The most recent edition of the Franchising Code of Conduct (Code), which was the most significant change in the regulation of the franchising industry since the Code was first introduced, has now been in force for a year. The first anniversary of the Code changes marks a good time for franchisors to ensure they are compliant with the new Code to avoid hefty penalties.

Disclosure

The new Code, among other things, introduced a suite of new disclosure requirements, the most significant of which include requirements for franchisors to:

  • update their system’s disclosure document to reflect the new mandatory Code template;
  • provide an information sheet to prospective franchisees, outlining the general risks and rewards of franchising;
  • comply with ongoing disclosure requirements around ‘material matters’ including those affecting franchisor as well as any ‘associates’;
  • provide information to new franchisees regarding the online trading activities of the franchisor; and
  • clarify franchisees’ renewal rights, including providing a ‘no renewal’ statement if necessary.

Financial penalties

Legislative amendments made in conjunction with the new Code expose franchisors to civil penalties of up to $51,000 for breaching any of a number of obligations under the new Code, including the disclosure requirements set out above.

The Australian Competition and Consumer Commission also now has the power to issue infringement notices along with fines of up to $8,500, without applying to a court, whenever the Commission makes an assessment that one of the civil penalty provisions has been breached.

Why franchisors need to act now

Franchisors were given a grace period to comply with a number of provisions in the new Code, allowing them four months after their end of financial year (i.e. 31 October 2015 for most franchisors) to update their disclosure documents.

As this grace period has now finished, franchisors whose disclosure material has not been updated since the changes to the Code now face financial penalties.

Recent cases such as SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50 reiterate the importance of complying with disclosure obligations. In that case, a franchisor failed to accurately disclose its true financial position to a franchisee. The franchise agreement was set aside by the Court, which made its ruling before the commencement of the new Code.