Under the Franchising Code, franchisors are required to:
- Keep the marketing fund income in a separate bank account from other money held by the franchisor.
- Only use the marketing fund to meet expenses that:
- Have been disclosed in the disclosure document
- Are legitimate marketing or advertising expenses
- Have been agreed to by a majority of franchisees
- Reflect the reasonable costs of administering and auditing the fund.
- The marketing fund financial statement must be prepared and audited within 4 months of the end of the financial year (e.g. by 31 October 2018). Copies of these documents must be provided to contributing franchisees within 30 days of their preparation (e.g. by no later than 30 November 2018).
- The marketing fund does not need to be audited for a particular financial year if 75% of franchisees who contribute to the fund vote against undertaking an audit (this vote must occur within 3 months of the end of relevant financial year e.g. by 30 September 2018 for the financial year ending 30 June 2018).
- The statement and audit report must be provided to franchisees. This means it could be handed out at a conference, posted in the mail, faxed or emailed to each franchisee. In our view making it available on the intranet, or emailing a link to the intranet does not meet the Code requirement of providing it to the franchisee.
- It is the franchisor's responsibility to provide the statement and audit report. A franchisee should not have to request the information before it is provided.
The Code requires franchisors to prepare a financial statement outlining who contributes to the fund and what the money is spent on. The statement must include sufficient detail so as to give meaningful information about sources of income and items of expenditure, especially relating to marketing activities.
The Code doesn't define what "meaningful" information means. The ACCC have advised that they believe the statement to mean "having real impact; substantial" (which is the dictionary meaning of the term). The ACCC have urged franchisors to err on the side of caution in providing more information. The information provided must be truthful, clear and accurate. Franchisor's should take into account what a franchisee would reasonably expect to see.
The ACCC have previously stated that in their view, meaningful information about a marketing fund statement requires genuine transparency about:
- Sources of income (eg franchisees contributions, corporate club contributions, supplier rebates)
- The nature of the marketing or advertising services provided (eg merchandise, photography, brochures/flyers, website design, online search terms, third party graphic design, equipment rental, radio advertising, online directory listings, print advertising)
- $ amount for the relevant services (within reason)
- Geographical scope of the advertising or marketing, where relevant (eg local, state, national).
Below is an example published by the ACCC in September 2017 of a marketing fund statement that does not provide sufficient information or "meaningful information" and does not give franchisees enough detail to understand how the money was spent.
The ACCC have acknowledged that there are "no hard and fast rules" regarding what is "sufficient" in these circumstances (beyond the example of what is not sufficient set out above). A number of options were discussed with the ACCC at the Franchising Conference in October 2017. Options discussed included, adding footnotes to the financial report that referred to previous communications with franchisees regarding the marketing fund expenditure, attaching copy of a yearly marketing plan, attaching a schedule with further information and providing further information in the report itself.
Potential Consequences of Non-Compliance
If a franchisor fails to comply with the Franchising Code this could come to the attention of the ACCC in two main ways, namely:
- A franchisee could complain to the ACCC (they can do this anonymously)
- The franchisor's compliance could be randomly checked by the ACCC. Compliance with the marketing fund requirements is likely to come up in any random check of a particular franchise system.
The failure to comply with the marketing fund regulations can have significant consequences. If a regulation is breached with respect to the network the potential penalty is up to AUD54,000 multiplied by the number of franchisees in the network. This is potentially a very large amount. Despite this risk, the likely penalty would probably be much less. For example, in May 2017 Domino's Pizza paid penalties totalling AUD18,000 over its failure to provide franchisees with both an annual marketing fund financial statement and an auditor's report within the time limits prescribed by the Code.