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The results of the franchising inquiry are in – Get set for reform

20 March 2019
racha abboud
Read Time 4 mins reading time

The report for the parliamentary inquiry into franchising has been released and contains 71 recommendations for the sector, after  identifying evidence of systemic abuse throughout the course of the inquiry.

The report is highly critical of the Franchising Code in its current form, stating that “developers of this regulatory framework promoted it as being designed to address the power disparity … without unduly constraining the market. In practice the framework has not achieved that outcome and has in some cases further entrenched the power imbalance.”

In developing the recommendations, the committee said  it recognised and took into account that not all franchisors are doing the wrong thing by their franchisees.

Regardless, it would be highly prudent for ALL franchisors to read the report and its recommendations thoroughly, and to review their practices ahead of legislative changes to ensure franchisees are treated fairly and ethically.

Key recommendations

The report recommends changes to the Franchising Code of Conduct, sections of the Oil Code of Conduct relevant to franchising, and to the responsibilities and powers of the regulator.

  • Establishment of a Franchising Taskforce by the Australian Government: The Taskforce should be an interagency taskforce and include representatives from the Department of the Treasury, the Department of Jobs and Australian Competition and Consumer Commission (ACCC). The Franchising Taskforce would be responsible for further investigation of the report’s recommendations and their implementation.
  • Franchisees should develop a national body: The Committee found that franchisees were underrepresented by the Franchise Council and that relevant government departments and agencies should be aware of the risk of franchisors and their representatives in dominating any debate of practices within the sector.
  • Greater disclosure: This includes:
    • providing the disclosure agreement electronically;
    • providing two years of business activity statements, a profit-and-loss income statement, balance sheets and an assessment of labour costs during the sale/transfer of a franchise;
    • increasing clarity, consistency and accountability in the use of and reporting of marketing funds including the provision of statements quarterly, instead of annually; and,
    • an investigation by the Franchising Taskforce for the establishment of a public franchise register which would require franchises to provide up-to-date disclosure documents and template franchise agreements each year, with civil penalties for non-compliance with the Franchising Code.
  • Third line forcing and supplier rebates: Recommendations by the Committee focus on increased transparency and accountability. Franchisors must disclose in percentage terms of all supplier rebates, commissions and other payments in relation to the supply of goods and or services. The Committee has also recommended that the ACCC collect data on these conflicts of interest. If implemented, the disclosure would make it easier for franchisees to gain accurate information on the business’ profitability.
  • Protections for whistleblowers: The committee recommends measures that would reduce intimidation and as recommended in its 2017 Whistleblower Protections report , whistle-blower protection should apply to franchisees and their employees. Further, the committee recommended that breaches of the Franchising and Oil Codes by franchisors be included in the definition of disclosable conduct.
  • Unfair contract laws: The Franchising Taskforce should investigate making unfair contract terms in franchise agreements illegal and subject to penalties.
  • Cooling off period: The report contains several recommendations to simplify the triggering and timing of the cooling off period, and includes an extension of the cooling off provisions so that they apply to transfers, renewals and extensions.
  • Exit rights and goodwill: A change to the Franchising Code to allow franchisees to terminate their franchise agreement under certain conditions similar to the franchisor’s rights of termination. The Committee also recommended the proposed Franchising Taskforce examine allocation of goodwill in franchise agreements and franchisee protections in instances when significant capital outlay is needed towards the end of the term of a franchising agreement.
  • Collective action: The Australian Government should implement the ACCC’s proposal for a class exemption so that franchisees can legally collectively bargain with their franchisor. In addition, franchisees should be provided with tools such as joint negotiation to undertake collective action.
  • Dispute resolution and arbitration: The Committee recommends dispute resolution under the Franchising Code be amended to include binding arbitration and powers for a mediator/arbitrator to undertake multi-franchisee resolutions when disputes of a similar nature arise.
  • Enhancement and alignment of the Industry code: The Committee recommended the following measures:
    • financial penalties and infringement notices for all breaches of the Franchising and Oil Codes;
    • penalties should be aligned with Australian Consumer Law;
    • the Competition and Consumer Act, and Franchising Code should be amended to reflect the ACCC’s proposed penalty regime;
    • the inclusion of a ban on unilateral or retrospective variations to terms and conditions in the Franchising Code;
    • the Oil Code be amended to align with the Franchising Code; and,
    • reforms be identified by the Franchising Taskforce to support fair handling of capital intensive stock when franchise agreements between car manufacturers and new car dealers aren’t renewed.
  • No churning and burning: The ACCC should be given an intervention power to identify and act on the marketing and sales of franchises where there is evidence of systemic churning and/or burning by a franchisor.
  • Increased education and advice: Amongst the recommendations is the establishment of a website by the ACCC to educate and provide advice to franchisees, in addition to greater education and professional advice (including retail leasing arrangements and financing) prior to entering the sector.
  • Retail lease arrangements: The Committee recommends the Franchising Taskforce investigate retail lease arrangements; consider the clarity, transparency and timeliness of the disclosure of these agreements to franchisees.

We do not have a clear picture as to how the sector will be reformed as many recommendations in the report have been referred to the Franchising Taskforce for further investigation into their practicality and delivery.

Small Business Minister Michaelia Cash has said the Australian Government will consider the report’s recommendations before determining how to proceed. Given the upcoming Federal election, it is possible that it will take some time for an official Government response to the recommendations.

Franchisors who are doing the right thing need not fear the recommendations and subsequent changes, however, it’s essential that all franchisors review all aspects of their business model and should seek advice to ensure that they are doing the right thing legally and ethically by franchisees.

View the full report here.

Read the Franchise Council’s response here.

For more information on the recommendations and how they may impact your franchise, or for advice regarding your current franchise model, please contact us.

This article was written by Racha Abboud, Principal Lawyer – Commercial.

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The results of the franchising inquiry are in – Get set for reform

20 March 2019
racha abboud

The report for the parliamentary inquiry into franchising has been released and contains 71 recommendations for the sector, after  identifying evidence of systemic abuse throughout the course of the inquiry.

The report is highly critical of the Franchising Code in its current form, stating that “developers of this regulatory framework promoted it as being designed to address the power disparity … without unduly constraining the market. In practice the framework has not achieved that outcome and has in some cases further entrenched the power imbalance.”

In developing the recommendations, the committee said  it recognised and took into account that not all franchisors are doing the wrong thing by their franchisees.

Regardless, it would be highly prudent for ALL franchisors to read the report and its recommendations thoroughly, and to review their practices ahead of legislative changes to ensure franchisees are treated fairly and ethically.

Key recommendations

The report recommends changes to the Franchising Code of Conduct, sections of the Oil Code of Conduct relevant to franchising, and to the responsibilities and powers of the regulator.

  • Establishment of a Franchising Taskforce by the Australian Government: The Taskforce should be an interagency taskforce and include representatives from the Department of the Treasury, the Department of Jobs and Australian Competition and Consumer Commission (ACCC). The Franchising Taskforce would be responsible for further investigation of the report’s recommendations and their implementation.
  • Franchisees should develop a national body: The Committee found that franchisees were underrepresented by the Franchise Council and that relevant government departments and agencies should be aware of the risk of franchisors and their representatives in dominating any debate of practices within the sector.
  • Greater disclosure: This includes:
    • providing the disclosure agreement electronically;
    • providing two years of business activity statements, a profit-and-loss income statement, balance sheets and an assessment of labour costs during the sale/transfer of a franchise;
    • increasing clarity, consistency and accountability in the use of and reporting of marketing funds including the provision of statements quarterly, instead of annually; and,
    • an investigation by the Franchising Taskforce for the establishment of a public franchise register which would require franchises to provide up-to-date disclosure documents and template franchise agreements each year, with civil penalties for non-compliance with the Franchising Code.
  • Third line forcing and supplier rebates: Recommendations by the Committee focus on increased transparency and accountability. Franchisors must disclose in percentage terms of all supplier rebates, commissions and other payments in relation to the supply of goods and or services. The Committee has also recommended that the ACCC collect data on these conflicts of interest. If implemented, the disclosure would make it easier for franchisees to gain accurate information on the business’ profitability.
  • Protections for whistleblowers: The committee recommends measures that would reduce intimidation and as recommended in its 2017 Whistleblower Protections report , whistle-blower protection should apply to franchisees and their employees. Further, the committee recommended that breaches of the Franchising and Oil Codes by franchisors be included in the definition of disclosable conduct.
  • Unfair contract laws: The Franchising Taskforce should investigate making unfair contract terms in franchise agreements illegal and subject to penalties.
  • Cooling off period: The report contains several recommendations to simplify the triggering and timing of the cooling off period, and includes an extension of the cooling off provisions so that they apply to transfers, renewals and extensions.
  • Exit rights and goodwill: A change to the Franchising Code to allow franchisees to terminate their franchise agreement under certain conditions similar to the franchisor’s rights of termination. The Committee also recommended the proposed Franchising Taskforce examine allocation of goodwill in franchise agreements and franchisee protections in instances when significant capital outlay is needed towards the end of the term of a franchising agreement.
  • Collective action: The Australian Government should implement the ACCC’s proposal for a class exemption so that franchisees can legally collectively bargain with their franchisor. In addition, franchisees should be provided with tools such as joint negotiation to undertake collective action.
  • Dispute resolution and arbitration: The Committee recommends dispute resolution under the Franchising Code be amended to include binding arbitration and powers for a mediator/arbitrator to undertake multi-franchisee resolutions when disputes of a similar nature arise.
  • Enhancement and alignment of the Industry code: The Committee recommended the following measures:
    • financial penalties and infringement notices for all breaches of the Franchising and Oil Codes;
    • penalties should be aligned with Australian Consumer Law;
    • the Competition and Consumer Act, and Franchising Code should be amended to reflect the ACCC’s proposed penalty regime;
    • the inclusion of a ban on unilateral or retrospective variations to terms and conditions in the Franchising Code;
    • the Oil Code be amended to align with the Franchising Code; and,
    • reforms be identified by the Franchising Taskforce to support fair handling of capital intensive stock when franchise agreements between car manufacturers and new car dealers aren’t renewed.
  • No churning and burning: The ACCC should be given an intervention power to identify and act on the marketing and sales of franchises where there is evidence of systemic churning and/or burning by a franchisor.
  • Increased education and advice: Amongst the recommendations is the establishment of a website by the ACCC to educate and provide advice to franchisees, in addition to greater education and professional advice (including retail leasing arrangements and financing) prior to entering the sector.
  • Retail lease arrangements: The Committee recommends the Franchising Taskforce investigate retail lease arrangements; consider the clarity, transparency and timeliness of the disclosure of these agreements to franchisees.

We do not have a clear picture as to how the sector will be reformed as many recommendations in the report have been referred to the Franchising Taskforce for further investigation into their practicality and delivery.

Small Business Minister Michaelia Cash has said the Australian Government will consider the report’s recommendations before determining how to proceed. Given the upcoming Federal election, it is possible that it will take some time for an official Government response to the recommendations.

Franchisors who are doing the right thing need not fear the recommendations and subsequent changes, however, it’s essential that all franchisors review all aspects of their business model and should seek advice to ensure that they are doing the right thing legally and ethically by franchisees.

View the full report here.

Read the Franchise Council’s response here.

For more information on the recommendations and how they may impact your franchise, or for advice regarding your current franchise model, please contact us.

This article was written by Racha Abboud, Principal Lawyer – Commercial.