Australia: The Franchising Taskforce Issues Paper: a step closer to reform of the franchise sector

Last Updated: 18 September 2019
Article by Frances Wheelahan, Theonie Scott and Alice Goudie

On 23 August 2019, the franchising taskforce (Taskforce) released its Issues Paper. The Taskforce was established by the Government in response to the recommendations of the Inquiry into the Operation and Effectiveness of the Franchising Code of Conduct (Inquiry).

The Issues Paper seeks feedback from the franchising sector in relation to a selection of the Inquiry's 71 recommendations contained in the Fairness in Franchising Report which was released in March 2019 (Report).1 The Issues Paper provides an opportunity for franchisors and franchisees and others involved in the sector to comment on some of the significant recommendations arising from the Report.

The Taskforce will use the feedback it receives to assist the Government to formulate its position on the recommendations contained in the Report. Ultimately, we expect this will result in the Government moving a step closer to significant reform of the franchise sector in Australia.

Recommendations under consideration

Rather than seeking submissions on all of the specific recommendations made in the Report2, the Taskforce has taken a principles based approach to the issues. The Issues Paper identifies seven 'Draft Principles', and includes specific questions aimed at both franchisees and franchisors in relation to each.

While this approach risks traversing ground that has already been covered in detail by the submissions made to the Inquiry, it seems to be a sensible and manageable approach to tackling the numerous and in some cases complex recommendations.

The Draft Principles

Business Phase Draft Principle
Entering a franchising agreement
  1. Prospective franchisees should be able to make reasonable assessments of the value (including costs, obligations, benefits and risks) of a franchise before entering into a contract with a franchisor.
  2. Franchisees and franchisors should have 'cooling off' time to consider whether the relationship is right for them after signing.
Operating a franchise
  1. Each party to a franchise agreement should be able to verify the other party is meeting its obligations and is generating value for both parties.
  2. A healthy franchising model fosters mutually beneficial cooperation between the franchisor and the franchisee, with shared risk and reward, free from exploitation and conflicts of interest.
  3. Where disagreements turn into disputes, there is a resolution process that is fair, timely and cost effective for both parties.
Exiting
  1. Franchisees and franchisors should be able to exit in a way that is reasonable to both parties.
Regulatory framework across all phases
  1. The framework for industry codes should support regulatory compliance, enforcement and appropriate consistency.

Disclosure to franchisees and prospective franchisees

Improved disclosure is one of the key focus areas of the Taskforce. Disclosure to prospective franchisees, disclosure in relation to marketing funds, disclosure in relation to supply arrangements, rebates and practices, and disclosure of end of term arrangements for goodwill have all been selected as issues for review by the Taskforce.

In parallel, the ACCC last week released a report focused on the 'Disclosure practices in food franchising', identifying that franchisors need to significantly improve compliance with existing disclosure obligations under the Franchising Code of Conduct (Code).3

There is increased pressure from regulators and government for greater disclosure by franchisors, especially in relation to financial records and performance, as well as more frequent reporting. One of the recommendations included mandating the provision specific business information to prospective franchisees including:

  • the prior two years' Business Activity Statements;
  • a profit and loss (income) statement and balance sheets (statement of financial position); and
  • an assessment of labour costs.

Others included providing the actual financial statements for marketing fund accounts to franchisees within 30 days of the end of each quarter and disclosing further information about supplier rebates.

There is an opportunity for franchisors to provide feedback to the Taskforce on the impact of increased disclosure obligations on their businesses, in particular how easy or difficult would it be to provide information in relation to supplier rebates. For example, the Taskforce seeks feedback on whether franchisors would consider disbanding or not having a marketing fund if disclosure obligations increased.

As identified in the Report, there is a risk that these proposed changes may place a significant administrative burden on franchisors. Rather than requiring franchisors to provide franchisees with more information more frequently, a focus on better quality and more easily digestible information may be a more useful approach to reform.

Termination

Termination arrangements are the focus of Draft Principle 6 of the Issues Paper, reflecting the recommendations made in relation to exit arrangements in Chapter 11 of the Report. The Report expressed a view that the exit arrangements available in franchising relationships were often asymmetric and heavily weighted in favour of franchisors.

The Code currently contains rights for franchisors to terminate in certain circumstances, however there has been criticism that similar rights are not enshrined in the Code for franchisees. The broadening of franchisees' right to terminate, especially in circumstances of 'no fault', is being considered by the Taskforce.

The Inquiry specifically recommended that amendments be made to the Code that would give franchisees the right to terminate franchise arrangements in circumstances described as 'hardship', 'exploitation' and 'business failure'. The Taskforce acknowledges in the Issues Paper that business failure is complex and not always due to factors that are within the direct control of either the franchisor or the franchisee.

These proposed changes to Code would be very significant and would need to be carefully articulated. We suspect that if these changes were adopted they would require a number of franchisors (including 'well behaved' franchisors) to reconsider their business models.

Franchisors are invited by the Taskforce to provide feedback on the effect of franchisees being granted the right to terminate in these scenarios and the overall impact that this would have on their franchise system.

Oil Code

The Taskforce has also indicated that the Oil Code will be aligned, as much as possible, with the Code. Therefore, any business regulated under the Oil Code should continue to follow the proposed changes to the Code.

Next steps

The deadline for submissions on the Issues Paper is Friday, 20 September 2019. To encourage open dialogue on the proposed changes, the Taskforce has stated that any response it receives won't be published and will be kept confidential.

Once submissions are closed, the Taskforce will move quite quickly to the preparation of a Regulatory Impact Statement in October 2019.

The Issues Paper serves to illustrate the key areas of focus for potential reform of the franchise sector. It is also the opportunity for franchisors and franchisees to reflect on the potentially significant impact these reforms may have on their businesses, with changes to the Code likely to be implemented in 2020.

Footnotes

1 The Inquiry's recommendations can be found in the Fairness in Franchising report here: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising/Report

2 See our article here which discusses the key recommendations arising from the Report.

3 ACCC, Disclosure practices in food franchising: https://www.accc.gov.au/system/files/1620_Disclosure%20of%20practices%20in%20food%20franchising_D05.pdf

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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