Behind the Headlines

Jason Gehrke, Franchise Advisory Centre

Franchising Code exposure draft changes & supporting guide released

The federal government has released an exposure draft of proposed changes to the Franchising Code of Conduct and a supporting guide relating to the changes, and accepted public submissions for just three weeks, closing on Friday, December 4.

The exposure draft identified specific changes to the Franchising Code, however the supporting guide explains the nature of the changes and puts these into context in relation to the Government’s official response to the 2018 Franchise Inquiry “Fairness in Franchising” report.

A key feature of the new Code will be a requirement for franchisors to summarise certain information in a Key Facts Sheet. The exposure draft of the Code does not include a template of this Key Facts Sheet, and instead, three versions are proposed in the supporting guide, with the consultation process to determine which version will be adopted.

Public submissions into the proposed Code changes closed on December 4.

To view the exposure draft of Code changes, visit:

https://consult.industry.gov.au/small-business/franchising-code-exposure-draft/

 

Key summary of Code changes

There are at least 14 significant changes to the Franchising Code of Conduct that franchisors should know, in addition to many minor and in some cases, technical changes. Key changes to the Code include:

  1. Improved disclosure of future capital expenditure requirements in line with recent changes to the Automotive Code;
  2. Disclosure of nature of rebates and how these are calculated, as well as whether and how these are shared with franchisees;
  3. A ban on passing-on the costs of preparing a franchise agreement;
  4. Improved disclosure of marketing funds, with penalties now applicable for abuse of marketing funds;
  5. An extension of the cooling-off period from seven to 14 calendar days;
  6. An extension of cooling-off rights to buyers of existing franchises, in addition to “greenfield” outlets;
  7. Amendments to allow franchisees to negotiate an early exit from a franchise agreement;
  8. A new seven-day notice period to the franchisee before termination on the basis of “special circumstances” to allow for dispute resolution processes to commence;
  9. Restraint clauses will be rendered ineffective unless a franchisee has committed a “serious” breach (although serious is not defined);
  10. Dispute resolution to include conciliation and voluntary binding arbitration (in addition to mediation);
  11. Franchisors cannot refuse to take part in mult-party dispute resolution;
  12. The Australian Small Business and Family Enterprise Ombudsman to oversee all franchising dispute resolution advisor functions;
  13. A doubling of all finaces and penalties, increasing from a maximum of 300 to 600 penalty units to a total of $133,200 based on the current value of a penalty unit;
  14. All new provisions to commence from 1 July 2021, except for the new dispute resolution provisions which will commence the day the Code regulations are registered.

 

Rebate changes may disadvantage franchises

A proposed change in the new Franchising Code of Conduct that will require franchisors to disclose their rebate income and detail how rebates are calculated could disadvantage franchises against corporate competitors.

The requirement to include detailed rebate information in a disclosure document could make it easier for competitors to access highly confidential supply chain information, and in turn, demand equal or better rebate arrangements from the same suppliers that could change the balance of current competitive advantage among brands, according to Franchise Advisory Centre director Jason Gehrke, who is also a director of two national franchise brands.

This is a particular concern for any franchise which competes with a corporate chain, for which there is no such disclosure requirement. Franchise brands which have evolved from buying groups and rely almost exclusively on rebates for their income will be the worst affected by this requirement, with potentially disastrous outcomes for their franchisees.

A similar proposal was initially recommended by a previous federal government inquiry into franchising in 2006 (the Matthews Inquiry), but was ultimately abandoned because of the same concerns that pose unintended risks to both franchisors and franchisees.

 

Unfair contract changes to affect franchisors

The Australian government, along with the states and territories, have agreed to changes to the Australian Consumer Law which will make unfair contract terms unlawful, and expand the application of protection laws, according to a government statement.

The changes are likely to affect franchise brands which in some instances previously were exempt on the basis of their contract value, but will affect all franchisors equally with the possibility of courts imposing civil penalties and alternative remedies for using unfair terms in franchise agreements.

The eligibility threshold for unfair contract protections will be increased from small businesses that employ less than 20 employees to those that employ less than 100, or which has an annual turnover of less than $10 million. The requirement for an upfront payment under the contract to be below a certain threshold will also be removed.

The federal government will move to develop exposure draft legislation and provide an opportunity for stakeholder consultation on the proposed changes. 

 

Collective bargaining class exemption for franchises now available

The Australian Competition and Consumer Commission (ACCC) has finalised a class exemption from competition law effectively allowing small businesses, agribusinesses, fuel retailers, and franchisees to negotiate collectively with customers, suppliers, and franchisors, according to an ACCC media release.

The exemption applies to businesses with an aggregate turnover of less than $10 million in the preceding financial year, and franchisees and fuel retailers regardless of their size. Target businesses are not obliged to negotiate with any bargaining group.

The exemption will be available from early 2021, will not override existing legal or contractual agreements between parties, and will co-exist with the ACCC’s current authorisation and notification processes. 

 

Franchise CEO resigns after government pressure, but licensees rue exit

Australia Post CEO Christine Holgate has resigned after intense government and media pressure over corporate culture and expenses, including the gifting of Cartier watches worth $19,000 to four executives who brokered a deal with banks worth $220 million, according to a media report.

Pressure came from the highest levels of government, with Prime Minister Scott Morrison bluntly telling her if she didn’t wish to stand aside “she should go”. Holgate has reportedly confirmed she will not claim the termination payment she is entitled to which is worth more than $700,000. In her resignation statement Holgate spoke about the challenges Australia Post will face in the lead up to Christmas, and her regret that a decision made two years ago has not passed the “pub test”.

The Licensed Post Office Group which represents 2,850 members servicing 80% of Australia Post’s outlets has supported Holgate through the episode, describing her as the “best CEO Australia Post has ever had” and her resignation as “a significant step backwards for Australia Post licensees”. 

 

Business interruption COVID claims may skyrocket

Business interruption insurance claims related to the pandemic are expected to soar after the New South Wales Court of Appeal rejected the insurance industry’s argument that policies should not cover losses incurred by business clients due to COVID-19, according to a media report.

The ruling relates only to policies referencing the now repealed Quarantine Act 1908, rather than the Biosecurity Act 2015, with payments being contingent on specific policy wording and application under a variety of conditions. These conditions include whether physical access to a business was denied and whether a business restructured or continued to operate in a different capacity. Insurance Australia Group (IAG) alone reportedly expects to payout hundreds of millions of dollars in claims. 

 

One in five users struggle to make BNPL payments

Research by the Australian Securities and Investments Commission (ASIC) has found that 21% of buy now, pay later (BNPL) users have missed a payment in the last 12 months, according to a media report.

BNPL users who experience financial hardship or struggle to make payments are reportedly taking out additional loans or cutting back on essentials such as food to meet their financial obligations. A spokesperson for a major BNPL provider stressed that their best customers were those who could “afford to pay, and pay on time”. A code of conduct is being developed by the industry to address issues of consumer harm, among other things. 

 

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