Inquiry report into the operation and effectiveness of the Franchising Code of Conduct released

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its 369-page report detailing its findings into the franchising sector, with regards to the franchising code of conduct .

The Committee has stated that comprehensive and broad reform is required to resolve issues within the sector which are systemic. They have also noted that the current regulatory framework is not addressing the power disparity between franchisors and franchisees. To address the issues identified and rebalance the power disparity the Committee has made 71 recommendations most of which are to be referred for further investigation by a Franchising Taskforce (Taskforce). The major recommendations are provided below:

Franchising code of conduct major recommendations

The Committee has recommended that the Taskforce be formed to further investigate potential regulatory amendments including:

1. the implementation of a public franchise register to be updated annually, with updated disclosure documents and template franchise agreements, by franchisors;

2. a requirement that the franchisor (and master franchisor) make disclosure to franchisees regarding the purchase of products below cost pricing, the margin on products and the rebates the franchisor receives for the purchase of such products;

3. investigating the conflict of interests associated with supplier rebates and third line forcing and whether the ACCC should be investigating these issues;

4. whether the Australian Consumer Law should be amended to expressly extend the unfair contract terms regime to franchises by deeming franchise agreements to be standard form documents and making breaches of this regime subject to civil penalties;

5. whether the Franchising Code of Conduct (Code) should be amended to prevent unilateral variations in documents such as manuals and policies unless the majority of franchisees (or their representatives) agree to the variation;

6. an amendment to the Code requiring rental amounts paid to the franchisor under a head lease to be held on trust solely for the purpose of paying rent to the landlord;

7. whether amendments are required to deal with franchisees’ rights in relation to goodwill when the franchise agreement ends or is transferred as part of a sale contract; and

8. whether the extent to which franchise systems involve sufficient co-investment and risk sharing such that they should be regulated similarly to financial products.

Additional recommendations to the franchising code of conduct

In addition to those matters to be referred to the Taskforce, the Committee has recommended that:

1. unilateral variations of franchise agreements be prohibited unless the majority of franchisees (or their representatives) agree to the variation;

2. mandatory quarterly reporting on marketing funds be required and civil penalties be introduced for failing to adhere to the reporting requirements. An additional recommendation is that legislation is amended to clarify how marketing funds are to be distributed in the event a franchisor is wound up;

3. extensive additional disclosure be required including:

a. provision of disclosures in both hard copy and digital copy formats;

b. for existing sites – the disclosure of financial information in the context of sales, including the previous 2 years’ Business Activity Statements;

c. for greenfield sites – the disclosure of financial information in the context of sales including the previous 2 years’ Business Activity Statements for a comparable franchise site;

d. provision of a copy of mandatory guidance on employment matters and overseas workforce issues as prepared by the Fair Work Ombudsman;

e. the disclosure of all rebates, commissions or other payments in relation to the supply of goods and services to franchisees as a percentage of the full purchase price on each transaction;

f. the disclosure of the reasonable personal workload to be undertaken in running and operating the franchise business; and

g. provision of a copy of the ACCC’s Franchisee Manual as part of disclosure.

4. existing whistle-blower protections be extended to cover franchisees reporting franchisors who are breaching the Code;

5. numerous changes to the cooling off provisions be made, including:

a. that the cooling off period commence on the later date of:

i. the franchise agreement being executed;

ii. an upfront payment being made to the franchisor;

iii. the disclosure documents being received by the franchisee;

iv. a copy of the lease being received by the franchisee.

b. clarification that the 14-day disclosure period must commence 14 days before the franchise agreement is executed; and

c. making the cooling off period applicable to transfers, renewals and extensions of the franchise agreement;

6. franchisees be able to terminate franchise agreements in circumstances where:

a. they are suffering hardship;

b. they are being exploited by the franchisor; or

c. the business has failed;

7. franchisor rights of immediate termination be limited to special circumstances such as fraud and public health and safety and require 7 days’ notice to be given to franchisees during which period the franchisee can lodge a dispute which causes suspension of the termination process until the dispute is resolved;

8. a class exemption be created to make it lawful for franchisees to collectively bargain with their franchisor;

9. arbitration be provided as an option if mediation is unsuccessful and multiple franchisees be able to take part in mediation or arbitration with Franchisors;

10. the ACCC be given power to identify and act on instances of systemic churning and burning (i.e., the repeated sale of a franchise site that is known to perform poorly or fail in order to make money from franchisees paying franchise fees).
Whilst the Committee’s recommendations are numerous and substantive, the report is part of a greater legislative process which will involve:
• the Government considering which recommendations to implement; and
• the formation of the Taskforce to provide further recommendations,
before Parliament will consider any legislative changes proposed by the Government.

Additionally given the recent joint media release by the Hon Stuart Robert, MP and the Hon Michaelia Cash which confirmed the Government is looking at strengthening the unfair contract terms regime, it is expected that the amendments proposed by the Committee will be considered as part of the Government’s review of the unfair contract terms regime.

If you would like us to prepare new franchise documents for you, review your existing franchising documents or would like to obtain further advice in respect of the Franchising Code of Conduct, please don’t hesitate to contact us.

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