Getting regulation right: a universal challenge

Written by James Thomas on Monday February 9, 2015

Financial regulation has received so much mainstream attention in the recent past that it’s easy to forget that criticisms of “toothless regulators” or of the “glacial pace of regulatory change” are universal, and that the need for improved regulation and compliance expertise cuts across many sectors of the economy. The most recent example comes from the world of groceries retailing.

The management of groceries supply chains was of course thrust firmly into the spotlight by the 2013 horsemeat scandal, but the issue of regulation (or absence thereof) within the groceries supply chain goes back much further. Supermarkets have long stood accused of wielding excessive market power and abusing that power within negotiations with their suppliers. More recently, supermarkets’ relations with their suppliers have been cast further into the spotlight through the Serious Fraud Office’s investigation into Tesco’s accounting practices. Moreover, the Groceries Code Adjudicator (GCA) – which was set up to oversee supermarket-supplier relations – has just announced that it will undertake its first investigation into the supermarket supply chain, with practices by Tesco being singled out for closer scrutiny.

However, this first investigation has been some time in the making, and these recent developments belie a history of inaction and toothless regulation.

In the UK criticisms of supermarket power prompted an inquiry in 2000 by the Competition Commission, resulting in the establishment in 2001 of the Groceries Supply Code of Practice to"govern the relations between the major supermarkets and their suppliers"  albeit no regulatory agency was created to enforce that Code. A further Competition Commission inquiry in 2008 recommended a strengthened Code and an ombudsman to police it. The new Code came into force in 2009 and the Groceries Code Adjudicator Bill established the GCA to ensure compliance with this Code. The GCA finally came into being in 2013 and only now – some 18 months later – is it launching its first investigation; an investigation which the Adjudicator confirmed would not lead to Tesco being fined, because the offences would have been committed before the GCA was given the power to impose fines.

Indeed, as a recent report by the House of Commons Environment, Farming and Rural Affairs (EFRA) Committeepointed out: “the GCA … is at present unable to use her power to fine a retailer in breach of the Groceries Code because the Government has spent more than a year failing to set a maximum level of fine.” Only in the last fortnight have measures been put before Parliament to grant the GCA with these powers, which, if they pass successfully through Parliament, will allow the GCA to fine supermarkets up to 1% of their annual UK turnover.

Moreover, the EFRA Committee report pointed out that the GCA’s remit was restricted to relationships between supermarkets and their direct suppliers, and recommended reforming the GCA so that its remit covers relationships between the supermarkets and their indirect suppliers, given that the agricultural producers do not enjoy direct relationships with the supermarkets but contract via processing companies or other intermediaries. In other words, the GCA’s original remit was fundamentally of no use in protecting the interests of the suppliers that the Code was intended to protect.

So, some 15 years after the original Competition Commission enquiry, the prospect of a regulator with a clear remit and some teeth is only just taking shape.

The challenge of getting regulation right cuts across all sectors of the economy, and as different sectors struggle with that challenge the need for dedicated and competent compliance practitioners within all sectors will similarly grow. Just as those within the finance sector should look to other sectors for examples of best practice in regulation and compliance, it is perhaps also instructive to look towards examples of poor practice, to ensure that the mistakes of other sectors are not emulated.