29 May Winds of change in the Franchise Industry. By James Corne, CEO The Franchise Institute
Australia is one of the most highly franchised economies in the world, with a mix of over 80,000 businesses and 1,314 franchise systems, 594,500 employees and revenue of $182 billion, annually. Australian franchising mainly consists of small and medium enterprises, with 90 percent of franchisees accounted for by small businesses. Unfortunately, recent bad behaviour by a handful of well-known, publicly listed franchise systems has tarnished the whole industry. The Government has stepped in with some significant changes – here is a summary
The Parliamentary Inquiry Into The Franchising Code
During the 2018 hearings of the parliamentary inquiry into the franchise code, certain issues were raised including poor quality standards and non-compliance among the franchising community. The underlining message in submissions to the inquiry were that better enforcement of the existing regulations is required to ensure make the franchising community a fairer place for all – though I am not convinced the changes will achieve their goal.
Call For a Taskforce
The parliamentary inquiry report called on the government to establish a special franchising taskforce to thoroughly examine and implement its different recommendations. This taskforce would be made up of representatives from the Department of Jobs and Small Business and the Treasury.
Michaelia Cash, the Small Business Minister said the government would analyse the report methodically and consider what types of improvements needed to be brought into effect before proceeding. She said the government is committed to supporting fair and effective reforms, but that they would do so without imposing any unnecessary regulation on the franchising sector.
Winds of Change
The parliamentary report recommends a comprehensive suite of changes to the current franchising code such as:
- The inclusion of various civil pecuniary penalties.
- Giving the ACCC greater enforcement powers and more responsibilities. The additional powers would help them root out exploitative behaviour and misconduct in the franchising space.
- Improvements to aspects such as disclosure and transparency.
- Greater accountability and clarity around marketing funds.
- The taskforce will keep a hawk’s eye on the system and unfair contract terms in the franchise agreements will be illegal. They will also investigate the options for a public franchise register and will provide franchisors with template franchise agreements and updated disclosure documents annually.
- Recommends that civil penalties be levied if a franchisor fails to comply.
The Australian Competition And Consumer Commission (ACCC) announced its determination to target the food sector to ensure it is in line with all the rules and regulations. It aims to protect and promote fair competition and consumer law.
#1 A Registry Of Franchise Systems Across The Sector
Under these substantive franchisee reforms, a registry will be developed, covering all systems across the franchise sector in Australia. It will be backed by the government and be mandatory for all constituents to improve compliance.
The additional protection available under the registry will be advantageous in a collaborative business model to fix the responsibility for compliance. While the concept of mandatory registration is neither a new nor complete solution to all compliance-related problems, there are certain additional benefits to it because:
- It makes basic compliance rules obligatory for all franchise systems.
- It removes the voluntary element to “comply or not to comply” and mandates that every business including those audited by ACCC need to comply.
- The registry is searchable making it easy for new and prospective businesses to locate the information they want.
- It has an inbuilt mechanism for early warning that can alert the ACCC to examine any breaches of the law.
#2 Obtaining Business And Legal Advice: A Mandatory Requirement For Prospective Franchisees
The parliamentary inquiry, in its deliberations, pointed out an important structural theme. This related to large-scale connivance of the clear and strong recommendations in the franchise code of conduct. It also found prospective franchisees ignoring to submit mandatory documents provided by franchisors, to obtain legal and business advice.
The Australian regulatory and dispute resolution framework for franchising is known to be comprehensive and effective. Yet, some issues need attention. It is in the interests of prospective franchisees to be well-informed about all business details before signing on the dotted line. They must seek business and legal advice to complete their due diligence which is essential for conducting business safely.
It remains to be seen whether these new regulatory changes will result in a more level playing field.
If you want to know more, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435