While it may take some time for the recommendations to be implemented, businesses should be aware of the proposals put forward in the report and their future impact.
Significant changes – including increased disclosure, changes to transparency and accountability on supplier rebates and collective bargaining rights – could be on the way, if the recommendations in a recent report are implemented.
The 369 page report of the Federal Parliament's Joint Committee on Corporations and Financial Services made a slew of recommendations, which have bipartisan support and therefore could well form the basis of future legislation. In this article we'll focus on the recommendations which could have the greatest impact.
Increased disclosure obligations
A number of the recommendations would increase the disclosure obligations imposed on franchisors. In particular, the report recommends that franchisors make the following disclosures to existing and prospective franchisees:
- earnings and financial information for the preceding two years before a franchise is sold or transferred (or, in the case of a greenfield location, information relating to a comparable franchise);
- further information regarding the use and reporting of marketing funds;
- further detail around rental lease arrangements; and
- guidance on employment matters, including Awards, minimum wages and overseas workforce issues (however, the report notes that it is primarily the franchisee's responsibility to be aware of and comply with relevant employment laws).
The report has also called for an examination of whether amendments should be made to the Franchising Code to require disclosure as to what (if any) financial consideration the franchisee is entitled to receive on the expiry of the franchise agreement (and also upon lease expiry).
In order to ensure transparency in disclosure and other franchise documents, the report has recommended an investigation into options for the establishment and operation of a public franchise register which is to be provided with updated disclosure documents and template franchise agreements annually.
Transparency with respect to supplier rebates
The report found that it was common for franchise agreements to require franchisees to use specific suppliers and expressed concern that there was insufficient disclosure of the rebates franchisors may receive from those suppliers. In response to this finding, the report recommends that franchisors be obliged to disclose all rebates they receive as a result of the supply of goods or services to franchisees, as a percentage of the full purchase price on each transaction.
The report also recommends that consideration be given to requiring franchisors to disclose, in percentage terms, what proportion of these supplier rebates will be retained by the franchisor and what proportion will be distributed (whether directly or indirectly) to franchisees.
Finally, it calls for an investigation into conflicts of interest associated with supplier rebates and requirements by franchisors that franchisees deal with specified suppliers.
A proposed change that will no doubt have a dramatic effect on the negotiating power of franchisees is a class exemption to franchisees (regardless of their size or other characteristics) from the collective bargaining provisions of the Competition and Consumer Act 2010 (Cth). This would allow franchisees to take collective action, including joint negotiation and dispute resolution.
The effect of these recommendations will be to give franchisees a greater deal of bargaining power with franchisors.
The committee has also made the following recommendations of note:
- introduce pecuniary penalties for the imposition of unfair contract terms in franchise agreements (this is a change that the ACCC has been seeking for some time);
- significantly increase penalties for breaches of the Franchising Code of Conduct;
- protections for whistle blowers;
- increased power for the ACCC to intervene and prevent franchisors engaging in certain conduct including churning (where a franchisor repeatedly sells a franchise that has a track record of poor performance) and burning (where a franchisor continues to open new outlets, some of which are unlikely to be viable in order to profit from upfront fees);
Entering and exiting the franchise agreement
- provision of educational materials to prospective franchisees with the disclosure document and establishment of a FranchiseSmart type website (similar to the MoneySmart website);
- amend the cooling-off period for franchisees for any arrangement associated with a franchise to 14 days after the last of the following have occurred:
- a franchise agreement has been signed;
- a payment to the franchisor has been made;
- the required disclosure documents have been received by the franchisee (within the required disclosure period); and
- a copy of the lease has been received by the franchisee;
- greater exit rights for franchisees (including, controversially, where the franchisee is over-geared or experiencing "personal hardship");
- introduce notice requirements for franchisors to terminate a franchise agreement for "special circumstances" and provide a mechanism by which a franchisee may dispute such termination by a franchisor (with the termination being "put on hold" until the dispute is resolved, whether by agreement, mediation, arbitration or court action);
- controversially, it is recommended that the franchisor's power to terminate a franchise where the franchisee's operation endangers public health or safety would first require a relevant determination by a government authority, and similarly that the franchisor's power to terminate an agreement where the franchisee has acted fraudulently would require a court to first determine that the franchisee has acted fraudulently - these requirements would entail significant delay where the consequence may be substantial, and potentially irreparable, damage to the brand (and therefore may ultimately pose a significant existential threat to every other franchisee in the system);
- examination of ways in which the Franchising Code of Conduct should be amended to limit the ability of franchisors to impose capital expenditure requirements on franchisees; and
- examination of whether franchising should be regulated under the Corporations Act in a similar manner to financial products.
The future of franchising
The report calls for Government to urgently implement all proposed amendments to legislation. The report also recommends the establishment of a Franchising Taskforce which will be responsible for considering (and ultimately implementing) various other recommendations set out in the report. The Government is yet to formally respond to the report.
There are a number of recommendations made in the report which will be highly contentious, and some of them will need to be refined. However, given the bipartisan nature of the report, it seems inevitable that there will be significant reforms to Australia's franchising laws after the next election. If you would like to find out more about the findings of the report, please get in touch.