Keeping Franchisors on their toes
This article appears in the May/June 2014 issue of Business Franchise Australia & New Zealand
The Australian Competition and Consumer Commission is using its audit power to check whether franchisors are complying with the Franchising Code of Conduct.
The audit (or information-checking) power, which took effect on 1 January 2011, enables the ACCC to compel a franchisor to provide any information or documents it is required to keep, generate or publish under the Franchising Code. This includes disclosure documents, marketing fund statements and franchise agreements.
Importantly, the audit power allows the ACCC to investigate anonymous complaints against franchisors. This assists the ACCC in situations where franchisees may be hesitant to report contraventions due to fear of retaliatory action by their franchisor.
In the past, the ACCC has focused primarily on franchisors of concern. For example, franchisors that we’ve had previous dealings with, or that have been the subject of a significant number of complaints. The ACCC has audited more than 50 franchisors and most have been found to be complying with the Franchising Code.
The ACCC is now shifting its attention to industries that generate a disproportionate number of complaints. We’re currently looking at franchisors from the fast food and health and fitness industries, although our audits are not restricted to these two industries.
How does an audit work? First, the ACCC sends the franchisor a notice to produce documents, which clearly sets out the paper work that the franchisor will need to provide.
We are likely to ask for a copy of disclosure documents issued by the franchisor within a certain period. Copies of franchise agreements, certain lease documents and marketing fund statements may also be requested. We might also want to see any termination notices issued by the franchisor.
The franchisor has 21 days to respond. If the records are in order, there shouldn’t be any problems. Franchisors may apply for an extension and we are happy to grant one if there are good reasons for not being able to comply within the timeframe.
The ACCC will do an initial scan of the documents to see that everything we asked for has been provided. If something is missing, we’ll contact the franchisor and find out why.
The next step involves comparing what’s in the documents with what we already have on file. If there are discrepancies, we’ll raise these with the franchisor.
The good news – both for franchise systems and would-be franchisees – is that most audited systems to date show they are complying with the Code.
Where an audit reveals shortcomings, the ACCC has a range of tools to bring about compliance. If our review of the documents reveals severe, deliberate breaches of the Franchising Code (or the Competition and Consumer Act) by a franchisor, enforcement action may be necessary. If our review reveals very minor breaches, we’ll seek to resolve our concerns directly with the business (a so-called ‘administrative resolution’ that is often the end of the matter).
The audit power helps strengthen franchisor compliance with the Franchising Code by giving us a window into franchise systems that did not exist before. The very exercise of conducting rolling audits means that where there has been non-compliance with the code, there is a good chance we will pick it up. So the message for franchisors is simple: keep your books in order!
For more information on the ACCC’s audit power, click on the ‘Industry code audits’ link at www.accc.gov.au/industrycodes or contact the Small Business Helpline on 1300 302 021. For franchising information, visit www.accc.gov.au/franchising.
Dr Michael Schaper is Deputy Chairman of the Australian Competition and Consumer Commission.