Thinking | 8 October 2020

Fairness in Franchising: Government hands down response to franchising inquiry recommendations

By Jacqui Barrett and Rebecca Kazzi

Increased penalties for a breach of the Franchising Code of Conduct, improved access to dispute resolution processes, and improvements to disclosure are just a few of the recommendations of the Federal Government response to the 'Fairness in Franchising' report (Report) of the Parliamentary Joint Committee on Corporations and Financial Services.

The Report recognised a range of issues prevalent within the franchising sector, including non-compliance with the Code and unconscionable conduct by franchisors. It found that ‘the current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance’.

As an immediate response to the Report, the Government established a Franchising Taskforce in April 2019 in order to consider, and examine the feasibility of, the recommendations made in the Report.

Following on from the advice of the Franchising Taskforce, the key actions outlined by the Government, with a view to ensuring greater ‘fairness in franchising’ and to restore confidence in the industry, are as follows:

  1. Increased penalties for a breach of the Code

The Government response recognised that an effective enforcement regime is essential for ensuring compliance with Code.

As such, the Competition and Consumer Act will be amended in order to increase the maximum civil pecuniary penalty available for a breach of an industry code or the Code from 300 penalty units to 600 penalty units.

The Code will also be amended to apply penalties for breaches of clauses that relate to the use of marketing funds.

  1. Improved access to effective dispute resolution processes

Conciliation and a voluntary binding arbitration model will be introduced to complement existing dispute resolution options. The Code will be amended to expressly allow for multi-party dispute resolution.

Further, all franchisees will be enabled to access the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) dispute resolution services. The functions of the Franchising Mediation Adviser will also be incorporated into ASBFEO. The Government will appoint a Franchising Arbitration Adviser.

  1. Improvements to disclosure

A Key Disclosure Information Fact Sheet (Fact Sheet) will be introduced to improve upfront disclosure to franchisees. The Fact Sheet is intended to assist franchisees with understanding their obligations and the risks associated with entering into a franchise agreement.

Information to be contained in the Fact Sheet includes the disclosure of any interest which a franchisor may have in a leasing arrangement as well as a franchisee’s entitlement to goodwill.

Further, the Franchising Code will be amended to:

        • require franchisors to disclose information on supplier rebates, commissions and other payments;
        • require franchisors to disclose any master franchisor controls and rebates from suppliers; and
        • ensure that the disclosure document and franchise agreement is available to franchisees in both electronic and hardcopy form.
  1. Consultation on the development of a public register of franchisors

The Government will work towards the development of a public register of franchisors ‘to increase transparency in the sector and the ability of prospective franchisees to make an informed decision before entering a franchise agreement’.

Other actions

The Government has indicated that it will consult with the franchising sector to develop new provisions in the Code which facilitate negotiated early exit from franchising agreements to fairly balance the rights and interests of franchisors and franchisees. Franchisors will also be required to clarify a franchisee’s entitlement to goodwill in end-of-term arrangements in the franchise agreement.

The Report found that the Code did not place a sufficient duty on the stronger party (ie the franchisor) to conduct training in relation to the Code. As a result, the Government will also encourage prospective franchisees to undertake free online training and seek professional advice in relation to the Code prior to a franchisee’s entry into a franchise agreement.

Importantly, from a franchisor’s perspective, while the Government supported additional training and education for franchisees, it does ‘not consider that it is the franchisor’s role to ensure that prospective franchisees understand the requirements of the Code’.

Next steps for franchisors

The Government response does not provide a timeframe as to when the draft amendments to the Code will be tabled. We will keep you updated as further details of proposed amendments become available.

In the interim, franchisors may wish to consider updating their franchise agreements and disclosure documents, as outlined in the Government’s response, to ensure they are operating a best practice franchising model.

A full copy of the Government’s response is available here.

Contact

Jacqui Barrett

Jacqui Barrett

Partner & Head of US Practice

In the corporate space, Jacqui regularly advises and assists client with mergers and acquisitions, corporate structuring, corporate compliance and...

John Gray

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