The Parliamentary Joint Committee on Corporations and Financial Services (Committee) recently handed down its 396 page report that examined the operation and effectiveness of the Franchising Code of Conduct in Australia.
The bipartisan report was highly critical of the practices of a number of players in the $170 billion franchising sector which, in 2016, was estimated to have contributed approximately 9% of Australia’s GDP. The report will have significant ramifications for franchisors and franchisees alike as it proposes substantial changes to the Franchising Code of Conduct as well as to the responsibilities and enforcement powers of the regulators, including ACCC and ASIC.
Although the Committee acknowledged that many franchisors have developed franchise systems that operate to the mutual benefit of the franchisor and their franchisees it found that, on balance, “many franchisors are abusing the power imbalance between themselves and their franchisees”. The Committee concluded that the current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance.
In a clear case of a few bad franchisors apples spoiling the bunch, the Committee went on to say that the actions of certain franchisors have caused enormous reputational damage to the sector and has taken the view that this needs to be rectified for the benefit of the entire franchising industry. In light of this finding, the Committee made a number of recommendations that will be considered in the context of legislative reform over the coming years.
Key recommendations of the Committee
Franchising Taskforce – The Committee has recommended that the Australian Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the Parliamentary Joint Committee's recommendations.
Disclosure – The Committee made significant recommendations around improving disclosure for franchisees, including:
a requirement to provide disclosure documents in electronic form;
requirements around the provision of earnings and financial information when franchises are sold or transferred; and
greater clarity, consistency and accountability with respect to the use and reporting of marketing funds.
Registration – The Committee has recommended that the Franchising Taskforce investigate options for a public franchise register with franchisors providing updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code.
Whistleblower protection for franchisees - The Committee has recommended that the whistleblower protection regime be extended to apply to franchisees and their employees, and that breaches of the Franchising Code by franchisors be included in the definition of ‘disclosable conduct’ under current whistleblowing protection laws.
Unfair contact terms – That the Franchising Taskforce examine the appropriateness of making unfair contract terms in franchise agreements illegal and for civil penalties to be established.
Penalties – The Committee noted that it is firmly of the view that the lack of consequences for breaching the Franchising Code undermines the ACCC's ability to ensure compliance with the code. The Committee considers that civil pecuniary penalties and infringement notices should be made available for all breaches of the Franchising Code and the penalty amounts should be similar to the penalties currently available under the Australian Consumer Law to ensure meaningful deterrence.
No churning and burning – ‘Churning’ refers to the repeated sale at a single site of a failed franchise to a new franchisee. ‘Burning’ refers to continually opening new outlets, some of which are unlikely to be viable, to profit from upfront fees, while leaving existing outlets to struggle and close. The Committee has recommended that the ACCC be given an intervention power to identify and act on the marketing and sales of franchises where a franchisor shows a track record of systemic churning and/or burning.
Education and advice – The Committee suggested that franchisees need to develop far greater awareness around the risks and responsibilities of being a franchisee. This includes pre-entry education and seeking appropriate advice about the franchise agreement, but also extends to financing, and the implications of retail lease arrangements.
Retail lease arrangements – The Committee has recommended that the Franchising Taskforce consider various matters, particularly in relation to the clarity, transparency and timeliness of the disclosure of retail lease agreements to the franchisee. The Committee also emphasises that franchisees should exercise particular caution around retail lease agreements that involve shopping centres.
Where to for franchisors and franchisees from here?
Although it may be some time before the recommendations in the report see the light of day, given the report had bipartisan support, it is likely that there will be significant changes ahead for the franchising legislative landscape. Franchisors who have not already implemented a franchising system that operates for the mutual benefit of the franchisor and their franchisees may find themselves needing to implement significant operational changes to their current business model when those changes come into effect.
With that said, provided franchisees and franchisors are complying with current laws, there is no need for any immediate change to business practices.
If you have any questions about your current compliance with current franchising laws, or any other legal questions relating to your business, please don’t hesitate to contact Tom Morgan from our Corporate and Commercial Team.