Proposed Franchising Code changes: What every franchisor should know
The next stage toward increased regulation of the Australian franchise sector is currently underway, with the Franchising Taskforce assessing stakeholder feedback to its Regulation Impact Statement (RIS) that outlines options for significant changes to the Franchising Code of Conduct.
The RIS was released on November 11, with public consultation closing less than four weeks later on December 6.
The 49-page RIS sought specific input on 17 questions arising from seven principles derived as key themes from the 2018 Inquiry into the Franchising Code of Conduct.
For each principle in the RIS, input was sought for up to three problems distilled from the Inquiry report that were perceived to cause harm or difficulty for franchisees, for a total of 16 problems across all seven principles.
Each problem has up to four options each (for a total of 49 options) ranging from “maintaining the status quo” (i.e. no changes to the Franchising Code), to significant regulatory intervention.
In addition to the problems and options outlined for each principle, the RIS sought public input on two or more questions for each of the following seven principles:
- Prospective franchisees should be able to make reasonable assessments of the value (including costs, obligations, benefits and risks) of a franchise before entering into a contract with a franchisor. (3 questions)
- Franchisees should have time to consider whether the relationship is right for them before committing to an agreement. (3 questions)
- Each party to a franchise agreement should be able to verify the other party is meeting its obligations and is generating value for both parties. (2 questions)
- A healthy franchising model fosters mutually beneficial cooperation between the franchisor and the franchisee, with shared risk and reward, free from exploitation and conflicts of interest. (3 questions)
- Principle 5. Where disagreements turn into disputes, there is a resolution process that is fair, timely and cost effective for both parties. (2 questions)
- Franchisees and franchisors should be able to exit in a way that is reasonable to both parties. (2 questions)
- The framework for industry codes should support regulatory compliance, enforcement and appropriate consistency (2 questions)
RIS options include major changes
Some of the 49 options proposed under the Regulation Impact Statement would result in major changes to the Franchising Code of Conduct if adopted. Some of these include the following:
Financial Disclosure – Franchisors or franchisees selling a franchise would be required to give two years Business Activity Statements (BAS), and other financial information, or where this is not available, financial information for a comparable franchise, and verify the accuracy of financial information (Option 1.1.2) and Option 1.2.2 (a)).
National Franchise Register – This option may not be limited to a list of franchisors, but include a requirement to lodge disclosure documents and template franchise agreements (Option 1.2.2 (b)).
Extend Cooling-Off timeframes & triggers – Options propose to extend cooling-off to either 14 or 21 days from the current seven (Options 2.1.2 and2.1.3), and adding a new cooling-off trigger where lease terms are provided after the franchise agreement cooling-off period has expired, and the lease terms are more than 10% greater than originally estimated (Option 2.2.3). A further trigger may extend cooling-off to transfers, extensions and renewals (Option 2.3.2).
Marketing Funds – Increased frequency and standards of reporting may be required around marketing funds (Option 3.1.2 (b)), as well as the introduction of penalties for incomplete reporting (Option 3.12 (b)).
Disclosure of Rebates – Franchisors may be required to disclose the percentage or amount of rebate received from suppliers, as well as what proportion is retained by the franchisor and what proportion (if any) is directed to franchisees (Option 4.1.2).
ROI for Capital Expenditures – Franchisors would be required to ensure that franchisees receive a return on capital expenditure (Option 4.2.2).
Limits on Unilateral Variations – Franchisors would be banned from introducing unilateral variations to franchise agreements, or alternatively, be subject to a limitation of circumstances in which unilateral variations could be made (Option 4.3.2).
Arbitration when mediation fails – The RIS recognises that the government may not be able to compel parties to arbitrate, but proposes this would occur after mediation has failed (Option 5.2.2(b)).
Sector levy to fund improved mediation – This option proposes to merge the Office of the Franchise Mediation Advisor (OFMA) and the Australian Small Business and Family Enterprise Ombudsman’s (ASBFEO) mediation services into one body, to be funded by a levy based on numbers of complaints received (Option 5.1.2(a)).
Require dispute resolution processes to be included in franchise agreements – This option would also include required timeframes for dispute resolution processes, including arbitration, to occur (Option 5.1.3).
Termination restrictions and franchisee-initiated termination – This option proposes to apply additional requirements before franchisors can terminate franchisees under the special circumstances in the Franchising Code (Option 6.1.2(a)) (e.g. not until after mediation has been attempted), as well as provide statutory rights for franchisees to initiate a termination (eg. due to hardship, business failure, etc) (Option 6.1.2(b)).
Dilution of Restraint of Trade clauses – This option proposes further amendments to Clause 23 of the Franchising Code to void restraint clauses that do not comply with this clause (Option 6.2.2), plus add clarification of what constitutes a breach under this clauses. The Code may also be amended to include common law principles to protect franchisees against unreasonable restraints.
Goodwill – Franchisors will be required to clarify the franchisee’s rights in relation to goodwill at the end of the agreement, including how this will be calculated (Option 6.3.2).
Harmonisation of the Franchising and Oil Codes – This would require either both Codes to use the same common provisions (Option 7.1.2) or repeal the Oil Code and add specific fuel retailing provisions to the Franchising Code (Option 7.1.3).
Increased penalties – Both the Franchising Code and Oil Code would be subject to penalties for all breaches, and all existing penalties would be increased (Option 7.2.2)
Minor changes proposed
Many minor changes to the Franchising Code are also proposed in the Regulation Impact Statement (RIS), and due to their relatively non-controversial nature, are likely to be adopted. These include:
Electronic Disclosure – Franchisors will be required to provide an option to give disclosure documents in electronic format to franchisees (Option 1.1.2 (a)).
Provide ACCC Franchisee’s Manual – Franchisors will be required to give this ACCC publication to franchisees (it is currently available online to download for free). (Option 1.1.2 (d)).
Pre-entry education for franchisees – This includes potentially requiring franchisees to undertake existing free online education (Option 1.2.3) or building a new government website for potential franchisees (Option 1.3.2), and may include more education around leasing requirements (Option 2.2.4) and legal rights (Option 4.3.3), plus education around termination processes (Option 6.1.3) and improved understanding of how goodwill is handled in franchising (Option 6.3.3).
Improved sector education – This option requires the government to provide more communication and guidance about Franchising and Oil Code compliance to sector participants.
What next for possible Code changes?
The Franchising Taskforce is currently assessing stakeholder feedback to the RIS, and may publish submissions online.
According to a flowchart on the Taskforce’s website, once stakeholder responses have been assessed, the Taskforce will then provide advice to relevant ministers (including the Minister for Employment, Skills, Small and Family Business), followed by a public announcement of the Government’s position on franchising reforms.
A public announcement is not expected until early 2020, with speculation that the commencement date for amendments to the Franchising Code of Conduct may occur on July 1, 2020 in line with the timing of amendments to the Code arising from previous inquiries.
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