Assisted by Jason Vo
If you are a franchisor or franchisee, you will want to pay attention and be abreast of the key changes the Government is proposing to make to the Franchising Code of Conduct.
Further to our earlier article which provided an overview of the recommendations made by the 2019 Parliamentary Joint Committee on the Corporations and Financial Services inquiry into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising1 ("the Report"), after much anticipation, the Federal Government has taken the first steps to improving transparency and business relationships in the franchising sector by announcing a series of proposed changes to the Franchising Code of Conduct. ("the Code")
The changes proposed by the Government aim to correct the entrenched imbalance of power between franchisees and franchisors and aim to strengthen the regulatory framework within four facets of the franchising experience, which include:
- Entering a franchise agreement
- Operating a franchise
- Exiting and end of term agreements
- Code compliance
The Government's key actions include:
- doubling the penalties that apply for a breach of the Franchising Code (from $66,600 to $133,200);
- strengthening dispute resolution options through the introduction of conciliation and voluntary binding arbitration, in addition to mediation;
- targeted improvements to disclosure, particularly those relating to supply arrangements, marketing funds, exit arrangements and significant capital expenditure;
- a new mandatory Key Disclosure Information Fact Sheet to improve and simplify upfront disclosure, highlighting key information, and assisting franchisees to understand the obligations and risks associated with entering a franchise agreement;
- increasing disclosure to franchisees on supply arrangements and rebates received by franchisors by amending the Code to require franchisors to disclose information on supplier rebates, commissions and other payments and to disclose any master franchisor controls and/or rebates from suppliers;
- improving information provided to franchisees in relation to the use of marketing and other cooperative funds by amending the Code to clarify the requirements relating to the treatment and reporting of cooperative funds where regular payments are required to cover advertising and marketing activities;
- increasing awareness of the effect of restraint of trade clauses once a franchisee has exited a franchise agreement and clarify what constitutes a breach of clause 23 of the Franchising Code by amending this clause;
- strengthening the ability of franchisees to exit a franchise agreement before the end of the prescribed term and increase disclosure of end-of-term arrangements to franchisees for goodwill;
- strengthening the dispute resolution framework by expressly allowing multi-party dispute resolution under the Code, conciliation and voluntary binding arbitration;
- consultation on the development of a public register of franchisors, to increase transparency in the sector and increase the ability of prospective franchisees to make an informed decision before entering a franchise agreement;
- prohibiting (and introducing pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee); and,
- creating a franchising website to make it easier for franchisors and franchisees, including prospective franchisors and franchisees, to access information and support.
What's next? Implications for franchisors and franchisees
Although the response by the Government does not provide any timelines for the implementation of the proposed reforms to the Code, the proposed reforms are substantial and are likely to have additional compliance cost for franchise systems and significant impacts on both franchisors and franchisees.
In the meantime, franchisors should remain proactive and continuously review their business model and agreements, with a focus on being reasonable and fair. On the other hand, franchisees should protect their own interests by undertaking a thorough due diligence process prior to buying a franchise.
Coleman Greig will monitor the implementation of the proposed reforms and provide updates as they arise, so please stay tuned.
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.