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OFT backs down after six-year inquiry into milk and butter prices

The Office of Fair Trading (OFT) has backed off on some claims that supermarkets illegally colluded on prices of butter and milk after evidence from Tesco undermined the watchdog's case.

The OFT's dairy price-fixing inquiry has been running for seven years, and implicates a whole string of retailers and dairy companies in a cluster of different investigations into milk, butter and cheese. Asda, Morrisons, Safeway, Sainsbury's and Tesco were all named in the formal "statement of objections" in 2007, as were the producers Arla, Dairy Crest, Lactalis McLelland, The Cheese Company and Wiseman.

Investigations into price-fixing of cheese in 2002 and 2003 will continue, as will the OFT's inquiry into milk pricing in 2003. But on the strength of Tesco's evidence, investigations into alleged collusion over milk prices in 2002 and butter pricing in 2003 will be dropped. And the supermarket itself will be excluded from the 2003 milk inquiry.

Arla was granted immunity because it was the original whistle-blower. All other implicated parties apart from Tesco and Morrisons came forward in 2007 for "early resolution", under which they admitted a certain liability in return for reduced fines. Now that two of the investigations have been dropped, the £116m-worth of fines will be reduced to £70m.

Although Tesco is no longer implicated in the remaining milk investigation, it is involved in the cheese inquiry. The supermarket has consistently disputed all the allegations, including over cheese pricing, but has agreed not to contest the outcome on cheese in the interests of speedy closure. "We are delighted to have been cleared of all wrongdoing in relation to milk and butter," Lucy Neville-Rolfe, an executive director at Tesco, said. "We disagree with the OFT's views on cheese. We firmly maintain that we are innocent of all allegations against us. But given the passage of time and the cost of litigation, we are keen to bring this lengthy and costly process to a close."

Morrisons – which also stood its ground throughout – is now entirely exonerated because it was only implicated in the now-defunct milk 2002 case. The chain has been outspoken in its criticisms of the OFT's handling of the investigation. In April 2008 the OFT was forced to issue an apology and pay £100,000 in damages to settle Morrisons' libel claim over a 2007 press release that a High Court judge slammed as "sensationalist publicity".

The supermarket chain said yesterday that the seven-year fight has cost it more than £1.5m, for which there is no possibility of redress. "Morrisons has always believed strongly that it had no case to answer and that it should never have been part of the OFT's inquiry," it said in a statement. "The OFT's decision to drop all allegations against Morrisons is therefore a welcome vindication."

Elsewhere in the supermarket sector, the tone was less sanguine. Insiders expressed frustration over the way the investigation has been conducted, and said that the OFT should be embarrassed by being forced to make such a climbdown after all the fanfare when the inquiry was first announced.

"The OFT acts as prosecutor, judge and jury, which in most other aspects of life would be regarded as unacceptable," a source at one supermarket said. "Elsewhere there are the checks and balances provided by the judicial process, but the question here is who controls the OFT?"

Under the current rules, any organisation taking a case of illegal activity to the OFT is eligible for immunity. The early resolution process adds to the pressure to "confess", claim critics. "Effectively what the OFT does is say 'we think you're guilty, if don't you 'fess up we'll give you a really large fine, but if you do then we'll give you 30 per cent off'," one insider said. "The pressure is immense."

Dairy products are not the OFT's only contretemps with the retail sector. Last month, it levied a record £225m fine for price fixing on two tobacco companies – Imperial and Gallaher – and 10 retailers including Asda, Morrisons, Somerfield and Shell. Only Sainsbury's avoided a penalty, thanks to the leniency policy. Allegations against Tesco in the investigation were dropped.

OFT: Ongoing investigations

*Last week the OFT issued its first salvo alleging price fixing by Virgin Atlantic and Cathay Pacific on flights between London and Hong Kong. Virgin robustly disputes the charges. Cathay will be immune from any penalties because it reported the alleged activities.

*Royal Bank of Scotland opted for "early resolution" last month in a price-fixing investigation into its Professional Practices Coverage Team. RBS has agreed to pay a fine of £29m, reduced from £34m by the bank's agreeing to co-operate. Barclays blew the whistle, and is therefore exempt from fines.

*The OFT is looking into "exit fees" charged by retirement homes when residents either sell or rent their properties. Some 26 retirement homes were contacted at the start of the investigation last year and the OFT is now considering representations received in return.

*The ongoing inquiry into alleged price-fixing by MasterCard and Visa in the "interchange" fees charged to retailers is on hold pending the conclusion of a similar investigation by the European Commission. The OFT will make a decision on the way forward after the judgment from the General Court.