Australia: Churning and burning – Committee report fires up franchising sector reform

WHO SHOULD READ THIS

  • Franchisors and franchisees.

THINGS YOU NEED TO KNOW

  • A Parliamentary inquiry has recommended numerous changes to the Franchising Code of Conduct, which may affect the way your franchise operates.

WHAT YOU NEED TO DO

  • Stay tuned for updates, and ensure that your franchising documentation is up to scratch.

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) published the report, ‘Fairness in Franchising’ (Report), outlining the findings of its inquiry into the operation and effectiveness of the Franchising Code of Conduct (Franchising Code).

Burning issues uncovered

The Committee found that:

‘The current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance.

The actions of certain franchisors have caused enormous reputational damage to the sector.  This needs to be rectified for the benefit of the entire franchising industry.  The proposed reforms outlined by the committee in this report are substantial, and many.’

A key issue highlighted by the Committee is that too little information is required to be provided to franchisees during pre-contractual negotiations.  In addition, the fact there is little incentive for franchisors to remove unfair contract terms from their franchise agreements was observed to be a key contributor to the unbalanced nature of franchise arrangements.

Hot spots for reform

The Committee recommended a multifaceted approach to improved regulation in the franchising sector:

  • first, a suite of changes to the Franchising Code, including the introduction of civil pecuniary penalties and infringement notices for all breaches, increased and prescribed penalty amounts;
  • second, expansion of the responsibilities and enforcement powers of the Australian Competition and Consumer Commission (ACCC), to conduct investigations aimed at uncovering and eliminating misconduct and exploitative behaviour; and
  • third, creation of a Franchising Taskforce to examine the feasibility and implementation of Committee recommendations.

These recommendations are designed to lift standards of behaviour across the industry and to rebuild public confidence in Australian franchising.

Firing up ACCC powers

The Committee recommended changes to the responsibilities and powers of the ACCC, such as providing the ability to intervene and prevent the marketing and sale of franchises where a franchisor shows a track record of churning and/or burning.

The Committee also called upon the Australian Government to adequately resource the ACCC to enable it to appropriately fulfil these new obligations, and exercise its powers to investigate all complaints or whistleblower reports about unfair contract terms.

Shedding light on legislative amendments

The Committee proposed substantial changes to the Franchising Code, including:

  • changes to the upfront precontractual disclosure requirements, such that:
    • the disclosure document and franchise agreement must be made available in both hard copy and electronic form;
    • the information statement must be provided to franchisees as a separate document that is also subject to the disclosure and cooling off provisions, and not as an attachment to the Franchising Code;
    • a vendor must provide prospective purchasers two years’ Business Activity Statements, profit and loss statements, balance sheets and an assessment of labour costs for that particular franchise;
    • all financial information relating to the franchise business must not be provided to the franchisee separately to the disclosure document (that is, it must be provided in or attached to the disclosure document);
    • the actual financial statements for the marketing fund account be provided to franchisees within 30 days of the end of each quarter with sufficient detail as to be prescribed in the Franchising Code and relevant standards set by the Australian Accounting Standards Board; and
    • employment matters (e.g. Awards, minimum wages, overseas workforce issues) are included in mandatory disclosure;
  • introducing mandatory pre-entry education, by requiring the franchisor to provide each prospective franchisee a copy of the ACCC franchisee manual at the same time it provides the disclosure document;
  • requiring supplier rebates, commissions and other payments to be disclosed as a percentage of the purchase price on each transaction;
  • requiring franchisors to disclose (in percentage terms) the financial incentives attached to the supply of goods and services to franchisees, in an effort to combat third line forcing and associated conflicts of interest;
  • clarifying the cooling off period  and franchisee’s rights during this time;
  • giving franchisees exit rights (i.e. the right to exit a franchise agreement) under certain conditions, which vary according to the situation;
  • extension of the whistleblower protections  to apply to franchisees, their employees and breaches of the Franchising Code of Conduct;
  • introducing binding commercial arbitration  as a dispute resolution mechanism; and
  • creating a legal avenue for franchisees to collectively bargain with their franchisor, by facilitating collective action (e.g. joint negotiation, mediation and arbitration) to resolve problems and disputes.

Franchise Taskforce to spark further change

Lastly, the Committee recommended the establishment of an inter-agency franchising taskforce  to examine the feasibility and implementation of the Committee’s recommendations.  The Franchising Taskforce is to be comprised of key stakeholders such as representatives from the Department of the Treasury, Department of Jobs and Small Business and the ACCC (where appropriate).

The Taskforce will be responsible for:

  • reviewing the use of third party brokers in selling franchise businesses and the continued appropriateness of the use of ‘no agent’ and ‘entire agreement’ terms in franchise agreements;
  • investigating options for a public franchise register with franchisors providing updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code;
  • considering whether the ACCC should conduct an inquiry into exploitative behaviour around over-ordering;
  • examining conflicts of interest associated with supplier rebates and third line forcing;  and
  • evaluating the appropriateness of amending the Australian Consumer Law to provide that:
    • unfair contract terms are prohibited in small business contracts and franchise agreements; and
    • civil pecuniary penalties and infringement notices apply where the provision of a standard form contract (franchise agreement) to a small business contains an unfair contract term.

Recommendations set to simmer before legislation comes to the boil

While the Committee recommendations are significant and numerous, substantive regulatory reform is still months, if not years, away.  In the meantime, franchisors should keep in mind the concerns raised by franchisees throughout the inquiry, and proactively address these issues through transparent disclosure and open communication.

We will continue to monitor developments in this space, and provide updates as relevant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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