Report recommends more changes for Australian franchising

The long-awaited final report of the Inquiry into the Australian franchise sector and the effectiveness of the Franchising Code of Conduct has made a total of 71 recommendations for outright changes to Australia’s Franchising Code of Conduct, or other changes to conduct in franchise relationships.

The Parliamentary Joint Committee on Corporations and Financial Services report was finally released on March 14 after being delayed three times - the report was originally due on 30 September last year, before being extended to 6 December, then February 14.

The Inquiry report titled Fairness in Franchising recommends sweeping changes to Australia's Franchising Code of Conduct covering 20 broad topics, as well as increased powers for the Australian Competition and Consumer Commission (ACCC) to investigate and prosecute breaches of the Code, including (among other things) banning non-compliant franchisors from granting new franchises. Click here to download and read the report

Note: The Australian Code does not apply in New Zealand, but would affect New Zealand franchisors operating there or planning to expand across the Tasman.

New Franchising Taskforce to consider recommendations

A major recommendation of the Inquiry’s Fairness in Franchising report is the establishment of a new Australian Franchising Taskforce to oversee the feasibility and implementation of many of the Inquiry’s recommendations, and to link government agencies including the Department of Treasury, the Department of Jobs and Small Business, and the Australian Competition and Consumer Commission.

The Taskforce would be responsible for evaluating the detail required to enable many of the recommendations, and while the report includes suggestions as to its composition, it does not elaborate any Taskforce’s method of operation, or reporting requirements or deadlines, potentially creating future uncertainty around the implementation of significant recommendations.

Inquiry the most far-reaching yet

The final report of the current franchise inquiry is the widest and most far-reaching of any franchise inquiry conducted to date in Australia, with the report itself running to 369 pages, containing 71 recommendations, and taking input from nine hearings and 409 submissions.

By contrast, the last Australian Joint Committee Inquiry into franchising, Opportunity not Opportunism, conducted 10 years earlier in 2008, ran to 165 pages, contained 11 recommendations, and took input from four hearings and received 168 submissions.

Nearly a year passed between the release of the 2008 Inquiry report, and then Australian Federal Business Minister Craig Emerson’s announcement that the government would accept eight of the 11 recommendations in part or in full, which were included as amendments to the Franchising Code that took effect from 1 July 2010.

What next?

The release of the Franchise Inquiry report on March 14 is unlikely to result in any immediate changes to the Australian Franchising Code, based on the experience of the 2008 Inquiry.

In 2008, the report’s recommendations were first considered by the Federal Business Minister – a process at the time which took nearly 12 months – before deciding which recommendations to accept (and not all recommendations were accepted at the time).

In Australia's current political climate with a federal election due in May, there is a very limited window of opportunity for the current Business Minister Michaelia Cash to assess the report before the election is called and the government goes into caretaker mode. If the Minister does not respond quickly, the report may be considered by the next Business Minister at some point after the election.

Either way, many of the report’s recommendations require consideration by a Franchising Taskforce, which is yet to be assembled, and for which no reporting timeframe has been established. Even if the Taskforce is convened prior to the election, it will likely take some time to assess the large number of recommendations the Inquiry report has referred to it.

In the meantime, Australian franchisors and those looking to do business in Australia should assess the likely impact of the recommendations on their businesses, and what changes they may need to implement to accommodate the Inquiry’s recommendations.

NZ looking at lessons

Australia and New Zealand parted company on the topic of specific legislation to regulate the franchise sector with the introduction of Australia’s Code of Conduct in 1998. New Zealand did carry out a review of franchising regulation in 2008, but it was decided that current law already addressed the issues. It is worth noting that parallel surveys of the franchise sector in the two countries have suggested a very similar level of franchisor-franchisee disputes (affecting around 1-2 percent of franchisees) despite the difference in legislative regimes.

This latest Australian Inquiry was primarily sparked by a series of media investigations, first into exploitation within the 7-Eleven convenience store chain, which does not operate in New Zealand, and then allegations of misconduct within the multi-brand franchisor Retail Food Group (RFG), whose brands are mostly represented in New Zealand by independent master franchisees (see below). Nearly half of the submissions made by franchisees to the Australian Committees related to grievances with RFG.

Nonetheless, the New Zealand franchise sector will be scrutinising the report carefully. According to Dr Callum Floyd, the chairman of the Franchise Association of New Zealand (FANZ), ‘While the Australian report is focused on Australian franchising, where there is a different legislative and business environment, FANZ is, of course, interested in its contents and what can be learnt from it.’

‘We note that the Joint Committees undertaking the report acknowledged the considerable role of franchising within the Australian economy, and the many Australian franchisors with profitable franchise systems that treat franchisees fairly. However, it also found the “systematic exploitation of some franchisees by a subset of franchisors” – and devoted a whole chapter to one publicly listed multi-brand franchisor.’ 

‘The report recommendations made were specific to the Australian context and Australian legislative environment for franchising. There were many recommendations, including future areas for further consideration or investigation.’

‘FANZ will continue to digest and consider the Australian report for insights, as we will with future Australian developments as they occur.’

Australian report specifics

Jason Gehrke outlines some of the specific recommendations to be considered by the Australian Franchising Taskforce.

RFG targeted for further investigation

The Inquiry report noted that nearly half of all the submissions received from franchisees related to grievances with multi-brand ASX-listed franchisor Retail Food Group (RFG), or one of its brands.

An entire chapter of the 22-chapter report is dedicated exclusively to a case study of RFG which is highly critical of its performance as a franchisor. The chapter highlighted RFG’s acquisition on average of one new brand per year following its listing on the Australian Securities Exchange (ASX) which created an appearance of growth, but often masked a high rate of store closures that in some years matched or exceeded the number of new outlets opened.

The report highlighted escalating costs to franchisees imposed by the franchisor through fees, charges and rebates as practices designed to transfer profits from franchisees to the franchisor, and recommends that RFG and its current and former directors and senior executives be investigated by the ACCC, the Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC) for breaches of the Franchising Code, Australian Consumer Law, insider trading, tax avoidance, and breaches of disclosure and director’s duties, among others.

Two of the Inquiry’s nine public hearings were devoted exclusively to testimony relating to RFG, including the final hearing prior to which former RFG managing director Tony Alford and one other executive unsuccessfully appealed to the High Court in a bid to avoid giving testimony.

The report also noted that RFG continues to trade with the support of its lenders, with the company itself issuing a statement just two days before the release of the Inquiry report to deny that it was contemplating the appointment of administrators.  Read more 1;  Read more 2

Note: RFG brands in New Zealand are mostly operated through master franchisees owned independently of RFG. These master franchisees are not part of the Australian report.

Protection for whistleblowers

The Inquiry committee has recommended that franchisees and their employees receive the same legal protection from retaliation as employees of large corporations where they blow the whistle on improper or illegal conduct. The recommendation does not appear to extend to franchisor personnel.

Powers for ACCC to halt franchise recruitment

Where franchisors are found by the ACCC to be churning (ie. reselling the same franchise over and over again by setting franchisees up to fail) or burning franchisees (ie. selling unviable franchises), the ACCC will be given new powers to prevent non-compliant franchisors from granting new franchises, according to one of the recommendations of the Inquiry.

New disclosure and registration of documents

The report recommends future disclosure documents be made available both in hard copy and electronic form, and that outgoing franchisees must provide two years’ profit and loss statements and other financials to incoming buyers, whereas franchisees for new outlets must be given similar information for a comparable location.

Another recommendation requires the ACCC or another agency establish and operate a register of publicly-accessible disclosure documents and franchise agreements, which must be updated annually, and would result in fines for franchisors not providing this information.

Marketing funds will be required to issue quarterly expenditure reports under another recommendation, and legislation developed to determine how unused contributions are distributed in the event of a franchisor being wound up.

Supply arrangements under scrutiny

The report recommends further investigation of franchise agreement terms which give franchisors discretionary powers to impose unnecessarily high supply volumes on franchisees, as well as full disclosure of rebates as a percentage of the cost of goods or services purchased by franchisees. (This was also a recommendation of the Matthews Inquiry in 2006 which was not accepted at the time due to concerns it could undermine market competition if rival franchisors could see each other’s rebate information).

The report also recommends greater transparency in the establishment of preferred supplier arrangements in franchise groups, and particularly whether the payment of rebates or other benefits provided to franchisors influences the selection process, and whether this has an adverse impact on franchisees.

Unfair contract terms and franchisee approvals

The report recommends that unfair contract terms be prohibited in franchise agreements, and that fines and penalties apply to franchisors where such terms are used. It further recommends that unilateral changes to the terms of a franchise agreement should only be made with the agreement of the majority of a system’s franchisees, and that input from franchisees be mandated prior to franchisor decisions being made which impact franchisees, including appointing a franchisee representative to the board of the franchisor.

The report also recommends the creation of a dedicated association to represent franchisees.

Code harmonisation

The report recommends that the Australian Oil Code be amended to align with many provisions already present, or recommended to be included in the Australian Franchising Code.

Franchisee rights to terminate

The report recommends that the Franchising Taskforce consider how the Franchising Code should be amended to give franchisees rights to terminate their franchise agreements under special circumstances, such as if a liquidator is appointed to wind up a franchisor.

Arbitration in addition to mediation

The report recommends the appointment of an ombudsman to arbitrate franchise disputes which have not been resolved by mediation, and requirements to expedite dispute resolution processes, conduct multi-franchisee mediations or arbitrations, and a restriction on litigation until mediation has occurred.

Cooling-off extension; Rents under head leases to be held in trust

The report recommends that where a franchisee is the subject of a head lease, any rent paid by them to the franchisor be held by the franchisor in trust prior to being paid to the landlord. The landlord’s head lessor disclosure document and final lease agreement should also be provided to the franchisee at least 14 days before entering into the franchise agreement, and that franchisors must disclose whether leases align with the term of the franchise.

The report also recommends an extension of the current cooling-off period from seven days to 14 days after an agreement has been executed.

Limits on capital expenditure

The report recommends that there should be constraints on the ability of franchisors to impose capital expenditure requirements on franchisees so that franchisees can get an appropriate return on their investment in the balance of their term, or be paid compensation if the term ends before return has been achieved.

More details

This is not a definitive list of the Inquiry report’s recommendations. For more details, see the Inquiry report itself.

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