Recent Developments in Marketing Fund Disclosure Obligations
Marketing funds and associated disclosure have come under increased Government and industry scrutiny in recent times.
Now with a Federal Task Force releasing its findings, there’s a lot more for Franchisees and Franchisors to digest in terms of their responsibilities and rights.
Marketing funds allow a Franchisor to obtain financial resources for promotional or marketing activity, usually coming from contributions within the Franchisee network.
Proper disclosure can be a contentious area, with Franchisors balancing the burden of complying with disclosure obligations while running their businesses, and Franchisees having to rely on information provided by the Franchisor to make informed decisions about their business.
A Franchisor who maintains a marketing fund is required to provide Franchisees with an audited financial statement, separate to annual disclosure documents.
The recent developments in disclosure obligations for Franchisors under Australian law make it clear that there is a requirement for greater information and clarity around the reporting responsibilities in the Franchising Code of Conduct.
A report titled Fairness in Franchising was handed down by the Parliamentary Joint Committee on Corporations and Financial Services in 2019, with 71 recommendations to improve operations and effectiveness of the Franchising sector.
An Australian Government Franchising Task Force was developed to provide a response to the report, which delivered findings in August 2020 that support the need for action to improve fairness and transparency for Franchisees.
The consequences of poor disclosure by a Franchisor can be disastrous for both Franchisors and Franchisees alike.
The impact of poor disclosure for a Franchisor may not only result in a Franchisee or the Australian Competition and Consumer Commission (ACCC) taking action against them for breach of the Code but also can cause practical issues for the Franchisor being able to pass on legitimate costs to Franchisees due to those costs not being properly disclosed.
For Franchisees, poor disclosure by Franchisors can not only impact the financial viability of their business but also can have a devastating impact on their personal circumstances.
The purpose of disclosure is to give Franchisees information to help them make a reasonably informed decision about the Franchise and to ensure they are across all information that is material to running the Franchised business.
The key disclosure tool for Franchisors and Franchisees is the disclosure document. Disclosure documents cover matters including:
- existing franchises
- intellectual property
- the supply of goods and services
- capital expenditure
- company updates.
There has long been a disparity between the levels of disclosure expected by the ACCC and what is set out in the Franchising Code of Conduct.
What does good disclosure look like?
Marketing fund statements must detail all of the receipted funds and expenditure for the financial year and must include sufficient detail to give meaningful information to Franchisees about the sources of income and items of expenditure.
A high-profile example is the 2019 ACCC vs Ultra Tune Australia Pty Ltd case, which makes it clear there are areas in the Code that need clarity, despite requirements currently being set out.
The primary judge found that Ultra Tune had breached its disclosure obligations due to a lack of detail for how a majority of the marketing fund expenditure had been itemised. Namely, describing 80 per cent of the fund’s expenditure as simply Promotion & Advertising – Television.
There were also several minor items which accounted for less than 20 per cent of the total expenditure of the fund, described as gift vouchers, printing and stationery, seminars and meetings, administration fees, fleet administration and customer support.
The judge characterised this disclosure as being general in terms, which provided no meaningful information as to how most of the fund had been used.
He identified that Franchisees had very limited information about how and when the funds were spent, who the fees were paid to and what services were obtained.
The Australian Government is taking a strong stand to create more guidance and clarity around disclosure obligations particularly in relation to marketing fund statements, but proposed amendments to the Franchising Code of Conduct have not yet been released.
What should Franchisees disclose in the meantime?
The Franchising Code of Conduct directs Franchisors to provide a marketing fund financial statement which gives significant detail and meaningful information. When in doubt, Franchisors should seek to provide as much accurate, detailed, clear and unambiguous information on the marketing spend as possible.
Significant expenses require a greater level of detail, showing suppliers, locations and further information to help Franchisees understand how the funds were used.
In practice, this may require a breakdown of large costs, explanations on the relevance and effectiveness to Franchisees, and supporting materials.
For example, listing Digital Advertising at $1 million does not supply significant and meaningful disclosure for Franchisees to assess the relevance to their business.
Clearer disclosure may break the spend into Radio, Television, sponsored social media posts and Google advertising.
Best practice reporting would also include additional commentary on:
- the spend for each channel
- how much traffic each drove to the company website
- the target media outlets
- the target locations or markets
- any other information relevant to how the Franchisor spent the marketing fund.
Good industry, good news
Ongoing reform is building greater transparency and accountability for Franchisors and Franchisees.
Annual marketing fund statements have a rightful place in Franchising and the latest guidance from the regulator is designed to give Franchisees a better understanding of how their marketing fund contributions are being spent.
The review ensures Franchisors are regularly taking stock of their marketing efforts, driving strategic evaluation and change to provide sustainable results for network members.
Help is available
Franchisees have the right to request a disclosure document once every 12 months, but all too often they are not making use of or are even aware of this right.
There are some useful online resources available including the Australian Competition and Consumer Commission and the Franchise Council of Australia.
However, seeking professional legal advice that considers a party’s specific circumstances can help avoid disclosure disputes down the track.
Cowell Clarke are commercial law specialists and work with clients across Australia to create value and manage risk.
Megan Jongebloed is Head of the firm’s Franchise Law Group and can be contacted at email@example.com or by calling 08 8228 1107.