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In the face of negative publicity, franchise reform needs to remain targeted and effective

The franchise sector needs strong regulation but it's important that reform doesn’t make life unnecessarily complex for your average franchise business.

Franchising in Australia has a long history of successfully creating opportunities for small business owners. Unfortunately, the significant contribution the franchising sector makes to the Australian economy has recently been overshadowed by negative publicity attached to the sanctioning by the Fairwork Ombudsman of household names like 7-Eleven and Caltex as well as the ongoing investigations into Domino’s and Retail Food Group.

The behaviour of these industry heavy-weights has encouraged scrutiny of the perceived power imbalance between franchisor and franchisee and the limited enforceability of breaches.

While there are indeed unethical franchise operators that need to be regulated, it’s important that compliance around the Franchising Code of Conduct doesn’t make life unnecessarily complex for your average franchise business. So, how to balance to scales?

Assessing the operation and effectiveness of the Franchising Code of Conduct

In a move to restore confidence in the franchise sector, Nationals Senator John Williams (NSW) successfully referred an Inquiry into the operation and effectiveness of the Franchising Code of Conduct to the Parliamentary Joint Committee on Corporations and Financial Services on 22 March 2018.

The Inquiry aims to examine the:

  • operation and effectiveness of the Code, with a particular focus on the issue of full disclosure
  • effectiveness of dispute resolution
  • impact of consumer law unfair contract provisions on franchise agreements
  • adequacy of termination provisions
  • imposition of restraints of trade
  • enforcement of breaches.

What is the story emerging from the Parliamentary Inquiry submissions?

Earlier this year, the Inquiry called for submissions from the public in order to identify widespread issues and recommend reform within the franchise sector. 44 interested parties took the time to respond by the submission closure date of 4 May 2018, with a number of significant themes emerging:

  • Australia already has the most regulated franchise system in the world, so contributors are hoping for an emphasis on transparency rather than further regulation.
  • The disclosure document is too complicated and legalistic. Franchisees need access to a simple summary of fees and levies, so they can avoid unexpected costs.
  • Steps should be taken to ensure that advertising levies are used to drive sales and revenue for franchisees rather than being viewed as a revenue stream for franchisors.
  • Franchisors should not be pocketing generous rebates from suppliers to the detriment of franchisees. Franchisees should be seeing the benefits of group buying power rather than paying inflated prices for goods that they could source at competitive prices.
  • There needs to be increased effort to ensure that franchisees enter into the business with their “eyes wide open”.  A failure to disclose worst case scenarios and inaccurate profit predictions are the most commonly mentioned concerns.
  • Franchisees require an ongoing commitment from franchisors to provide support and education.
  • The prohibitive costs and unreasonable timeframes associated with dispute resolution need to be overhauled.

What are the best outcomes of the Parliamentary Inquiry into the Franchising Code of Conduct?

The challenge faced by the Parliamentary Committee is to find a way to expose the unethical operators without further increasing the complexity of the Franchising Code of Conduct. Business models that depend on a continuous signing of franchisees, with little commitment to providing ongoing support or prioritising franchisee profitability, are bringing the industry into disrepute.

Reputable franchise systems understand that the success and expansion of their brand is intrinsically tied to the success of their franchisees. These systems give careful consideration to who they will choose as prospective partners – they’re invested in full disclosure as they see this as a cornerstone to a healthy franchisee/franchisor relationship.

With these systems, there is an emphasis on providing high-level support and education and all steps are taken to avoid failure.

Franchising has proved to be an ideal system to support those who wish to start a business. However, the Committee must remember that with all business ventures comes a certain amount of risk. Even with changes to the Code and high levels of support from franchisors some franchises will fail.

An ideal result will see the Inquiry make recommendations that force a change in the behaviour of the unscrupulous operators but do not over-regulate and increase the complexity of the Code. This is a difficult balancing act but a positive change will no doubt restore confidence in the sector without affecting business viability.

The report of the committee is due out on 30 September 2018.

Feel free to contact our specialised legal team if you’d like advice on the Franchising Code or franchisor/franchisee obligations.

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