On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its report on the operation and effectiveness of the Franchising Code of Conduct (Report). The Parliamentary inquiry was established in early 2018 to address alleged systemic issues within the franchising sector.
The Report found that:
‘the current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance’.
The Report proposes that a two-pronged approach be adopted, being:
- to implement changes to the law to afford the ACCC more responsibilities and give (in some cases) greater enforcement powers and to introduce more substantial penalties for offending Franchisors; and
- to make substantial amendments to the Franchising Code of Conduct (Code).
Set out below is a summary of some of the key recommendations of Committee as set out in the Report.
1. Establishing a Franchising Taskforce
The Report recommended that a Franchising Taskforce be established to monitor the feasibility and implementation of the recommendations in the Report. The Taskforce will consist of various stakeholders, including representatives from the Department of Treasury, Department of Jobs and Small Businesses, and the Australian Competition and Consumer Commission (ACCC).
2. Greater disclosure of information in the pre-contractual stage
The Report focusses on increasing the disclosure obligations of Franchisors, including:
- requiring Franchisors to provide the information statement as a separate document that is subject to disclosure and cooling off period provisions in the Code; and
- requiring vendors in sales of franchises to provide prospective purchasers the prior two years’ Business Activity Statements, and profit and loss statements balance sheets and an assessment of labour costs for that particular franchise.
3. Introducing greater protections against third line forcing
The Report criticised third line forcing (being the practise of requiring Franchisees to purchase goods and services from either the Franchisor or a mandated supplier) as facilitating conflicts of interest where financial incentives exist for Franchisors. The Report recommended that:
- the ACCC be given greater power to investigate these conflicts of interest; and
- Franchisors be obliged to disclose in percentage terms the financial incentives attached to the supply of goods and services to Franchisees.
4. Introducing civil penalties and infringement notices
The Report recommends introducing new law to impose various civil penalty and infringement notice provisions that primarily impact Franchisors, including:
- introducing civil pecuniary penalties and infringement notices for all breaches of the Franchise and Oil Codes. The penalties are to be in alignment with penalties for breach under the Australian Consumer Law; and
- imposing civil penalties and infringement notices on Franchisors for the use of unfair contract terms.
5. Enhancing the powers of the ACCC
- The Report recommended that the ACCC be given greater powers of enforcement and investigation, including:
- granting ACCC the power to intervene and prevent Franchisors from marketing and selling franchises where they have a record of churning (repeated sale of a failed franchise to new Franchisees) or burning (continually opening new franchises which are unlikely to succeed in order to benefit from upfront fees); and
- the Australian Government providing the ACCC with sufficient resources to investigate all whistle-blower reports or complaints about unfair contract terms.
6. Establishing Franchisee termination rights under certain circumstances
Overall, it appears from the Report that Franchisors will be the most significantly impacted by the proposed changes to the law and to the Code arising from the Committee’s recommendations.
Specifically, Franchisors will need to be ready to respond to amendments to the law and the Code including, review and amendment of Franchise Agreements, changing disclosure practises and, to the extent necessary, changing their operational model.
Hall & Wilcox will continue to monitor how the finding of Report will be implemented and provide updates on any proposed changes to the law and to the Code as they arise.
Hall & Wilcox will be running round table discussions on the outcomes of the Report nationally in the coming weeks. Click here to register your interest for these sessions.
This article was written with the assistance of Ashlee Johnson, Law Graduate.