Franchise Association Calls For Positive Regulation

The recommendations proposed by the Association, which will be submitted to a Parliamentary Select Committee shortly, are :

1. A registration system for organisations which offer franchises for sale.
2. Registration of advisors to the franchise industry.
3. Terms which can result in disqualification from registration. Association chairman Miles Agmen-Smith said these will be similar to regulations covering company director or investment adviser disqualification.
4. A system for registration of sub-franchisees with their franchise system.
5. Extension of the Association's own disclosure document requirements to all franchises.
6. Compulsory mediation before any disputes or entering arbitration or other legal routes.

Mr Agmen-Smith said that following a meeting with Minister of Commerce The Hon. Lianne Dalziel on 12 February, the Association would make these recommendations in a submission to the Financial Services Provider (Registration and Dispute Resolution) Bill which is currently before the Finance and Expenditure Select Committee. The recommendations are intended to give added protection to people investing in franchised businesses.

‘The Association's board has maintained a long term open line (of communication with government) for the purpose of improving legislation for the franchising sector,' he said. ‘But this ironing franchise controversy has created extra focus and interest. Franchising is spread across all manner of activities - it is a way of doing business and its value is in the multi billions. Possibly every part of the New Zealand economy has a franchising component somewhere.' 

He said the Association has also been in dialogue with the major banks to seek assistance for the ironing franchise investors. Banks such as ANZ/National, BNZ and Westpac have all responded positively.

‘These are a part of FANZ's ongoing programme for the franchise community which includes many other steps and programmes such as rolling member compliance checks and promotion of more generous legal aid assistance for mediation as a better way of resolving issues when they do arise,' Mr Agmen-Smith concluded.

Good or Bad For Franchisors?

News of the Association's new stance on regulation of the sector has taken many by surprise. The concept of regulation has been hotly debated among FANZ's own members for many years, with some fearing that Australian-style legislation would impose considerable compliance costs upon franchisors - many of whom are small businesses themselves.

Another concern is that any regulation, no matter how well-meaning, could end up being unduly restrictive through the involvement of those who do not necessarily have an understanding of how the sector operates (see our stories on What Price Legislation? and Legislation - Help or Hindrance? With this statement, the Franchise Association has blown that particular Pandora's Box wide open and we can now expect suggestions for amendments and other legislation from a variety of other parties.

There is no doubt that the Association had to act. Regulation has been a regular topic of discussion in the sector for many years now, and the influx to New Zealand of Australian franchisors used to operating under the costly legislation in that country has increased awareness. In 2005, a group called the Fair Trading Coalition called for franchise legislation as a way of addressing issues in the motor trade. The recent problems of the alleged fraud involving Green Acres and the high profile of the Blue Chip situation have served to put franchising as a whole under the spotlight - regardless of whether those issues are related to franchising or not. The danger is that a few bad experiences might result in heavy-handed regulation being imposed upon the burgeoning franchise sector as a whole. In the light of that, the Association's board has made the tough call it had to make.

How Would It Work?

The idea of incorporating the recommendations in the Financial Services Provider (Registration and Dispute Resolution) Bill is an interesting one. It could be argued that it sends the wrong signal, as franchisors promote a method of marketing and distribution rather than financial services and there are many aspects of the bill that would (or should) presumably not apply to them. However, it is planned to have real teeth - for example, the penalty for non-registration in a similar role for financial service providers is up to $100,000 - which would give the recommendations, if adopted, immediate impact. Most importantly, the fact that the Bill is a current one would mean that, if adopted, the recommendations could be put in place much faster than would otherwise be the case. Click here for explanatory notes on the Bill.

There are, of course, many questions to be answered as matters proceed. How do you define a franchise? How would the provision of legal aid to franchisees be managed to prevent franchisors becoming involved in time-wasting petty disputes with litigious franchisees? While the registration process might easily be managed by the Companies Office (as proposed for the financial services providers), who will develop and manage the terms of qualification and disqualification - and how will it be funded?

According to Peter Fergusson, general manager of FANZ, if the proposals are adopted then the impact upon those who already comply with the Association's Code of Practice will be minimal. Lianne Dalziel herself has expressed the desire not to burden the franchise sector with additional red tape and the recommendations at the moment should serve only to drive bad operators out of franchising rather than penalise the many good ones. It could, in other words, be the best possible development for franchisors and franchisees alike.

On the other hand, it is election year. It is to be hoped that politicians of all parties will support the efforts of the franchise sector to act responsibly in managing the issues created by its considerable success.

 What do you think? Send your thoughts on franchise regulation to editor@franchise.co.nz

Comments

"I completely agree that a serious re-think of how the industry needs to be managed should take place to keep our business systems free of unscrupulous wheelers and dealers. If there is a fear I have it is that the cost of compliance will ultimately end up back in the consumers' pockets. As you know franchise services are usually at a premium to independent operators who don't have the benefit of a network system nor the costs associated. [With compliance costs] our prices would then increase exponentially and give an almost unfair advantage to our independent competitors. It may also trickle down to potential franchisees who could well look outside franchising to purchase a business which ultimately affects us as Master Franchisors and as you would appreciate a fair share of a MF profit is derived from franchise fees. Although Chem-Dry has almost saturated our new business opportunities the principles I have outlined will affect us into the future and cause undue challenges.

We are certainly between the rock and the hard place."

Fred Morley, Chem-Dry (New Zealand) Ltd

"I am both surprised and dismayed by the lack of consultation by the Board of the FANZ to members of the FANZ, especially the affiliate lawyer members. The six recommendations are far reaching and except for recommendation number 5 the others go into new uncharted territory. I am strongly of the view that considerable thought and planning is necessary before any submissions could or should be made to a Parliamentary Select Committee.

Although the Hon. Lianne Dalziel as Minister of Commerce has herself 'expressed the desire not to burden the franchise sector with additional red tape, no-one can trust politicians and the parliamentary draftsman often goes further than may have been intended by the politicians themselves which means that we could end up with draconian legislation. If that were to be the result then the FANZ would wish that it had not embarked on the reform process when it did not have any control as to the final result.

I would also point out that at present the lack of franchising legislation in New Zealand is very attractive in relation to overseas franchisors wishing to enter our country and the United Kingdom does not have any franchising legislation. Why should we push for it at the present time simply because, to the public, it looks like a knee-jerk reaction to the recent Green Acres saga with the dishonest Keith Lapham fleecing innocent ironing franchisees, the majority of whom cannot speak English.  More care is needed and the FANZ owes it to its members to consult and plan properly rather than to go it alone with some half-baked ideas."

Stewart Germann, Stewart Germann Law Office

 "Unfortunately the Government is likely to regulate the franchising industry as the Green Acres fraud has effected so many vulnerable people.  It's sad that the industry's good name has been badly compromised by one individual and a franchisor that must have had some knowledge of the circumstances and failed to act and support their brand. My biggest concern is that the FANZ in representing the industry has acted in a unilateral way imposing a potentially new order. In my opinion a more balanced approach would have included consultation from [members and other people] with years of experience of managing major systems; all the dynamics of representation of outputs; and people management at all levels, from disputes and failures through to larger-scale value-creation."

Colin Theyers, Staples Rodway Corporate Finance Ltd

"A kneejerk reaction indeed! Beware of any push to legislate.

The bureaucrats will love this. It has provided a heaven sent opportunity to take another step towards "harmnonising" our relationship with Australia. There will be considerable pressure to adopt the Australian model unless some common sense prevails."

John Fitzpatrick, Mamuska The Cheesecake Shop    

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