Code.
6. The Adjudicator will be required to arbitrate disputes between large retailers and their direct suppliers, or to appoint another person to do so.
7. Where there are reasonable grounds to suspect that a large retailer has broken the Groceries Code or failed to follow an earlier Adjudicator’s recommendation, the Adjudicator may carry out an investigation and, if this finds that the Groceries Code has been broken, exercise certain enforcement powers. (These powers are referred to in more detail in paragraph 12 of this Memorandum.)
8. The Adjudicator will publish guidance about investigations, may publish guidance on other matters concerning the Groceries Code and may give advice about the code to large retailers or suppliers.
9. The Adjudicator will be funded by a levy paid by the large retailers.
10. The Secretary of State will be required to review the performance of the Adjudicator at regular intervals, and will consider whether the Adjudicator has been effective and whether the office should continue.
11. In 2011 the Bill was the subject of pre-legislative scrutiny by the Business, Innovation and Skills Committee of the House of Commons (“the Commons Committee”). The Commons Committee published its report on 28 July 2011 (endorsing the need for an Adjudicator) and the Government’s Response was published on 15 October 2011.
Provisions for delegated legislation
Clause 9: Investigations: enforcement using financial penalties
The delegated power
12. If, as a result of an investigation, the Adjudicator is satisfied that a large retailer has broken the Groceries Code, the Bill (clauses 6 to 9) enables the Adjudicator to take one or more of the following enforcement measures:
(1) to make recommendations as to what the retailer should do to comply with the code (clause 7);
(2) to require the retailer to publish information about the investigation (clause 8);
(3) to impose a financial penalty on the retailer (clause 9).
13. However, a financial penalty may only be imposed if the Secretary of State has made an order authorising the Adjudicator (generally, rather than case by case) to impose such penalties. The order making power is contained in clause 9 and Schedule 3.
14. If an order is made to authorise financial penalties, then clause 9 of the Billalready prescribes a number of related matters. Clause 9(3) specifies certain key information which the Adjudicator must give by notice to the large retailer. Clause 9(4) grants a right of appeal against the imposition of a financial penalty or its amount. Clause 9(5) makes financial penalties recoverable as a debt and clause 9(6) provides that they must be paid into the Consolidated Fund. However, certain other related matters (referred to in paragraphs 15 to 17 below) are left to the Secretary of State’s order making power.
15. Where the Secretary of State makes an order authorising financial penalties, the order must specify the maximum penalty that may be imposed or how that maximum is to be calculated (paragraph 2 of Schedule 3). The maximum could therefore be an absolute amount or could, for example, be an amount calculated by reference to the relevant retailer’s groceries turnover or the value of supply arrangements related to the relevant breach of the Groceries Code.
16. Paragraph 3 of Schedule 3 enables the order to include further measures about procedural matters.
17. Paragraphs 4 and 5 of Schedule 3 respectively allow the order to require the Adjudicator to publish guidance about the criteria the Adjudicator intends to adopt in deciding the amount of a financial penalty and to consult before publishing such guidance.
Why this is left to delegated legislation
18. The main order making power (clause 9 and paragraph 1 of Schedule 3): In its 2008 report the Competition Commission recommended a power to impose monetary penalties on retailers to help ensure their compliance with the Groceries Code. The Commons Committee also recommended that such a power should be available to the Adjudicator from the start, although it recognised that the arguments on whether to introduce penalties from the start were finely balanced.
19. The Government remains of the view that it may be necessary to allow the Adjudicator to impose financial penalties on large retailers which break the Groceries Code. It is possible that the other available enforcement measures – recommendations and requirements to publish – will not by themselves prove to be a sufficient deterrent to ensure a high level of compliance; and, in that case, it may well be important to be able to make the additional measure available quickly, without needing new primary legislation.
20. However, financial penalties are a very serious sanction and, in the Government’s view, should not be introduced unless, after allowing a period for the Adjudicator to operate and exercise his or her other powers, there is evidence that they are really needed. Therefore the power to impose financial penalties may only be authorised “if the Secretary of State thinks that the Adjudicator’s other powers are inadequate” (paragraph 1 of Schedule 3).
21. Paragraph 6 of Schedule 3 requires the Secretary of State to carry out a consultation before making an order under clause 9. This will ensure that the views of interested parties on the adequacy of other powers can be taken into account.
22. The Government considers that there is a reasonable likelihood that financial penalties will not be needed. The appointment of the Adjudicator, with the early prospect of guidance, advice, encouragement and publicity for the Groceries Code, should in itself give new impetus to the code. The large retailers willalso want to avoid the risk of being investigated for possible breaches and will be deterred by the possibility of publicity for proven breaches. Furthermore, large retailers will immediately be conscious that financial penalties could be introduced swiftly if the original regime appears not to be effective. Together, these factors should be a powerful deterrent and should contribute to a high level of compliance.
23. Therefore time should be allowed for the Adjudicator to prove the effectiveness of the original regime before the addition of financial penalties is considered. Whether penalties are really needed cannot be sufficiently considered until this time has passed and more evidence is available.
24. The specification of the maximum penalty (paragraph 2 of Schedule 3): The Government’s view is that a decision about what is the right level of maximum penalty would be better able to be taken once there is more evidence about levels of compliance or non-compliance with the Groceries Code and, in particular, what is the evidence which has led the Secretary of State to conclude that the Adjudicator’s other powers are inadequate. For example, if there were evidence that large retailers were using breaches of the Groceries Code to improve their turnover and / or profits, that might be a factor suggesting that the maximum amount should be calculated by reference to relevant turnover or profits. The question of the maximum penalty could be part of the consultation required by paragraph 6 of Schedule 3.
25. Further measures about procedural matters (paragraph 3 of Schedule 3):Although procedural matters are to some extent addressed by clause 9(3), this power would allow the order to include more detail than would be appropriate for the Bill. For example, this might include the manner of communication by which notice should be given by the Adjudicator to the large retailer, or the means by which payment of a penalty should be made to the Consolidated Fund.
26. Requirement for guidance from the Adjudicator: The Government considers that the need for guidance will depend to some extent on the evidence causing the Secretary of State to make the order and on what will be the maximum penalty. For example if the maximum is relatively low, that may reduce the need for guidance on the criteria to be adopted in deciding the amount in a particular case. The Secretary of State could also take into account whether and how any such guidance would relate to guidance previously published by the Adjudicator under clause 12(1)(c) (criteria to be adopted in choosing whether to use the enforcement powers and which ones).
27. In the Department’s view, any guidance itself published by the Adjudicator (as opposed to the requirement to publish it) will not constitute delegated legislation (see further paragraph 32 below). In any event, it is not possible for this guidance to be prepared and published unless and until there is a requirement for it under paragraph 4 of Schedule 3. The guidance would need to take into account the other provisions and the context of the order made under clause 9(1) and Schedule 3.
Parliamentary procedure
28. An order under clause9(1) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament (clause 23(2)). It is considered that the introduction of financial penalties would be a significant step with potentially serious consequences for the large retailers; and that therefore the affirmative procedure is needed.
Clause 12: Guidance
29. Clause 12(1) requires the Adjudicator to publish guidance about how it will approach investigations. This guidance must address the criteria the Adjudicator intends to adopt in deciding whether to carry out investigations, the practices and procedures the Adjudicator intends to adopt in carrying out investigations and the criteria the Adjudicator intends to adopt in exercising enforcement powers.
30. In addition, clause 12(2) enables the Adjudicator to publish guidance about practices and procedures in carrying out other functions; and clause 12(3) enables the Adjudicator to publish guidance about other matters relating to the Groceries Code.
31. Clause 12(4) requires the Adjudicator to consult before publishing guidance.
32. These powers are mentioned here for completeness. Any guidance will be published under delegated powers and will have legal effect, in particular because the Adjudicator must take account of it in carrying out functions (see clause 12(6)). However, in the Department’s view the guidance will not be delegated legislation because it will not be legally binding in any strict sense. It will be possible for the Adjudicator, as well as large retailers and suppliers, to take account of wider circumstances and to depart from the guidance without necessarily committing any breach of the law.
33. The guidance will deal with matters of detail which could not practicably be addressed in the Bill and may need to be amended at fairly short notice to reflect changes in circumstances.
34. It will also be important that the guidance required by clause 12 is published by the Adjudicator, who will be the person who will take it into account while exercising his or her functions. Therefore the guidance cannot be published until the office is established and the first Adjudicator appointed. This also militates against any possibility of dealing with these matters in the Bill.
35. Clause 12(5) requires the guidance which must be published under clause 12(1) to be published within 6 months of clause 1 coming into force. This is because clause 4(3) prohibits investigations until this guidance has been published.
36. No Parliamentary procedure is provided in relation to the publication of guidance under clause 12.
Clause 15(8): guidance from the Secretary of State as a result of a review of the Adjudicator
37. Clause 15 requires the Secretary of State to review the Adjudicator’s performance for specified review periods. This requirement is explained in more detail in paragraph 63 below, in the context of the possible abolition of the Adjudicator.
38. Clause 15(8) allows the Secretary of State, as a result of the findings of a review, to give guidance to the Adjudicator about any matter relating to the Adjudicator’s functions. For example, the Secretary of State might wish to guide the Adjudicator to exercise the enforcement powers more actively or differently.
39. Clause 15(9) requires the Adjudicator to take account of any such guidance in carrying out functions.
40. As with the Adjudicator’s powers to publish guidance under clause 12, this power of the Secretary of State is mentioned here for completeness. Any guidance will be published under a delegated power and will have legal effect, due in particular to clause 15(9). However, in the Department’s view, the guidance will not be delegated legislation because it will not be legally binding in any strict sense. The Adjudicator will be able to depart from the guidance without necessarily committing any breach of the law.
41. By its nature, any guidance from the Secretary of State will deal with matters which could not be addressed in the Bill because they will depend upon the outcome of a future review carried out under clause 15.
42. No Parliamentary procedure is provided in relation to the publication of guidance under clause 15(8).
Clause 15(10): Restriction (following review by the Secretary of State) of information that may be considered when deciding whether to investigate
The delegated power
43. Clause 15(10) enables the Secretary of State, by order, to insert a new section 4A in the Bill (as enacted) which would restrict the information that the Adjudicator can consider when deciding whether to commence an investigation as referred to in clause 4. This power can only be exercised as the result of the findings of a review under clause 15.
44. The new section 4A(1), if inserted, would restrict the Adjudicator, in deciding whether to carry out an investigation, to consideration of four categories of information: information provided by a supplier (this includes indirect suppliers – see clause 22); information that is publicly available; information provided by a person who obtained it while employed by the relevant retailer; and information provided by the relevant retailer about whether it has complied with an earlier recommendation under clause 7.
45. The new section 4A(2) would clarify that, when carrying out an investigation, the Adjudicator is not limited to the four categories of information referred to above but may consider any information.
Why this is left to delegated legislation
46. The Commons Committee considered a draft of the Bill which (in that draft) restricted the Adjudicator, in deciding whether to carry out an investigation, to information provided by a supplier and information that is publicly available (the first two categories referred to above). The Committee recommended that there was a good case for amending the Bill at least to allow information from trade associations representing direct and indirect suppliers, and possibly from whistleblowers who are employees or ex-employees of retailers, to trigger an investigation. It also recommended that the Bill might usefully be amended to grant the Secretary of State the power to add additional categories of information in future.
47. Part of the reasoning behind these recommendations of the Commons Committee was that suppliers might not have the confidence to bring complaints directly to the Adjudicator, despite the provision for confidentiality in clause 18. They might, in particular, prefer to pass their information through a trade association.
48. Having reflected on the Commons Committee’s recommendations and the issues underlying them, the Government has concluded that the best position is that, at the outset, the Adjudicator may consider information from any source in deciding whether to commence an investigation. By comparison with the Committee’s recommendations, this avoids the need to set out a fairly long list of possible sources which might artificially or even unintentionallyexclude some source which turned out to be useful. This wide access to information should enable the Adjudicator to make an effective start in exercising his or her functions. The ability to provide information through a trade association or other intermediary should also reassure suppliers who might (despite clause 18) have residual concerns about complaining directly to the Adjudicator. But in any event the Adjudicator will not be able to commence an investigation unless there are “reasonable grounds to suspect” a breach of the Code or a failure to follow an earlier recommendation (clause 4(1)).
49. However, as a safeguard balancing this wide access to information at the outset, the Government also considers that the Secretary of State should have a power to restrict the categories of information that the Adjudicator may consider in deciding whether to start an investigation. It is true that the Adjudicator’s power to impose costs on a person who makes a complaint which is vexatious or wholly without merit should act to deter unmeritorious complaints. However, that power to impose costs is subject to a high threshold before it can be exercised and there may be other reasons why it might prove necessary to exercise the power. For example, the Adjudicator might be subject to organised campaigns by trade associations or others which, whilst made in good faith and with some merit, are simply impractical for the Adjudicator to deal with given the likely level of resources available and which make it harder for the Adjudicator to identify and pursue the most important areas of complaint. (It may be that the Secretary of State’s order making power acts to restrain such campaigns.) Another possibility is that suppliers do not in fact have confidentiality concerns about complaining directly and that this removes one important reason for allowing the Adjudicator to consider information from any source. These are matters which are suitable to consider in the context of a secondary power because they should be judged in the light of experience.