HC Deb 06 July 1995 vol 263 cc597-606

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Bates.]

8.43 pm
Mr. Stuart Randall (Kingston upon Hull, West)

The relationship between motor manufacturers and their dealer networks is determined by an arrangement called the block exemption scheme. The scheme is defined by the European Commission under procedures that result in the European Parliament having limited opportunities to intervene and influence. Although the Commission has just produced a new version of the block exemption scheme, which comes into operation in October, the principles on which it is based remain the same. That means that there is no free market in the operation of the relationship between manufacturers and dealers. On the contrary, the block exemption scheme is skewed very much in favour of manufacturers, which gives them considerable powers over dealers.

My main reason for initiating this debate tonight is to present to the House and the public details of the abuse of those powers by certain car manufacturers, particularly Fiat UK Ltd. Fiat has been attempting to rationalise its dealer network, which seems a perfectly reasonable thing to do. After all, it is in the business of making cars and must make a profit. So nobody would argue with that. What is unacceptable, however, are the unscrupulous and highly discriminatory methods that it uses to control its dealer network.

Fiat has terminated franchise agreements with some of its smaller dealers just because they are small. The fact that they have been loyal dealers for 20 or 30 years and have performed excellently is not relevant to Fiat. When Fiat decides to terminate a franchise, it generally does so in a way that results in the total destruction of the dealership concerned. The businesses often go into liquidation and the owners, who may have spent their lives building up the businesses, are often ruined. The result is also the loss of jobs and livelihoods for employees. All that adds up to an abuse of power by manufacturers through the block exemption scheme. Because no free market is in operation, dealers do not have freedom of action to protect their interests.

Before I became a Member of Parliament, I spent 25 years in business, including a spell in the motor industry for three and a half years. As a result, I strongly believe that when an organisation such as a big multinational car manufacturer is given powers via the block exemption scheme, it should take on certain responsibilities. Fiat has shown a disgraceful lack of responsibility and is bringing considerable discredit to the motor industry. A key complaint against Fiat—I have had an unbelievable number of complaints—is that it deliberately pursues a policy of undermining small dealers by terminating their franchises for no cause other than to replace them with larger groups. Moreover, it does so without offering compensation.

All dealer agreements contain a provision for termination, which, at this point in time, is usually 12 months, although that will change. However, under domestic law, Fiat has the right to terminate at will, and it certainly does. What disappoints me is that, under the revised block exemption scheme, the power to terminate in that way will remain. That means that a manufacturer can terminate a franchise at any moment without giving a reason. Termination should at least be based on breach of contract or objectively valid grounds, and we are far from that in the motor industry. Instead, there is no legal base in the block exemption scheme for challenging termination.

EU law provides for equal treatment by manufacturers of their dealers, regardless of size. In practice, that means that the terms of trading should not be conducted in a way that discriminates against a dealer purely on grounds of size. Fiat, however, ruthlessly ignores those laws and resorts to large-scale discrimination in a disgraceful way. For example, it has supplied cars at a greater discount to large dealers, set unrealistic targets for small dealers and set minimum sales levels in circumstances where a much larger discount has been given to larger rivals. The European Commission should not allow Fiat to get away with such dirty tricks. Does the Minister condemn the breaking of EC law in that way?

Dealerships devote their own time and money to develop expertise in Fiat products to meet the conditions of their franchise agreements, only to find the rug pulled from under their feet by the policy operated by Fiat. In terms of fairness and reasonableness, the actions of Fiat are extreme and without moral justification.

Fiat's directors, especially Ian Rowlands, have sought to justify their actions by reference to their rights under the dealer agreement. He told me that Fiat has powers under the block exemption scheme which it intends to use in its commercial interest with no reasonable regard to the dealers' interest and well-being. Many dealers have worked for Fiat all their working lives.

Lancia, which is owned by Fiat, is terminating all of its dealer agreements and withdrawing from the United Kingdom. Most Lancia dealers are also Fiat dealers. Termination of the Lancia franchise came as a complete surprise to most dealers. The reputation of Fiat has suffered as a result. No compensation has been offered to those dealers. In addition, Fiat lied by suggesting to various companies that Lancia was in Britain to stay.

What prompted me to initiate this debate was the dreadful treatment that a company in my constituency, AB Motor Company of Hull, received from Fiat UK. It was established in 1919 and is the oldest established motor company in Hull. It had a very successful track record for 75 years, right up to the time when the franchise was terminated by Fiat. It has had that Fiat franchise since 1971 and the agreement was renewed in 1986.

When the agreement was renewed, Mr. Trevor Good, who was the proprietor of AB Motors in Hull, was advised by his lawyers not to sign the agreement as it offered no protection to the dealership. However, if Mr. Good refused to sign, he would no longer be a dealer and his business would have to close down. He had no option but to sign the franchise agreement, which was so stacked against him.

Fiat terminated the franchise without giving reasons and then undermined the company during the notice period. While AB Motors still held the franchise, Fiat released all of the fleet listings, which are the lists of customers, to a competitor. The revenue of AB Motors completely collapsed. Fiat also encouraged discriminatory advertising in the local press during the termination period by another Fiat dealer, which damaged AB Motors by suggesting that it was no longer a Fiat dealer even though that was not true. That had a massive impact on the revenue stream, which dropped immediately by 40 per cent.

This may sound strong but I have a long list of other cases, which, clearly, I cannot go into during the debate. However, I would like to touch on one or two so that the House realises that there is a lot of beef behind what I am saying. Mr. Christopher Keeley, chairman of Datchet Green Motors, had a Toyota dealership. He had just invested £80,000—the points that I am making are the allegations of the people concerned—in the business on the understanding that Fiat would continue the dealership. When the termination threat came, no compensation was offered.

Mr. S. Davies of Altrincham said that the problem with the block exemption scheme, whatever its terms, in negotiating new agreements, is that it cannot work for the dealers unless there is a forum for presenting termination grievances in which they can be dealt with expeditiously. That does not exist.

Mr. J. P. Vilton, managing director of Vilton Cars, Cannon Hill, London, entered a franchise agreement in 1990 to sell Lancia cars. Five months later, Fiat ran down the Lancia operation and failed to maintain previous levels of support. The impact was so disastrous that the business is no longer viable.

Mr. Chris Horrock, of Page Motors, Essex, had a Lada and Citroen dealership. His dealer agreement was terminated, after he had made a big investment. His database of customer listings was given to other companies. Again, there was discriminatory advertising. His chief salesman was headhunted.

Mr. Malcolm Fitch was given 90 days' termination notice by Fiat, which took his parts computer. He alleges that Fiat owes him money and will not pay.

Mr. Tony Stillwell's dealer agreement was terminated at roughly the same time. Fiat insisted that he invested and would not take parts back when the termination notice ended. Fiat offered him an alternative Lancia dealership only for him to find that four months later it had wound it up. That is discreditable behaviour.

That is only a tiny fraction of the horror list that I have. AB Motors—the company in my constituency—is planning legal action against Fiat to obtain compensation for the losses that it incurred as a result of Fiat's actions. It is being supported with legal services and costs by the Retail Motor Industry Federation, RMI, which regards this as an important test case and is to be commended for its continued support.

I have also tried to operate as an intermediary. I arranged for AB Motors and Fiat to meet in a country house away from telephones to resolve the dispute by means of a compensation package without recourse to the courts. Although there seemed to be some goodwill in the beginning, Fiat showed its true colours when one of the directors, Ian Rowlands, said that it was not interested in the merits of the case because Fiat was bigger, had more power and money and would win. That was its attitude. It would just crush the smaller company. Fiat representatives at that meeting went on to say that Fiat believes that the liquidation of dealerships is an inevitable consequence of termination. Statistics show that once terminated, dealerships are dead.

Many of the organisations that I have talked to about this matter, including RMI and certain manufacturers, believe that the block exemption scheme is still deficient. It still allows unscrupulous manufacturers to abuse the considerable powers that it gives them over their dealers, especially in respect of termination. I regret that the Commission, in carrying out its review of the block exemption scheme, did not use the opportunity to prevent abuse by certain manufacturers, which has resulted in the breaking of EU law through discrimination against small companies.

In this debate, I have attempted to speak up for small companies, which are generally good performers. They are loyal to their manufacturers, but they have been hammered because they tend to be on the small side. The Commission could have restored a sensible and realistic balance between dealers and manufacturers by introducing a form of compensation to dealers when their franchise was terminated. That would not be an unreasonable burden on manufacturers and it could provide the opportunity for dealers to remain in business, providing jobs and economic prosperity locally, or to adopt an alternative business strategy.

Another key benefit of the compensation argument is that it would encourage manufacturers to move towards fewer and larger dealerships. The possible efficiency improvements were outlined in the Monopolies and Mergers Commission report called "New Motor Cars", which was produced in February 1992. We must all recognise that there has to be a move towards efficiency improvements and we must encourage that. What is at issue is the way in which the manufacturers have gone about it. Perhaps the Minister could tell the House what the Government's position is on the MMC report. So far, no action has been taken and we would be pleased to hear about the Government's view.

Mr. Piara S. Khabra (Ealing, Southall)

I apologise; I should have been here earlier in the debate but, unfortunately, I could not be. I believe that my hon. Friend knows that one of the dealers concerned lives in my constituency. Under the block exemption scheme, he has been given notice by Fiat that it is terminating its deal with him. My constituent has been in business with the company for the past 12 years. He had invested money, he was successful and he gave business to Fiat, but he is now about to be bankrupted. Does my hon. Friend agree that the block exemption scheme is a disaster and that the House should take action to deal with it?

Mr. Randall

I suspect that my hon. Friend is talking about First County Garages in Norwood Green.

Mr. Khabra

Yes.

Mr. Randall

That was one of the companies to which I did not refer and I appreciate the fact that my hon. Friend has raised the case. I spoke to the managing director of the company. The threat to the company arose after massive investment; the gentleman who owns the company put everything into it to try to meet Fiat's needs. Even after that, he has been kicked hard by Fiat. It should have come clean with him and said that he was not suitable or that his expansion plans were not good enough. To lead people up the garden path, to encourage them to invest and then to take such actions is a disgrace and I appreciate the fact that my hon. Friend has raised the point.

From the information that I have, I believe—this is strong—that Fiat UK Ltd. is behaving like a serial killer. It is wiping out lots of viable businesses with superb track records, with obvious consequences for jobs. I hope very much that Fiat will review its policy and that that will be the case for other companies that are abusing the block exemption scheme. I hope that the companies will provide compensation, because that is the way out and would provide a balance. I hope that the Commission will recognise that the changes that it has just introduced to the block exemption scheme will still leave it deficient and open to abuse.

9.3 pm

The Parliamentary Under-Secretary of State for Corporate and Consumer Affairs (Mr. Jonathan Evans)

I thank the hon. Member for Kingston upon Hull, West (Mr. Randall) for his speech. It is well known in the House that he has wide experience, especially of the motor trade. His speech is timely because, as he said, the negotiations on the new block exemption scheme have recently been concluded. I am pleased to report that the aims of the United Kingdom have been broadly met in the negotiations. Later, I shall deal in detail with many of the points that the hon. Gentleman raised.

It would be helpful for me to explain the background to the block exemption scheme before turning to the Government's policy. Paragraph 1 of article 85 of the treaty of Rome prohibits agreements between undertakings that affect trade between member states and which have as their objective, or effect, a distortion of competition. However, there are occasions when such agreements may have positive benefits that outweigh those negative effects. Paragraph 3 of article 85 of the treaty therefore provides that agreements may in fact be granted an exemption in such circumstances.

To gain an exemption, such agreements must provide benefits to the Community, and consumers must receive a fair share of those benefits. The restriction on competition to be permitted must, however, be no greater than that which is necessary to deliver those benefits. In essence, that is what the structure of EU competition policy is, and the way in which an exemption can be applied for.

Agreements that satisfy those criteria must be notified to the Commission for individual exemption, and it is then for the Commission to decide whether they do indeed merit exemption, or whether the negative effects are so great as to outweigh any of the benefits that may arise. There are, of course, occasions when there is likely to be a large number of similar agreements that qualify for exemption, and in such cases the Commission will often grant a block exemption. Agreements that satisfy the terms of a block exemption do not need to be individually notified to the Commission; they will be valid without there being any specific authorisation.

In the European Community, most manufacturers of motor vehicles distribute their new cars using a system known as selective and exclusive distribution. Selective distribution allows the manufacturer to select dealers who meet certain standards. Exclusive distribution means that the manufacturer will grant each dealer an exclusive territory in which to operate. In return, the dealer undertakes to sell only that manufacturer's cars in that territory.

That system, though, can and does restrict competition. It may also have an effect on trade between member states. Not everyone is allowed to sell new cars, as manufacturers choose their dealers and expect them to maintain high standards. They also ensure that there is only one dealer for each brand in any given area. Furthermore, dealers are restricted to selling only the manufacturer's brand of car. That system is permitted because it also provides a number of positive benefits for the consumer.

As we know, cars are technically complex machines and require a high degree of expertise, both before they are sold, to ensure that they are safe to use, and after sale, to ensure that they stay that way. The hon. Gentleman knows that from his wide experience at the highest levels in the motor industry.

Furthermore, a consumer rightly expects to be able to buy his car, perhaps in one part of the country, and, if need be, have it serviced in another part of the country. For those reasons, it is necessary for a manufacturer to maintain a national network of high-quality sales and service facilities. Selective and exclusive distribution is one way of ensuring that the manufacturer is able to do that, and encourages high standards through specialisation.

The selective and exclusive distribution system is therefore exempted from EC competition rules by a block exemption, which initially came into force in July 1985. The exemption on that occasion was to last for 10 years and would expire on 30 June 1995. One will see from that how timely the debate is.

Mr. Randall

I am grateful to the Minister for outlining these points, particularly on competition, but many of the points to which he referred are in the recommendations of the MMC report. What the MMC was saying in its investigation into the industry in 1992 was that the block exemption scheme is stifling competition and that we need to change it to ensure that the dealers have more flexibility to be able to compete.

Mr. Evans

I certainly accept that. I shall come to the context of the MMC report, because it is important to set the context of these matters. There was the block exemption for a period of 10 years, the MMC report and the negotiations. It is important, within the context of the pertinent remarks that have been raised by the hon. Gentleman, to set the matters in context. I assure him that I will come to the MMC report, because it has been the agenda for subsequent negotiations over the adjustments to the block exemption to which he referred.

Mr. Randall

Although the new block exemption scheme is coming into operation in October, the discussions by the Commission are now complete, and the new document has been produced. Unfortunately, it does not include many of the proposals that were included in the MMC report. What mechanism, if any, will there be for us to make changes?

Mr. Evans

Yet again, the hon. Gentleman's remarks are premature. I wish to set out the context for him. That is important. I am sure that he will know that one of the important aspects of his success in obtaining this Adjournment debate was that it was an opportunity to set out the context of the matter for the industry in general. If I am to outline, not only to the hon. Gentleman but more widely, the Government's policy in this regard, it is important that I should be able to deal with the matter in the context that I have set out. I hope that he understands that.

The selective and exclusive distribution system is therefore exempted from EC competition rules by the block exemption, which would have expired on 30 June 1995. Interestingly, the cars block exemption scheme was the first sector-specific block exemption to be granted by the European Union.

The exemption goes into some detail in setting out the terms for a number of the other parts of the agreement between a manufacturer and his dealers. For example, it specifies the minimum length of agreements. It also stipulates that each party must give one year's notice of termination. In the context of many of the cases that were raised by the hon. Gentleman, the operation of the one-year notice of termination has led to many of the concerns that have been raised by him. However, I accept that there are others.

The block exemption has not been without its critics. Some feel that it offers too much power to the manufacturer at the expense of the dealer. There have also been a number of complaints from consumers, who feel that car prices in the European Union are inflated because of the exemption, as it permits a restriction of competition.

This lack of competition was perceived to be due to a number of factors. Most dealers could sell only one brand of car. Dealers could not advertise to customers outside their contract territory. It was also felt that manufacturers were able to discriminate against customers who purchased a car in another country within the European Community. That matter was the subject of considerable publicity some years ago.

For the reasons that I have outlined, a number of consumer organisations believed that, when the block exemption expired in June 1995, it should not be renewed. On the other hand, manufacturers argued that competition in the market was fierce. They said that renewing the block exemption in its original form was essential in order that they could continue to offer a high-quality service to customers. Dealers' views were mixed. The larger dealers wanted to be able to sell more than one brand of car.

The hon. Gentleman said that smaller dealers wanted to have a free market. I am bound to say to him that that was not the universal view of smaller dealers. Many smaller dealers felt that the selective and exclusive distribution system offered them some security, and that in a free market they might be edged out by the larger dealers. However, all dealers believed that their position within the manufacturer-dealer relationship needed to be strengthened, although they wished to retain the basic principles of the block exemption.

Mr. Randall

On a point of correction, I did not suggest that small dealers wanted a free market. There is enough co-ordination in the motor industry for me to say that. I was saying that the block exemption scheme was not a free market. If there were a free market, the dealers could protect their interests, but as they are caged into the system, with all the powers stacked in favour of the manufacturers, manufacturers can do what they like with dealers. That was the point that I made about the benefits of the free market in this context.

Mr. Evans

I am grateful for that clarification. It underlines the point that I have made, that the general view of all dealers is that they want to ensure that their position within the manufacturer-dealer relationship is strengthened. That is one thing on which we can all agree. That brings me to the position in relation to the Monopolies and Mergers Commission inquiry.

The Government's policy on the renewal of the block exemption was guided by the Monopolies and Mergers Commission's investigation of the supply of new cars. It is worth examining the background to that inquiry, and the outcome. The hon. Gentleman has asked me to give the Government's response in this regard.

In May 1990, the Director General of Fair Trading referred the issue to the Monopolies and Mergers Commission for investigation. His primary concern was the price of new cars in the UK. That was the focus of the inquiry. The MMC was also required to establish whether a scale or complex monopoly existed, and whether it operated, or might be expected to operate, against the public interest.

The MMC's report was, as the hon. Gentleman says, published in February 1992. It concluded that prices in the United Kingdom were not significantly higher than in other countries. Where they were higher, that was due to factors such as exchange rates, and because cars in the United Kingdom were of a higher specification than on the continent. The report found a scale monopoly in favour of the Ford Motor Company, but that it did not operate against the public interest.

However, the MMC concluded that the operation of selective and exclusive distribution by 24 manufacturers constituted a complex monopoly. The report did not conclude that the system as a whole should be prohibited, but it did find that a number of restrictions on dealers might be expected to operate against the public interest: while they did not lead to higher prices, they might be able to sustain higher prices. The MMC therefore recommended that the restrictions should be lifted.

The MMC said that dealers should be allowed to advertise outside their contract territories. It said that they should be granted greater freedom to sell competing brands of cars, both inside and outside their contract territories, and that they should also be able to sell car-related goods, and provide services outside their territories.

The overall effect of the changes would have served to increase the independence of dealers in the United Kingdom. That would increase competition in the industry, which would ensure that prices were not artificially higher in the United Kingdom than in other countries.

The Government were minded to agree to and implement those recommendations. To that end, undertakings were sought from the major suppliers in the United Kingdom. Those undertakings were not forthcoming. The alternative was to implement the MMC's recommendations by an order in the House. However, in March 1994, the Government announced that an order would not be sought.

That decision was made because a review of the block exemption regulation was imminent. The Government felt that to seek an order for enforcement of the MMC's recommendations would subject the industry to a period of uncertainty which might be altered within a relatively short time by the outcome of the Commission's own review of the block exemption.

The Government announced instead that they would encourage the Commission to take account of the MMC's findings. The analysis in the MMC's report, and its recommendations, therefore, have formed the basis of the United Kingdom's negotiating position and policy during negotiation on the new regulation.

I come now to the outcome of that. The Commission's review of the block exemption began towards the end of October 1994, when it issued a preliminary draft to competition authorities in member states. In the United Kingdom, officials from my Department conducted an extensive consultation exercise. That sought the views of all interested parties. Many helpful comments were received, which reflected the importance of the issue to all concerned.

Having heard the views of member states in November 1994, the Commission published an official draft of the proposed new regulation. Again, a number of comments were made, by a variety of organisations. They included groups from within the industry, as well as consumer associations and legal bodies. Following further consultation with member states, the final regulation was approved by the College of Commissioners in June of this year. The current exemption has now been extended for three months, and will now expire not on 30 June but on 30 September. The provisions in the new regulation will come into force on 1 October 1995, for a period of seven years.

I come now to the new provisions in the block exemption. The hon. Gentleman has made it clear that he is disappointed by the outcome of the negotiation, but the Government take a rather more positive view of the outcome than would be apparent from the remarks that we have heard in the debate. I shall outline why we take that view.

Among the significant changes that have taken place is that dealers will now have greater freedom to sell competing brands. They will also be able to advertise outside their contract territories. The importance of that is that those were key recommendations in the MMC's report.

Furthermore, the minimum duration of agreements has been increased to five years. Both parties will now have to give at least two years' notice of termination. That is a doubling of the previous period, and it is an important step in the right direction. Each party will be able to request the views of an independent expert in the case of disputes over sales targets. That, as well as the right to compensation if only one year's notice of termination is given, further strengthens the position of dealers.

Mr. Randall

I understand that the new arbitration facility can be invoked only after a court hearing has taken place. Will the Minister confirm that it is not possible just to go along and say, "Will you rule on this?", as I think it should be, and that a breach must have been perpetrated for the arbitration procedures to be invoked?

Mr. Evans

One of the challenges of the current system is the absence of any facility for the introduction of a third-party element to resolve disputes, although an independent element has been negotiated for disputes involving, in particular, sales targets. That is a step in the right direction. I shall be happy to give the hon. Gentleman more details in due course, but the important point is that, for the first time, there is that independent element.

For that reason, among others, the Government believe that the settlement is good for the United Kingdom, and represents a good deal for UK car dealers. The MMC's analysis has been reflected in the Commission's conclusions. The elements of selective and exclusive distribution have been retained, but some of the other restrictions have been lifted.

The Commission has expressed the belief that, previously, there were a number of instances of non-compliance with the terms of the previous block exemption. Others—notably, some dealer trade associations—have said that it offered the manufacturer too much power at the expense of dealers, and that that led to abusive treatment of dealers. That is relevant to many of the concerns expressed by the hon. Gentleman.

Each block exemption contains a list of clauses known as the blacklist, which sets out a number of restrictive practices that may not be included in any agreement that seeks the benefit of the block exemption. It is worth noting that the blacklist in the new regulation has been extended to provide much greater certainty; that also demonstrates the Commission's commitment to stamp out malpractices that have occurred under the current block exemption.

The hon. Gentleman suggested that the block exemption might be amended to prohibit all forms of abusive treatment of dealers by manufacturers. I do not think that appropriate.

Mr. Randall

The manufacturers want bigger and fewer networks. That was highlighted in the MMC report, which suggested that such an arrangement would produce greater efficiency and productivity. During that process, however, many smaller companies are being discarded because they cannot secure the necessary investment and the right structures to provide that efficiency. How are we to move from the current position to the new position? I am merely saying that we should have a scheme that allows terminations to take place in a way that does not wipe out companies.

That is a dilemma, but I feel that it could be handled better. It is clear that the Commission has not got to grips with the problem; in my view, a compensation system is the only answer.

Mr. Evans

The hon. Gentleman has made it clear that he is not happy with the outcome of the negotiations on the block exemption. The Government believe, however, that many of the concerns raised in the MMC report have been addressed during those negotiations. We part company, ultimately, on the Government's belief that the block exemption is not there to regulate every aspect of the manufacturers' agreement with dealers; it is there to deal with trade and competition issues. In those circumstances, it can be taken only so far.

The Commission has stated explicitly that, in future, it will monitor compliance with the block exemption closely. That statement is to be applauded, as block exemptions permit restrictions of competition. Owing to the benefits that such restrictions provide, it is essential that the provisions of the exemptions are not abused. As I have made clear to the hon. Gentleman, they may have been breached in the past.

If a manufacturer breaches the terms of the block exemption, the Commission will take appropriate action to deal with the matter. It is for that reason that the new block exemption is a useful step forward. It will stimulate competition and encourage competitiveness, and it should equip all members of the industry to face the challenges of the future.

Question put and agreed to.

Adjourned accordingly at twenty-four minutes past Nine o'clock.