On 14 March 2019, the Parliamentary Joint Committee (Committee) on Corporations and Financial Services delivered its much anticipated 326 page report into the franchising sector (Report).
In the last 12 months, the Committee conducted an inquiry into the operation and effectiveness of the Franchising Code of Conduct (Franchising Code). As part of this process, the Committee conducted public hearings and received over 400 submissions from both franchisors and franchisees.
Some widespread changes to the franchising industry have been proposed in the Report. The Committee was critical of the current Franchising Code and the actions of certain franchisors. Of concern, the Committee drew a comparison between franchising and the financial services sector in terms of poor governance, in some areas.
The Committee has called for increased penalties for breaches of the Franchising Code and more extensive powers for the Australian Competition and Consumer Commission (ACCC).
The Committee said that certain themes recurred throughout its inquiry including the need for transparency and accountability, fairness and protection and education and awareness.
Some key areas for improvement were identified by the Committee: disclosure by franchisors particularly around the accuracy of earnings information, abuse of marketing funds by franchisors, transparency and accountability on third line forcing and supplier rebates, the need for whistleblower protections for franchisees and their employees, fair exit rights for franchisees and goodwill and clarification around the cooling off provisions set out in the Franchising Code.
Recommendations from the report
The Report makes 71 recommendations including:
- That the civil pecuniary penalties regime be expanded to cover all breaches of the Franchising Code and that the quantum of these penalties be significantly increased to provide what the Committee referred to as ‘a meaningful deterrent’. The current maximum penalty under the Franchising Code is 300 penalty units (approximately $63,000). The Committee recommended that this increase should at least reflect the current penalty regime set out in the Competition and Consumer Act 2010 which sets maximum penalties at the greater of $10 million; three times the value of the benefit obtained from the offence; or 10 per cent of the annual turnover of the business.
- The establishment of an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the Committee's recommendations. It is recommended that the Committee include representatives from the ACCC and various government departments.
- That the Franchising Code be amended to require a franchisor to provide a franchisee with its prior two years’ Business Activity Statements, a profit and loss statement and balance sheets.
- New powers for the ACCC to prevent the marketing and sales of franchises where a franchisor has demonstrated a track record of 'churning and/or burning'. This is likely to be already covered under the current legislative framework.
- That the Franchising Code be amended in various places including in relation to disclosure matters and to impose additional obligations on franchisors including to require franchisors to provide a franchisee with guidance on employment matters, including Awards, minimum wages and overseas workforce issues. Workplace issues in the context of franchising is now a significant focus area and this proposed amendment is likely to result in a great deal of debate.
- That consideration be given by the Taskforce to amending the Australian Consumer Law to specifically prohibit unfair contract terms in franchise agreements and the civil penalty provisions and infringement notices apply where a franchise agreement contains an unfair term. This change no doubt seeks to remove any uncertainty as to whether the current legislative framework applies to all franchise agreements.
- That in certain circumstances including where the franchisee is performing so poorly (so that its EBITDA is negative), franchisees be given the right to terminate the franchise agreement. The issue of goodwill payments for franchisees at the end of the term is also to be considered by the Taskforce.
- That franchise agreements cannot be unilaterally varied by franchisors unless a majority of franchisees agree.
- Enhanced whistleblower protections in line with the Committee's recommendations in its 2017 report.
- That the Department of Treasury and the Department of Jobs and Small Business consider implementing new reforms that would support the fair handling of capital intensive stock when franchise agreements between car manufacturers and car dealers are not renewed including:
- a minimum of 12 months' notice of when a dealer is being non-renewed;
- a prohibition on manufacturers compelling dealers to make capital improvements after the notice of non-renewal (or termination); and
- mandating that the franchisor buy back (at cost price) all vehicle parts that are up to three years old.
The Committee's report fits into a broader examination of regulation of the Australian automotive industry and the possibility of an independent code. The Committee noted that in many cases, the issues raised by the automotive industry overlap with other franchising sectors but stated that it did not object to a separate industry code being established to deal with non-franchise related matters.
Next steps for the franchising industry
Commentary surrounding the Report suggests that it will prompt significant change in the franchising industry. While this may be true, until specific legislative proposals are revealed, one can only speculate as to what meaningful reforms will develop. In the meantime, the Franchising Taskforce and various other departments will conduct an assessment of the viability of the Committee’s recommendations. Franchisors should review the Report and the recommendations as against their current franchise operations.