It’s been a big week in franchising with a 325-page report released on the Fairness in Franchising Inquiry by the Parliamentary Joint Committee on Corporations and Financial Services.
Franchising is big business in Australia, but the sector has been getting a lot of bad press over the last few years. The situation is not looking any brighter on the back of a damning report by the committee.
The committee was overwhelmingly critical of the existing regulatory framework, indicating that it has manifestly failed in its purpose to protect franchisees from systematic poor conduct and exploitative behaviour.
The report compared the current situation and “the extent of poor corporate governance” to that of the financial services sector uncovered in last year’s banking royal commission.
As a result, the committee is proposing substantial changes to the Franchising Code of Conduct as well as the responsibilities and powers of the regulator. The changes are intended to drive a fairer, more transparent system and address the alleged power imbalance that favours franchisor over franchisee.
If implemented, these changes are sure to shake up the industry and could impact how you operate your franchise business.
What does the franchise inquiry report recommend for franchisors?
The report makes a number of recommendations (71, in fact) with a general aim to develop greater:
- transparency and accountability
- fairness and protection
- education and awareness
The recommendations include:
- establishing a taskforce to examine the feasibility and implementation of a number of the recommendations
- new laws to introduce civil penalties and infringement notices for breaches of the Franchising Code
- mandatory disclosure, in percentage terms, or all supplier rebates, commissions and payments relating to the supply of goods and services to franchisees
- the creation of a public franchise register, incorporating annual updates to disclosure documents and template franchise agreements
- amending the Franchising Code to allow franchisees to unilaterally exit a franchise agreement under certain circumstances
- introduce protections for franchisees required to undertake significant capital expenditure
- new powers for the ACCC to investigate and act upon “burning and churning” by franchisors looking to profit from upfront fees and to prohibit the marketing and sale of franchises by brands with a history of such practices
- changing the dispute resolution process under the Franchise Code to include:
- mandatory binding arbitration with the capacity to award remedies, compensation, interest and costs
- allowing a mediator or arbitrator to undertake multi-franchisee resolutions
- whistleblower protections to address intimidatory behaviour and misconduct by franchisors
- the taskforce to examine the appropriateness of making unfair contract terms in franchise agreements illegal and for civil penalties to apply
- the development of a FranchiseSmart website for franchises along the lines of the ASIC MoneySmart service to provide education and advice
Changes have also been recommended to the Oil Code of Conduct that specifically relate to franchising.
If adopted, the recommendations will have a significant impact on the industry and the franchisors and franchisees operating within it.
What do the franchise inquiry recommendations mean for your franchise business?
With an election later this year we’re not expecting there will be any change to the law for some time; however, with franchising under the spotlight, franchisors need to adopt a collaborative approach, have best-of-breed financial reporting, great governance, robust compliance programs and provide support to franchisees to ensure access to finance and continued growth.
If you’d like to learn more about the recommendations in the Fairness in Franchising Inquiry or need advice on how the report could affect you as a franchisor, get in touch with BlueRock’s franchising specialists.
We can help you ensure your franchise business is ready for any changes.