Final report recommends licensing of franchisors in Australia

The final report of the 2023 Review of the Franchising Code of Conduct has been released and contains 25 findings, 23 formal recommendations for change and 34 suggestions for implementation for the Australian Government to consider, including the introduction of a licensing system for franchisors.

The report was tabled in Parliament on February 8 by the Minister for Small Business, Julie Collins, who received the report from reviewer Dr Michael Schaper in December last year.

Editor’s Note: Australia has had formal franchise legislation since 1998, and is already regarded as one of the one of the most regulated franchise sectors in the world. There is no franchise specific legislation in New Zealand. Past surveys have shown a similar level of franchisor/franchisees disputes in both countries.

The comprehensive 152-page report considered input from 95 formal submissions, 40 meetings and roundtables with individuals and organisations linked to franchising, and two surveys – one of franchisees and one of franchisors - specifically conducted to inform the review. Of the 95 formal submissions noted as being received, only eight appear to have been lodged by franchisors, 15 by various industry associations, five by state or commonwealth government agencies, and the rest by various individuals or law firms.  

Additionally, the Schaper Review included a statistical analysis conducted by the Australian Bureau of Statistics (ABS) and compiled from the Australian government’s mandatory Franchise Disclosure Register. This is the first time a Franchise Code review has included a comprehensive snapshot of the Australian franchise sector, and found that there are 1,144 franchisor brands with a total of 70,735 franchisees operating in Australia. 

The 2023 Review noted that the ABS data for the size of the franchise sector shows almost no growth in the number of franchise brands since a study conducted by the Asia Pacific Centre for Franchising Excellence in 2014, and suggested a 5.2% decline in franchisee numbers in the same period with the franchise sector falling behind the rate of growth of the broader economy.

Editor’s Note: The two sets of figures are derived from completely different research methodologies, so comparisons may not be realistic. Two comparable surveys in New Zealand, in 2012 and 2021, suggested the number of franchises here grew by 32% over a similar nine-year period, and the number of franchisees increased by 45%. The next survey of the New Zealand market is due to take place later this year.

The Review report concluded that the Franchising Code of Conduct is generally fit for purpose and should be retained, but remade to include a number of improvements. It also found that the number of reviews and changes to the Franchising Code in recent years had contributed to uncertainty in the sector, recommending that future reviews should be conducted every five years.

Although the Review recommends a licensing system for franchisors be considered as a mechanism to increase Code compliance and minimise potential harm to franchisees by non-compliant franchisors, it does not land on a final position as to the nature or administration of such a licensing system.

The Review also recommended expanding the range of Code breaches subject to infringement notices, and increasing infringement notices to 60 penalty units in line with Australian Consumer Law notices.

The Minister will now consider the Review report and the Government's response, including the extent to which it might adopt the Review's recommendations.

The 23 recommendations of the Review are spread across six broad headings as follows:

About the franchising sector 

The Australian Government should ensure the provision of more comprehensive, robust statistics about the franchising sector.  

Scope and structure of the Code

• The Code should be remade, largely in its current format.
• A clear statement of purpose should be inserted into the Code.
• Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code.
• Reviews of the Code should be conducted in five-yearly cycles in the future.

Entering into a franchise agreement

• Simplify and consolidate the pre-entry information given to prospective franchisees.
• Franchisor obligations under the Code in relation to existing franchisees should be simplified.
• The existing requirement that new vehicle dealership agreements must provide a reasonable opportunity to make a return on investment should be extended to all franchise agreements.
• The existing requirement that new vehicle dealership agreements must include provisions for compensation for franchisees in the event of early termination should be extended to all franchise agreements.
• Enhance the public visibility and usage of the Franchise Disclosure Register.

Additional information should be included on the Franchise Disclosure Register relating to dispute resolution and adverse actions brought by enforcement agencies.

During a 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.

Ending a franchise relationship

• Provisions relating to termination for serious breaches should be simplified. Changes made in 2021 relating to termination under clause 29 of the Code should be revisited.
• Best practice guidance should be provided to franchisees and franchisors regarding franchisee-initiated exit, to enhance the effectiveness of clause 26B of the Code.
• Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements.

Regulatory oversight and dispute resolution

• A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (‘FranchiseSmart website’).
• Australian Government agencies should work with relevant sector participants to improve standards of conduct in franchising by developing 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 on prospects prior to formal ADR.
• 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.

To read the full Review report, click here.
To read the Australian Small Business Minister’s media statement about the release of the Report, click here.

 

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