The Federal Government commissioned review of the Franchising Code of Conduct has found it is generally fit for purpose. However it has made a tranche of recommendations, including licensing franchisors.
The independent review by Dr Michael Schaper suggests a system of licensing franchisors could lead to improved Code compliance.
“There has been increasing discussion amongst the sector about the desirability of a more fundamental shift in regulatory approach, to address persistent issues in the sector without necessarily imposing a greater degree of complexity or regulatory burden than the current Code.
“However, a comprehensive analysis is needed before embarking on such a fundamental shift,” he said.
Franchising Code review recommendations
The just-released review indicates some changes would enhance the Code.
Schaper suggests it is remade, largely in its current format; that a clear statement of purpose should be included; that service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code; the definition of motor vehicle dealership in the Code should be amended to clarify that it includes all sales, service and repair work.
He also recommended reviews of the Code should be conducted in five yearly cycles in the future.
Entering into a franchise agreement
The review found the Code requirements relating to disclosure are comprehensive.
“They can sometimes be burdensome for franchisors to comply with, and burdensome for franchisees to comprehend and act on. Any further attempt to address concerns by mandating greater disclosure is likely to be counterproductive,” the report reads.
Schaper noted it is impractical to mandate compulsory pre-entry education and advice, but suggested improvements through enhanced education and advice.
The review stated that “all franchise agreements ought to provide a reasonable opportunity to make a return on investment (including provision for compensation in the event of early termination)”.
It also commented on the value of the Franchise Disclosure Register but noted it is not well-used, and greater enforcement of the listing requirements would be beneficial.
During the franchise relationship
Franchise systems should be encouraged, through education, to consult franchisees regarding any major change to the business model during the term of the franchise agreement, the review suggests.
Ending the franchise agreement
Schaper’s review recommended simplifying the provisions of termination for serious breaches without diminishing franchisee protection.
The review also suggested more work should be undertaken to limit the use of unreasonable restraints of trade in franchise agreements.
Eight recommendations in regulatory oversight and dispute resolution
The review suggests the following changes:
- The introduction of a comprehensive online government resource similar to ASIC’s MoneySmart website (‘FranchiseSmart website’).
- Australian Government agencies should collaborate with the sector to develop best practice guidance and education.
- ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution.
- The Australian Government should assist franchisees to access low-cost legal advice before utilising formal alternative dispute resolution.
- The Australian Government should consider an appropriate role for franchise interests when implementing its commitment to a designated complaints function for the ACCC.
- Franchisees should be able to seek a ‘no adverse costs’ order when bringing a matter against a franchisor for breach of the Code or the Australian Consumer Law.
- The scope of penalties under the Code and associated investigation powers and infringement notice regime in Part IVB of the CCA should be increased.
- The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship.
Industry support for the findings
The Franchise Council of Australia (FCA) has welcomed the findings, and is now reviewing the details.
Brendan Green, chair of the FCA, said “As the Federal Government acknowledges, the Franchising Code of Conduct predominantly works well for both franchisees and franchisors, both of whom the FCA represents.
FCA focused on driving excellence
“We made clear in our consultation and submission that there are areas where the Code does need to be updated to embrace technology and the reality of doing business in 2024. There is also significant and costly duplication which needs to be addressed – a move that would deliver an immediate $10 million in savings.
“Our objective as the peak body for this important sector is to drive excellence while also continuing to build connectivity, community and support across all members, whether franchisors or franchisees,” said Green.
“This includes an important focus on promoting and supporting our members in regional and rural Australia who are even more relied on at a community level to provide key services.”
ASBFEO welcomes the review
The Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, has also welcomed the release of the review.
Billson said “Dr Schaper has produced a well-researched and thoughtful report for the Australian Government and we support the report and the majority of his sensible recommendations to strengthen the Franchising Code and regulatory landscape for small and family businesses.
“We need to have the right balance between regulatory safeguards and conduct expectations for franchisees and franchisors while providing for incentives for businesses to invest, develop, take risks, boost productivity, innovate and share success in franchise partnerships.”
Billson said he would “enthusiastically” work with the Government and officials to explore the expanded educative role the recommendations suggest.
“We support the recommendation for a clear statement of purpose to be inserted into the Code to explicitly state why it exists and what it seeks to achieve,” he said.
“Similarly, we back changes that would also provide a clear statement to prospective franchisees that while purchasing a franchise provides an opportunity to make a reasonable return, it does not guarantee a fixed rate of return. The statement would also outline other terms of their arrangement, so they have quality information to make an informed decision.”
Read the review here.
