by Simon Lord

last updated 29/07/2009

What Price Legislation?

by Simon Lord

last updated 29/07/2009

September 2007 - Should franchising be legislated? A few years ago, the question would have been met with a resounding NO from the franchise sector.

These days, I would estimate that the mood is more 50:50. However, even the most ardent supporters qualify their support with the caveat ‘providing it's the right legislation.' 

An article in the NBR during 2007 suggested that New Zealand is one of only six countries where franchising is not covered by specific legislation. This is nonsense: in fact, of the 35 or so countries which are members of the World Franchise Council, only around half have specific legislation and most other countries have none. However, the NBR's suggestion that legislation is one day inevitable here is probably correct. Australia introduced franchise legislation in 1998 and the combination of CER and the fact that New Zealand is seen as the logical first step for Australian franchises going overseas means that many of those ideas are gaining ground here. In addition, the Franchise Association of New Zealand vigorously promotes its own Code of Practice, which is mandatory upon its members, as helping to protect franchisors and franchisees alike. If the Code is so good, many argue, why not give it the force of law and make it compulsory for all franchisors - not just Association members?

The Australian Code has been trumpeted as a huge success. Regulation has apparently reduced the number of cowboys operating on the fringes of franchising, increased public confidence in franchisors, raised standards throughout the sector and encouraged the government to invest in supporting the export ambitions of Australian franchisors. So why don't we just adopt the same legislation here?

Well, for starters, the franchise sector in Australia suffered terribly when the legislation was first brought in. Growth was severely restricted for a couple of years and many franchises incurred huge compliance costs - one home services franchisor, a good operator and an enthusiastic supporter of high standards, estimated it had taken $150,000 straight off the bottom line. Those costs were ultimately passed on to franchisees and customers, while other companies cancelled their franchising plans altogether.

Secondly, the wording of the Australian legislation caused many headaches. The ACCC, which administers the Code there, was given a $500,000 war chest to fight test cases to determine exactly what the franchise legislation actually meant - a frightening prospect. While there is no doubt that Australia now has a strong and hugely successful franchise sector once more, a recent review of the Code has introduced further requirements which are again arousing concern.

Finally, the issue of compliance costs would, of course, be much greater in New Zealand. A large retail franchise in NZ is only 50 outlets: in Australia, it is 300-plus. This means that additional costs would be amortised over a much smaller base and present a significant obstacle to the development of local franchises.

This is why even those in favour of franchise legislation have their concerns. They believe - and I agree - that intelligent, practical laws designed for New Zealand conditions would be worthwhile but that heavy-handed legislation would be counter-productive. Unfortunately, legislators rarely have a light touch.

Finally, one must also ask whether the Australian legislation has actually had any real impact upon the people it is supposed to assist - the franchisees? I have my doubts. I have seen no figures proving that the level of disputes in Australian franchising has reduced since the introduction of the Code and, while mandatory disclosure has certainly improved the quality of information provided to potential franchisees, there is still doubt as to how many people actually read it.

In many ways, the biggest problem is that franchisees often fail to take adequate professional advice - legal and financial - before getting into a new business. Sadly,  there is no law that can realistically govern human nature. In fact, it could even be argued that legislation would provide a false sense of security that would increase that problem.

This article first appeared in NZ Business. Elsewhere on this website, Gehan Gunasekara looks at what New Zealand franchise legislation might cover .

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