Franchising

The Fairness In Franchising report by the Parliamentary Joint Committee on Corporations and Financial Services comments

Franchising is big business in Australia. In 2016, franchising was estimated to contribute approximately 9 per cent of gross domestic product (GDP). As a business structure, franchising exhibits a substantial disparity in power between franchisors and franchisees. This power imbalance is inherent to the structure, given the franchisor owns the business model and has control over operations and franchisee contracts, as well as their tenancy in many cases.

As a distinct form of business with characteristics that differentiate it from other forms of business, franchising is governed by its own code and legislation. The developers of this regulatory framework promoted it as being designed to address the power disparity that is reinforced in the contract (the franchise agreement) between the franchisor and franchisee, without unduly constraining the market. However, in practice the framework has not achieved that outcome and has in some cases further entrenched the power imbalance.

A franchise agreement is typically a standard form long-term contract between franchisor and franchisee. The franchise agreement is designed by the franchisor. Therefore, it has ordinarily been used to protect the franchisor's interests and place most of the commercial risks, burdens and responsibilities on the franchisee. Even a franchise agreement that may appear fair and reasonable when the franchise is operated to the mutual benefit of the franchisor and franchisee can, if the circumstances change (such as a change of ownership), be abused by the franchisor to the detriment of the franchisee. Indeed, many of the public and confidential submissions received by the committee outlined the significant, and often lifechanging, detriment that many franchisees endured as a direct result of being exploited by franchisors.

When this committee inquired into franchising in 2008, it appeared that some franchisors were behaving opportunistically, but that the issues were relatively isolated. By contrast, the evidence to this inquiry indicates that the problems, including exploitation in certain franchise systems, are systemic. Resolving systemic issues requires a much broader and more comprehensive approach. The committee is therefore proposing substantial changes to the Franchising Code of Conduct (Franchising Code), to the sections of the Oil Code of Conduct (Oil Code) that relate to franchising, as well as to the responsibilities and powers of the regulator. Prior to this inquiry, the principal regulatory response to issues in the franchising sector has been around improving pre-contractual disclosure. During this inquiry, much was made of: firstly, improving the awareness of prospective franchisees and ensuring that they have access to appropriate legal and business advice prior to entering a contract; and secondly, improving the accuracy and meaningfulness of the information provided to prospective franchisees.

The prevailing regulatory response operates on the assumption that if a prospective franchisee is well-informed about the nature of the business and the contractual obligations into which they are entering, the franchisee will be suitably equipped to look after their own interests. Efforts to improve franchisee education and awareness in tandem with greater transparency are certainly important and necessary. However, they are insufficient because the franchise agreement embeds the power disparity between franchisor and franchisee for the duration of the contract, including the exit arrangements.

The committee received a raft of evidence about how the abuse of contractual power can manifest in a franchise agreement. Further, the committee also received evidence that pointed to shortcomings in the current regulatory responses such as the duty to act in good faith and the unfair contract terms provisions.

Franchising is typically viewed as a relationship between franchisor and franchisee. Even at this relatively straightforward level, there is enormous diversity within the franchising sector in Australia. However, the listing of some franchise operations on the stock exchange and the entry of private equity has added further complexity. The entry of a third party, such as shareholders, may shift the franchisor's focus from its franchisees to its shareholders. For example, if the franchisor cannibalises franchisee territory, increases its fees, reduces its service to franchisees, and introduces costly mandatory training that is unaccredited, the franchisee will find scant relief in the contract and the Franchising Code.

This report recommends an overarching franchising framework that is fair for all participants and which recognises that, in franchising (just like banking and financial services), disclosure alone is an insufficient regulatory response to power imbalances and exploitative behaviour by powerful corporations.

The committee acknowledges that many franchisors have developed franchise systems that operate to the mutual benefit of the franchisor and their franchisees. Indeed, the committee heard from a franchisor whose business model explicitly recognises the mutual importance of the franchisor, franchisees and suppliers. Further, that franchisor has commitment to resolving challenges in collaboration with its franchisees. Therefore, in developing its recommendations, the committee has been mindful to avoid imposing unnecessary burdens on franchisors who treat franchisees fairly. That said, the recommendations are designed to lift standards and conduct across the entire industry because, on the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees.

The committee notes that wage theft continues to occur in many franchises: partly due to the business model franchisors operate and partly due to a range of socio-cultural problems. At times, wage theft was occurring as a way for franchisees to extract profits or service payments in order to stay afloat in a financially constrained business model (given wages are one of the greatest costs in the franchisee's control). In some instances wage theft was encouraged by franchisors. Whilst many franchisors cited greed as the primary motivation for wage theft, the committee notes that the issue is far more complex and partly inherent to the business models' structural breakdown of power and the imposition of cost controls. Some of the recommendations contained in this report, if implemented, will go a long way to indirectly rectify this issue by mitigating incentives to engage in wage theft.

Industry views—The Franchise Council of Australia

The Franchise Council of Australia (FCA) is the peak body for Australia's franchise sector. The FCA has been highly influential across all aspects of franchising, including education, research, policy and the development of the regulatory framework. The FCA describes itself as representing 'franchisees, franchisors and suppliers', stating that it 'has a strong track record of working collaboratively with government and regulators to advance the best interests of Australian franchising, and has supported constructive efforts to reform the Franchising Code'.

However, the FCA does not appear to provide a balanced representation of franchisor and franchisee views, and this is likely because of its membership composition. There are almost no franchisee members of the FCA, and membership of the FCA is dominated by franchisors. In effect, the FCA is captive to the interests of franchisors. A more balanced representation of views would be of benefit to the entire franchise industry. For example, the existence of strong franchisee associations in the United States has enabled the development of Fair Franchise Standards which can be used to assess and accredit franchise systems.

The committee also observes that the FCA opposed almost all the recommendations submitted to this inquiry by the Australian Competition and Consumer Commission (ACCC). The recommendations proposed by the ACCC were designed to address some of the power imbalances in the franchise sector and many of these recommendations are supported in this report.

While the committee received a raft of evidence from disgruntled franchisees as well as some automotive dealer organisations, there was no strong and well-informed franchisee organisation that had an industry-wide view of the franchising sector. The committee is of the view that many of the problems considered in this report, including the unbalanced regulatory framework, are at least partially a result of a lack of effective representation of franchisee views. Therefore, the committee considers it important that the relevant government departments and agencies be keenly aware of the risk that the policy and regulatory debate can be, and has been, easily captured by franchisors and their representatives. The committee also considers it important that franchisees develop a strong national association.

The committee's approach

As noted earlier, the franchising sector is diverse and, as a result, the issues that arise are complex. However, certain themes recurred throughout the inquiry, including the need to develop greater: • transparency and accountability; • fairness and protection; and • education and awareness.

These themes are not necessarily discrete, and many aspects of the inquiry illustrated all these themes to a greater or lesser extent. Nevertheless, the committee considers these themes to be useful to explain its approach to the report and the topics covered in the chapters. xvi The chapters on disclosure and registration, third line forcing, and supplier rebates all talk to a need for greater transparency and accountability of franchisors. The chapters on unfair contract terms, the cooling off period, exit arrangements, goodwill, restraints of trade, collective action, dispute resolution, and the industry codes all point to a need for greater fairness and protections for franchisees that require amendments to the Franchising and Oil Codes of Conduct, as well as to primary legislation, to prevent exploitation by franchisors.

The chapters on pre-entry education and access to advice, retail leasing, and financing and lending, illustrate the need to increase the awareness of franchisees in relation to the risks and obligations involved in entering a franchise agreement and to provide franchisees with ready access to independent sources of information and advice. The remainder of the executive summary sets out the key findings and recommendations of the report.

Franchising taskforce

The committee recommends that the Australian Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the committee's recommendations. The Franchising Taskforce should include representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the ACCC.

Industry associations

As noted above, the FCA does not appear to provide a balanced representation of franchisor and franchisee views. The committee therefore recommends that the relevant government departments and agencies be alert to the risk that franchisors and their representatives can capture the policy and regulatory debate. The committee also urges franchisees to develop a strong national association.

Disclosure and registration

Disclosure is a vitally important transparency mechanism and comprises both up-front (pre-contractual) disclosure, as well as disclosure during the term of the franchise agreement. Evidence to the inquiry revealed significant concerns about pre-contractual provisions and the accuracy of earnings information, and the abuse of marketing fees and funds by franchisors.

The committee makes significant recommendations around disclosure including: • a requirement to provide the disclosure document in electronic form; • requirements around the provision of earnings and financial information when franchises are sold or transferred; and  • greater clarity, consistency and accountability with respect to the use and reporting of marketing funds.

Registration is an important step in achieving market transparency. The committee recommends that the Franchising Taskforce investigate options for a public franchise register with franchisors providing updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code. Civil penalties should apply for non-compliance.

Transparency and accountability on third line forcing and supplier rebates4 Consistency of products and services offered to customers across a franchise network is of paramount importance. For this reason, it is common for franchisors to use third line forcing arrangements to require franchisees to use specified suppliers. These arrangements also allow franchisors to use bulk buying power to obtain better deals for their franchisees.

But, an inherent conflict of interest exists when the franchisor uses third line forcing arrangements to mandate that franchisees purchase goods and services from particular suppliers while at the same time receiving a financial incentive in the form of supplier rebates, the amount of which remains hidden. The committee notes that, at times, the goods were priced at a greater cost than what could be sourced in the open market. The committee recommends that the ACCC collect data on the extent to which these conflicts of interest manifest in practice.

It is fundamentally important for prospective franchisees to be able to make an informed appraisal of the true cost of goods in order to assess the profitability of a business, especially when both royalties and rebates are applied simultaneously. The committee recommends mandatory disclosure in percentage terms of all supplier rebates, commissions and other payments in relation to the supply of goods or services to franchisees. The committee also refers a range of related matters to the Franchising Taskforce.

Whistleblower protections

Evidence to the inquiry revealed a substantial amount of intimidatory behaviour and misconduct by franchisors. The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2018 which passed Parliament on 19 February 2019 implements some of the committee's recommendations from its September 2017 report, Whistleblower Protections. The committee recommends that the whistleblower protection regime recommended in its Whistleblower Protections report apply to franchisees and their employees, and that breaches of the Franchising and Oil Codes by franchisors be included in the definition of disclosable conduct. The committee recommends the Government respond to its Whistleblower Protections report.

Unfair contract terms laws 

Given the inherent power imbalance in franchising, many franchisees have suffered as a result of unfair contract terms. The unfair contract terms laws have had limited effect on franchising. The committee considers it unacceptable that franchisors are able to retain unfair contract terms (such as unilateral changes to the business model or setting menu prices below cost) in their franchise agreements without penalty, and therefore have little incentive to remove such terms. The committee therefore recommends that the Franchising Taskforce examine the appropriateness of making unfair contract terms in franchise agreements illegal and for civil penalties to be established. 

Cooling off period 

A franchisee is currently entitled to a seven day cooling off period after signing the franchise agreement, during which time they may terminate the agreement. However, the timing of the cooling off period and the mechanisms which might trigger it are beset with uncertainty. In order to ensure that prospective franchisees have access to all necessary documentation before the cooling off period expires, the committee makes several recommendations to clarify the triggering and timing of the cooling off period.

Fair exit rights and goodwill

Appropriate exit arrangements are essential in ensuring that one party is not overly penalised when the business relationship ends. For too long, the Franchising Code has only provided termination rights to franchisors. The committee recommends a significant addition to the Franchising Code to give franchisees the right to exit franchise agreements under certain conditions, which vary according to the situation. These recommendations should bring significant cultural change to franchising and help address the power imbalance. The committee also recommends the Franchising Taskforce consider greater transparency around the allocation (if any) of goodwill in franchise agreements, as well as protections for franchisees when required to undertake significant capital expenditure near the end of the term of a franchising agreement. 

Collective action 

The committee recommends that the Government implement the ACCC's proposal for a class exemption to make it lawful for all franchisees to collectively bargain with their franchisor regardless of their size or other characteristics. The committee recommends that franchisees be empowered to undertake collective action, such as joint negotiation, mediation and arbitration to resolve problems and disputes. This would provide a significant mechanism to address the power imbalance between franchisees and franchisors and intimidatory behaviour by franchisors. Dispute resolution and arbitration10 Evidence to the inquiry included a litany of instances where the franchisee alleged the franchisor failed to engage in good faith in the mediation process, knowing that the only alternative was court action which was prohibitively expensive for the franchisee. Absent good faith, the mediation process fails by design.

If all the issues are unable to be resolved satisfactorily through mediation, a determinative procedure such as arbitration is required. The committee accepts that arbitration is more expensive than mediation because of the time and expertise required. But, it can deliver finality to parties who want to resolve a matter and move on. Arbitration is cheaper and more flexible than pursuing court action and this is important in any attempt to deliver a just outcome in a timely fashion at a reasonable price.

The committee therefore recommends that the dispute resolution scheme under the Franchising Code include binding arbitration with the capacity to award remedies, compensation, interest and costs. Further, the committee recommends that the Franchising Code be amended to allow a mediator or arbitrator to undertake multi-franchisee resolutions when disputes relating to similar issues arise.

Enhancement and alignment of the Industry codes

The current Franchising Code has fallen short of its intended aim to strike an appropriate power balance between franchisors and franchisees. One of the key proposals in this report relates to the penalty regime associated with the Franchising and Oil Codes. For too long, some breaches have either not attracted a penalty, or the penalty amounts have been derisory. The committee is firmly of the view that the lack of consequences for breaching the Franchising and Oil Codes undermines the ACCC's ability to ensure compliance with the codes. Where penalties are manifestly insufficient, franchisors are likely to factor the risk of a penalty into the cost of doing business. Where penalties are unavailable or not applied, there is no incentive for a franchisor to comply with the codes. Therefore, the committee considers that civil pecuniary penalties and infringement notices should be made available for all breaches of the Franchising and Oil Codes. Further, the penalty amounts should be similar to the penalties currently available under the Australian Consumer Law to ensure meaningful deterrence. Importantly, the penalty amounts must be prescribed in legislation, so that the limit on penalties under industry codes does not apply to franchising. The committee therefore recommends the Franchising Taskforce develop amendments to the Competition and Consumer Act and the Franchising Code to implement the penalty regime recommended by the ACCC.

The committee also notes that the Food and Grocery Code of Conduct has some features that would enhance the Franchising Code, and recommends the inclusion of a ban on unilateral or retrospective variations to terms and conditions in the Franchising Code.

The committee also recommends that the Franchising Taskforce identify reforms that would support the fair handling of capital intensive stock when franchise agreements between car manufacturers and new car dealers are not renewed. The committee also recommends that the Oil Code be amended to align with the Franchising Code to avoid inconsistencies, and that the Franchising Taskforce consider options to ensure that multiple codes remain aligned over time. 

No churning and burning 

Churning refers to the repeated sale at a single site of a failed franchise to a new franchisee. Outlets that pass through a corporate store stage in between being operated by franchisees can also be counted as site churning. Burning refers to continually opening new outlets, some of which are unlikely to be viable, to profit from upfront fees, while leaving existing outlets to struggle and close. Franchise systems that focus on profit through the sale of new outlets may be tempted to engage in churning and burning complemented by contracts which were shorter in duration than industry standards. While the committee received evidence about churning and burning in other franchise systems, the problem appears to be far greater within Retail Food Group (RFG). The committee is concerned about both the aggregator model of acquiring existing franchising brands used by RFG as part of its growth strategy, as well as the implications of RFG's listing on the stock market. The committee recommends that the ACCC be given an intervention power to identify and act on the marketing and sales of franchises where a franchisor shows a track record of systemic churning and/or burning. The committee notes that the proposed intervention power should target only the most egregious behaviour by franchisors. 

Education and advice 

Appropriate education is vital in equipping prospective franchisees with the knowledge and skills to better inform themselves about the risks and responsibilities of becoming a franchisee. Many prospective franchisees do not have ready access to services that can help them understand those risks, and some franchisees have not undertaken sufficient due diligence or sought sufficient and appropriate legal or accounting/business advice.

The committee proposes a range of improvements to the education and advice available for franchisees. In particular, the committee recommends that the ACCC  develop a FranchiseSmart website for franchises along the lines of the Australian Securities and Investments Commission (ASIC) MoneySmart service.

The committee also considers that franchisees need to develop far greater awareness around the risks and responsibilities of being a franchisee. This includes pre-entry education and seeking appropriate advice about the franchise agreement, but also extends to financing, and the implications of retail lease arrangements.

Financing and lending

Previous parliamentary inquiries and the Royal Commission on Financial Services have exposed misconduct related to small business lending, including in franchising.15 The committee draws attention to the detrimental consequences of irresponsible lending and borrowing in the franchise sector. The committee also questions franchisor-assisted lending, and whether it risks artificially inflating the value of franchise outlets.

Retail lease arrangements

The interaction between shopping centre landlords, franchisors and franchisees is complex and, at times, fraught. Franchisors argue that major shopping centre landlords engage in anti-competitive conduct and impose restrictive lease terms, excessive price increases, and onerous conditions around lease termination.

In some cases, factors external to the franchise relationship cause problems in retail leasing. While the committee recommends that the Franchising Taskforce consider various matters, particularly in relation to the clarity, transparency and timeliness of the disclosure of retail lease agreements to the franchisee, the committee emphasises that franchisees should exercise particular caution around retail lease agreements that involve shopping centres.

Conclusion

Disclosure has been the principal and almost only protection for franchisees. Many franchisors would like to keep it that way. However, the extent and breadth of misconduct and exploitation by franchisors within the franchise sector demonstrates that disclosure and transparency alone, while vitally important, are an insufficient response to power and information asymmetry.

During the inquiry, the poor conduct of a large number of franchisors has been exposed publicly. In spite of that exposure, up until the reporting date the committee continued to receive information from franchisees indicating that intimidatory conduct is continuing. 

The current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance. The committee has therefore taken a two-pronged approach to improved regulation. Firstly, the committee recommends a suite of changes to the Franchising and Oil Codes. This includes a recommendation for civil pecuniary penalties and infringement notices for all breaches of the Franchising and Oil Codes, an increase to the penalty amounts to a level similar to the penalties currently available under the Australian Consumer Law, and prescribed penalty amounts in legislation, so that the limit on penalties under industry codes does not apply to franchising.

Secondly, the committee proposes to give the ACCC more responsibilities, and in certain instances, greater enforcement powers. The committee therefore expects the ACCC to undertake a series of investigations to root out misconduct and exploitative behaviour in the franchise sector.

However, the ACCC is not the only regulator with responsibility for franchising because part of ASIC's remit includes oversighting corporate governance in Australia. Recent parliamentary inquiries and the Financial Services Royal Commission have identified serious failures of corporate governance in the financial services sector. The evidence presented to the committee during this inquiry indicates that the extent of poor corporate governance in some areas of franchising is comparable to that in the financial services sector. There are deeply rooted cultural problems that will not be resolved by a franchisor replacing a few senior executives. ASIC must take a much more proactive role in monitoring franchisor corporate governance and taking enforcement action where necessary.

The actions of certain franchisors have caused enormous reputational damage to the sector. This needs to be rectified for the benefit of the entire franchising industry. The proposed reforms outlined by the committee in this report are substantial, and many elements are interdependent. For example, the new features proposed for the Franchising Code would be ineffective if mandatory arbitration is not included in the dispute resolution arrangements, and if the recommended penalty regime is not implemented in full. The committee has sought to strike an appropriate balance between the legitimate business interests of both franchisors and franchisees. The committee has taken a holistic approach to address the systemic problems presented to it, and therefore recommends that the government avoid cherry picking, and instead implement all the recommendations in this report as soon as possible.

The Committee's recommendations are

Franchising Taskforce 

Recommendation 1.1  

The committee recommends that the Australian Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the committee's recommendations. The Franchising Taskforce should include representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the Australian Competition and Consumer Commission. Whistleblower protections 

Recommendation 3.1 

The committee recommends that the whistleblower protection regime recommended in its September 2017 report, Whistleblower Protections, apply to franchisees, their employees and that breaches of the Franchising and Oil Codes of Conduct by franchisors be included in the definition of disclosable conduct. The committee also recommends the Australian Government respond to its Whistleblower Protections report. Intervention power and investigations 

Recommendation 4.1 

The committee recommends that the Australian Competition and Consumer Commission be given power to intervene and prevent the marketing and sales of franchises where a franchisor shows a track record of churning and/or burning. 

Recommendation 4.2 

The committee recommends that the Australian Competition and Consumer Commission, the Australian Securities and Investments Commission and the Australian Tax Office, conduct investigations into the operations and dealings of Retail Food Group, its former and current directors and senior executives and companies and trusts they own, direct, manage or hold a beneficial interest in, with regard to matters including, but not limited to, the Australian Consumer Law, the Franchising Code of Conduct, insider trading, short selling, market disclosure obligations (including related party obligations), compliance with directors' duties, audit quality, valuation of assets (including goodwill), and tax avoidance. 

Industry associations 

Recommendation 5.1 

The committee recommends that, until a suitable body exists to adequately represent the interests of franchisees, the Franchising Taskforce examine how consultation processes associated with franchising policy, regulation and legislation can achieve an appropriate level of input from franchisees, including whether it is appropriate for a franchisee representative to be a voting member of the franchisor's board. 

Recommendation 5.2 

The committee recommends that the Franchising Taskforce examine how the Australian Government could be provided with regular reports and updates on the effectiveness of regulatory settings for franchising, including the extent to which industry participants are seeking to circumvent the regulatory arrangements. 

Disclosure and registration Up-front and pre-contractual disclosure 

Recommendation 6.1 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to provide that the disclosure document and franchise agreement must be made available in both electronic and hardcopy form. 

Recommendation 6.2 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to provide that franchisors must provide the information statement set out in Annexure 2 to franchisees as a separate document that is also subject to the disclosure and cooling off provisions, and not as an attachment to the Franchising Code of Conduct. Provision and accuracy of earnings information 

Recommendation 6.3 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to provide that:  the vendor franchisee or franchisor must provide the prior two years' Business Activity Statements, a profit and loss (income) statement and balance sheets (statement of financial position) and an assessment of labour costs for that particular franchise business to the prospective franchisee, or franchisor if the vendor franchisee is closing or selling back to the franchisor, in the disclosure document or attached to the disclosure document; or   if the franchise is a greenfield franchise, then the franchisor must provide the prospective franchisee the Business Activity Statements, profit and loss statements and balance sheets for the two year period of a comparable franchise to the prospective franchisee in the disclosure document or attached to the disclosure document. 

Recommendation 6.4

The committee recommends that the Australian Government amend the Franchising Code of Conduct to provide that all financial information relating to the franchise business must not be provided to the franchisee separately to the disclosure document (that is, it must be provided in or attached to the disclosure document). 

Recommendation 6.5 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to require the franchisor to include the following statement in the franchise disclosure document concerning financial statements it provides: "To the best of the franchisor's knowledge, the earnings and other financial information provided in this disclosure document are: a) accurate, correct and compliant with the Franchising Code of Conduct and relevant Australian Accounting Standards Board standards at the time of signing; b) except where discrepancies have been identified in writing at the time of signing." 

Franchise agreement brokers 

Recommendation 6.6 

The committee recommends that the Franchise Taskforce review the use of third party brokers in selling franchise businesses and the continued appropriateness of the use of 'no agent' and 'entire agreement' terms in franchise agreements, and if so, whether additional disclosure on the meaning and effect of such clauses should be mandated in the Franchising Code of Conduct. 

Marketing fees and marketing funds 

Recommendation 6.7 

The committee recommends that the Australian Government amend clauses 15 and 31 of the Franchising Code of Conduct to provide that both clauses apply where a franchisee is required to make regular payments to the franchisor to cover advertising and marketing activities. The language used in clauses 15 and 31 needs to be consistent. 

Recommendation 6.8  

The committee recommends that the Australian Government amend clause 31 of the Franchising Code of Conduct to provide for civil pecuniary penalties for a breach of the clause. 

Recommendation 6.9 

The committee recommends that the Australian Government amend clause 15 of the Franchising Code of Conduct to provide that the actual financial statements for the marketing fund account be provided to franchisees within 30 days of the end of each quarter with sufficient detail as to be prescribed in the Franchising Code of Conduct and relevant standards set by the Australian Accounting Standards Board. 

Recommendation 6.10

The committee recommends that the Australian Government amend clause 12 of the Franchising Code of Conduct to provide that a master franchisor must comply with clauses 15 and 31 where the subfranchisee is directly or indirectly required to contribute to a marketing or cooperative fund controlled or administered by the master franchisor.

Recommendation 6.11

The committee recommends that the Auditing and Assurance Standards Board prepare and issue an audit guidance and Chart of Accounts for marketing and cooperative fund audits in order to:  assist accountants and franchisors in the preparation of financial statements for a marketing or cooperative fund; and  assist auditors to prepare audit reports for marketing or cooperative funds.

Recommendation 6.12

The committee recommends that the Australian Government clarify, through legislation, the distribution of unused marketing funds in the event of the franchisor winding up. 

Recommendation 6.13 

The committee recommends that, subject to the other recommendations in this report in relation to marketing funds and fees in the Franchising Code of Conduct, the Oil Code of Conduct should be amended so that it contains the same provisions as the Franchising Code of Conduct in relation to marketing funds and fees. 

Franchise registration 

Recommendation 6.14 

The committee recommends that the Franchising Taskforce investigate options for a public franchise register with franchisors providing updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code of Conduct and Oil Code of Conduct. The Franchising Taskforce should examine:  the appropriateness of the Australian Competition and Consumer Commission (ACCC), or another agency, operating the register;  the information being made publicly available online with a disclaimer that the ACCC (or another agency) does not endorse the franchise systems listed; and  the application of civil penalties for non-compliance. 

Recommendation 6.15 

The committee recommends that the Australian Government amend section 51ADD of the Competition and Consumer Act 2010 to provide civil pecuniary penalties for non-compliance with a section 51ADD notice. 

Additional Disclosure 

Recommendation 6.16 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to require, as part of mandatory disclosure, guidance on employment matters, especially Awards, minimum wages, and overseas workforce issues to be developed by the Fair Work Ombudsman. 

Third line forcing 

Recommendation 7.1 7.52 

The committee recommends that the Franchising Taskforce examine how to amend the Franchising Code of Conduct to provide that franchisors are required to include within the disclosure document to franchisees for the two year period prior to the franchisee entering the franchise:  where the maximum resale price of each item has been below the cost price of the product purchased by the franchisee including, but not limited to, the cost of the product inclusive of any fees associated with the purchase of the product, royalties, other fees and fixed and variable costs in relation to the purchase and sale of the product have been added; and  the margin between the purchase price paid by the franchisee and the maximum price or recommended resale price of the top five by volume of goods and services sold by the franchisee; and  if data is not available for that particular franchise, then data for a comparable franchise needs to be provided.

Recommendation 7.2

The committee recommends that the Franchising Taskforce consider whether the Australian Competition and Consumer Commission should conduct an inquiry into all terms in franchise agreements relating to the discretion of the franchisor to decide the volume and frequency of supply orders for goods and services to be sold in the franchised business to prevent exploitative behaviour around over-ordering.

Supplier rebates

Recommendation 8.1

The committee recommends that the Australian Government amend the Franchising Code of Conduct so that all supplier rebates, commissions and other payments in relation to the supply of goods or services to franchisees by the franchisor or suppliers mandated by the franchisor be disclosed as a percentage of the full purchase price on each transaction.

Recommendation 8.2

The committee recommends that the Franchising Taskforce consider amendments to item 10 of the Franchising Code of Conduct to require the franchisor to detail in percentage terms what proportion of the supplier rebate will be:  retained by the franchisor; and  directed to franchisees, including indirectly, through:  direct payment to franchisees;  free or subsidised training; or  advertising and marketing; or  subsidised goods and services; or  administration expenses.

Recommendation 8.3

The committee recommends that the Franchising Taskforce conduct an investigation to examine conflicts of interest associated with supplier rebates and third line forcing, including:  the extent to which tender processes for suppliers conducted by franchisors are influenced by rebates or other benefits provided back to franchisors;  the nature and extent of rebates or benefits that flow from suppliers to franchisors;  the extent to which those rebates or benefits coincide with the use of third line forcing;  the extent to which such rebates or benefits may be conflicted remuneration;  the extent of the detriment suffered by franchisees as a result of such rebates or benefits;  whether any of the rebates or benefits (including any associated third line forcing) are in breach of the Franchising Code of Conduct or competition laws;  whether, and if so, the extent to which rebates or benefits are passed through to and provide a benefit to franchisees; and  making recommendations for policy or regulatory change to address any problems that are identified.  

Recommendation 8.4 

The committee recommends that the Franchising Taskforce consider amendments to items 7 and 10 of the Franchising Code of Conduct to provide that if the master franchisor controls and/or receives rebates from suppliers, this is disclosed in the franchise disclosure document. 

Unfair contract terms 

Recommendation 9.1 

The committee recommends that the Franchising Taskforce examine the appropriateness of amending section 23 of Schedule 2 of the Australian Consumer Law to provide that:  unfair contract terms contained in small business contracts and franchise agreements are prohibited; and  civil pecuniary penalties and infringement notices apply where the provision of a standard form contract (franchise agreement) to a small business contains an unfair contract term.

Recommendation 9.2

The committee recommends that the Franchising Taskforce consider amendments to the Competition and Consumer Act 2010 to ensure section 155 notices are available to allow the Australian Competition and Consumer Commission to obtain evidence about whether a standard form contract contains an unfair contract term.

Recommendation 9.3

The committee recommends that the Australian Government resource the Australian Competition and Consumer Commission to enable it to appropriately investigate all complaints or whistleblower reports about illegal unfair contract terms.

Recommendation 9.4

The committee recommends that the Franchising Taskforce examine the appropriateness of amending the Franchising Code of Conduct to require compliance with unfair contract terms legislation.

Recommendation 9.5

The committee recommends that the Franchising Taskforce examine how to amend section 23 of Schedule 2 of the Australian Consumer Law to provide that unfair contract terms provisions apply to all franchise agreements notwithstanding any other term in the franchise agreement or other agreements.

Recommendation 9.6

The committee recommends that the Franchising Taskforce consider options to address the existence of unfair contract terms in perpetual franchise agreements.

Recommendation 9.7

The committee recommends that the Australian Government amend the Franchising Code of Conduct to require that where any franchise agreement provides for what would otherwise be unilateral variation to the terms of the agreement, that such amendment can only be made with the agreement of the majority of franchisees within the same franchise system or representatives elected by a majority of franchisees within the same franchise system.

Recommendation 9.8

The committee recommends that the Franchising Taskforce consider whether the Franchising Code of Conduct should place restrictions (including whether such amendments can only be made with the agreement of the majority of franchisees, or representatives elected by a majority of franchisees, within the same franchise system) on franchise agreements providing for what would otherwise be unilateral variation to subsidiary requirements to franchise agreements, such as franchise manuals or policies.

Cooling off period

Recommendation 10.1

The committee recommends that the Australian Government amend the cooling off period in the Franchising Code of Conduct to clarify that the cooling off and disclosure periods are measured in calendar days.

Recommendation 10.2

The committee recommends that the Australian Government amend the cooling off period in the Franchising Code of Conduct to clarify in clause 26 of the Franchising Code of Conduct that a franchisee may exercise their right to exit any and all arrangements associated with a franchise (including leases) at any time up until 14 days after the last of the following have occurred:  a franchise agreement has been signed;  a payment to the franchisor has been made;  the required disclosure documents set out in the recommendations in chapter 6 have been received by the franchisee (within the required disclosure period); and  a copy of the lease has been received by the franchisee.

Recommendation 10.3

The committee recommends that the Australian Government amend the cooling off period in the Franchising Code of Conduct to clarify in clause 9 of the Franchising Code of Conduct that the 14 day disclosure period must begin at least 14 days before the signing of a franchise agreement.

Recommendation 10.4

The committee recommends that the Australian Government amend the cooling off period in the Franchising Code of Conduct to apply to transfers, renewals and extensions (including decisions to renew or not to renew), together with longer notice periods for renewals and extensions (including decisions to renew or not to renew).

Recommendation 10.5

The committee recommends that the Australian Government amend the cooling off provisions contained in the Oil Code of Conduct to make them consistent with the Franchising Code of Conduct.

Recommendation 10.6

The committee recommends that the Australian Government amend the Oil Code of Conduct to make the disclosure provisions consistent with the Franchising Code of Conduct, and that it be made explicit that the disclosure provisions also apply to transfers. 

Exit arrangements 

Recommendation 11.1 1 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to include provisions for franchisee triggered exit from franchise agreements as set out in scenarios 2, 3 and 4 in this chapter. 

Recommendation 11.2 

The committee recommends that the Franchising Taskforce consider how to amend the Franchising Code of Conduct to include provision for a franchisee to have a right to terminate the franchise agreement in special circumstances (similar to clause 29), for example, if a liquidator is appointed to the franchisor (or where the franchisor is a natural person, becomes bankrupt). 

Recommendation 11.3 

The committee recommends that the Australian Government amend clause 36 of the Oil Code of Conduct for termination in special circumstances to align with clause 29 of the Franchising Code of Conduct, and to include a note that such clauses do not give rise to a statutory right to termination and that such a right must be in the franchise agreement itself. 

Recommendation 11.4 

The committee recommends that for termination in special circumstances under both the Franchising Code of Conduct and Oil Code of Conduct, the franchisor must provide seven days' notice and if the franchisee lodges a notice of dispute with a mediator, arbitrator or court during the seven days, the termination process must be suspended until the dispute is resolved. Action by a franchisor in furtherance of a non-compliant notice (with insufficient notice) should attract a civil penalty of a similar amount to other penalties associated with such further action or termination. 

Recommendation 11.5

The committee recommends that the Australian Government amend the termination in special circumstances provisions in both the Franchising Code of Conduct and Oil Code of Conduct such that:  termination in relation to fraud can only occur if the franchisee is convicted of fraud in connection with the operation of the franchise; and  termination in relation to public health and safety can only occur if the franchisee if served with a 'permanent closure direction' for the franchise by a relevant government body, or failure to remedy WHS orders or notices. 

Goodwill 

Recommendation 12.1 

The committee recommends that the Franchising Taskforce examine whether the Franchising Code of Conduct should be amended to include a requirement for franchise agreements and transfer contracts to set out the endof-term arrangements for franchisee goodwill, including:  what financial consideration the franchisee is entitled to (if any) when a franchise agreement expires and the agreement is not renewed, including:  if the franchise is closed down; or  if the franchise becomes a corporate store; or  if the franchise is sold by the franchisor to another party;  what financial consideration the franchisee is entitled to (if any) when a lease between a franchisor and the landlord upon which the franchise is dependent is not renewed; and  how the franchisee goodwill is calculated and determined separately from the site and brand goodwill.

Recommendation 12.2

The committee recommends that the Franchising Taskforce examine how to implement the collection and analysis of data on franchise transfers to determine how common it is for franchisee goodwill to be included in transfer contracts and whether or not the corresponding franchise agreements attribute goodwill to franchisees. The Franchising Taskforce should then re-examine whether the policy and regulatory settings are appropriate, particularly if it is common for transfer contracts to include goodwill, but franchise agreements do not.

Restraint of trade

Recommendation 13.1

13.51 The committee recommends that the Australian Government, through the Australian Competition and Consumer Commission (or another agency as appropriate) commission a review of clause 23 of the Franchising Code of Conduct to determine whether it is fit for purpose and whether any changes are required. 

Recommendation 13.2 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to incorporate into the disclosure document an explanation that clauses (or part thereof) of a franchise agreement that are not in compliance with clause 23 of the Franchising Code are of no effect and not enforceable by the franchisor. 

Recommendation 13.3 

The committee recommends that the Australian Government amend the Franchising Code of Conduct to:  clarify what constitutes a 'breach' for the purposes of paragraph 23(1)(b) with particular regard to the concept of a "related agreement" within the clause; and  insert "at the time of expiry" at the beginning of paragraph 23(1)(b). 

Collective action 

Recommendation 14.1

14.39 The committee recommends that the Australian Government implement the Australian Competition and Consumer Commission's proposal for a class exemption to make it lawful for all franchisees to collectively bargain with their franchisor regardless of their size or other characteristics. The committee recommends that the following additions be made to the reform:  the proposal be extended to also cover collective action regarding franchise business models, dispute resolution, and sharing of information;  the fees for the notification and authorisation process should be reduced so that they are not an impediment to franchisees and other small businesses; and  any contract terms that seek to supersede or restrict the effect of the class exemption for collective bargaining be declared illegal under Unfair Contract Terms laws. 

Recommendation 14.2 14.40 

The committee recommends that the Australian Competition and Consumer Commission conduct an investigation into whether franchisors have taken action to impede franchisees who have attempted to pursue issues collectively, and to take action based on the findings of this investigation, as appropriate. 

Dispute resolution 

Recommendation 15.1

15.72 The committee recommends that the Franchising Taskforce consider the appropriateness of:  merging the Office of the Franchising Mediation Adviser with the Australian Small Business and Family Enterprise Ombudsman, and that franchising be included in the name of any combined body;  funding any combined small business and franchising ombudsman through an industry levy based on numbers of complaints;  all franchisees under the Franchising Code of Conduct falling within the jurisdiction of the combined body if established;  enhancing the powers of any combined body so that it may refer and direct parties to binding arbitration under the Franchising Code of Conduct; and;  the appointment of a combined small business and franchising ombudsman as an independent assessor with the ability to review handling of disputes and the capacity to refer systemic or serious matters to regulators. 

Recommendation 15.2 

The committee recommends that the dispute resolution scheme under the Franchising Code of Conduct remain mandatory and be enhanced to include:  the option of binding arbitration with the capacity to award remedies, compensation, interest and costs, if mediation is unsuccessful (does not exclude court action);  require that mediation and then arbitration commence within a specified time period once a mediator or arbitrator has been appointed;  restrictions on taking legal action until alternative dispute resolution is complete (along similar lines to those used by the Australian Financial Complaints Authority);  immunity from liability for the dispute resolution body;  to include a requirement that if a franchisor takes a matter straight to court, the franchisor must demonstrate to the court's satisfaction that the matter cannot be resolved through mediation, and if not the court should order the parties to mediation;  the capacity for a mediator or arbitrator to undertake multi-franchisee resolutions when disputes relating to similar issues arise (as determined by the mediator or arbitrator).

Comparison of industry codes

Recommendation 16.1

16.34 The committee recommends that the Franchising Taskforce consider amendments to the Competition and Consumer Act 2010 and the Franchising Code of Conduct to implement the penalty regime recommended by the Australian Competition and Consumer Commission, including:  civil pecuniary penalties (and, thereby, infringement notices) be made available for all breaches of the Franchising Code of Conduct and Oil Code of Conduct;  the quantum of penalties available for breach of the Franchising Code of Conduct and Oil Code of Conduct be significantly increased to ensure that penalties are a meaningful deterrent, such as to at least reflect the penalties currently available under the Australian Consumer Law; and  ensuring that the penalties for a breach of the Franchising Code of Conduct are prescribed in legislation, so that the limit on penalties under industry codes in subsection 51AE(2) does not apply to franchising.

Recommendation 16.2

The committee recommends that the Australian Government amend the Franchising Code of Conduct to include the following provisions:  except where already incorporated into a joining fee, a prohibition on passing on to the prospective franchisee the legal costs of preparing, negotiating and executing documents, including a civil penalty for any franchisor found to be deliberately attempting to increase franchise fees to circumvent a regulation to prevent the passing on of legal costs;  a ban on unilateral variations to terms and conditions;  a ban on retrospective variations to terms and conditions;  a ban on franchisors charging wastage and shrinkage payments; and  a duty on franchisors to provide franchisees with training on the requirements of the Code.

Recommendation 16.3

16.36 The committee recommends that, subject to any recommendations for reform of the Franchising Code made in this report, the Australian Government amend the Oil Code of Conduct to align with the Franchising Code of Conduct.

Automotive industry code

Recommendation 17.1

The committee recommends that the Department of the Treasury and the Department of Jobs and Small Business give further consideration to identifying reforms that would support the fair handling of capital intensive stock when franchise agreements between car manufacturers and new car dealers are not renewed, including, but not limited to:  manufacturers being required to provide at least 12 months' notice when not renewing a dealer agreement;  dealers not being compelled to upgrade the dealership after notice of nonrenewal or termination has been given to the dealer; and  in the event of the non-renewal of a lease, mandating that the franchisor buy back at cost price all vehicle parts up to three years old, with the cost of any independent valuation of stock to be split evenly between the franchisor and franchisee. 

Recommendation 17.2 

The committee recommends that the Department of the Treasury and the Department of Jobs and Small Business ensure that multiple codes remain aligned over time, noting that options may include establishing a core franchising code that applies generally, with industry-specific aspects in schedules or subcodes that apply in addition to the core franchising code for relevant industries. Pre-entry education and access to advice

Recommendation 18.1

The committee recommends that the Australian Government amend the Franchising Code of Conduct to require the franchisor to provide a prospective franchisee with the Australian Competition and Consumer Commission franchisee manual at the time the franchisor first provides the disclosure document to the prospective franchisee.

Recommendation 18.2

The committee recommends that the Australian Competition and Consumer Commission develop a FranchiseSmart type website with a similar design and purpose to the Australian Securities and Investments Commission MoneySmart website to address issues that franchisees may encounter within the franchise sector, including examples of detrimental outcomes experienced by franchisees, information on Australian Fair Work rights, minimum wage laws and Awards, and provisions that apply to migrant workers.

Recommendation 18.3

The committee recommends that the Australian Government amend the Franchising Code of Conduct to require, as part of mandatory disclosure, a reasonable estimate of the personal workload to be undertaken by the franchisee (or their nominee or manager) in running and operating the franchise business).

Retail lease arrangements

Recommendation 20.1

20.95 The committee recommends that the Franchising Taskforce examine the appropriateness of amending clause 13 of the Franchising Code of Conduct to:  remove the word 'or' after subparagraph 13(3)(a)(ii) and replace it with the word 'and';  require that a copy of the head lessor disclosure statement and final lease agreement be provided to the franchisee or prospective franchisee no less than 14 days prior to the franchisee entering into the franchise agreement;  remove any references to 'a copy of the agreement to lease' within clause 13;  require that the franchisor must, upon request by a franchisee or prospective franchisee, provide the head lessor disclosure statement that is currently in effect within 7 days of the request;  remove any inconsistencies in subclause 13(4) with respect to the above;  provide that, notwithstanding any terms of a franchise agreement or related documents including the lease agreement or other agreements or documents providing the franchisee with the right to occupy a premise, a franchisee may terminate without penalty the franchise agreement and any agreement to the sub-lease of a premises by providing written notice to the franchisor within six months of the franchisee occupying the premises if:  the franchisor does not comply with the obligation to provide the head lessor disclosure statement; or  a head lessor disclosure statement when given to a franchisee is:  materially incomplete; or  omits information, including key financial information; or  contains false or misleading information;  and the franchisee is in a substantially worse position than the franchisee would be if the head lessor disclosure document were not subject to the above. 

Recommendation 20.2  

The committee recommends that the Franchising Taskforce examine the appropriateness of amending Annexure 1 of the Franchising Code of Conduct to insert a new item 9.3 in Annexure 1 of the Code to read as follows:  whether the site to be occupied for the purposes of the franchised business is to be occupied by the franchisee:  as owner of the site; or  as lessee under a lease or agreement to lease granted by the franchisor, an associate of the franchisor or a third party; or  as sublessee under a sublease granted by the franchisor, an associate of the franchisor or a third party; or  as licensee under a licence granted by the franchisor, an associate of the franchisor or a third party; or  pursuant to any other occupancy right and, if so, the details of the conditions of such occupancy right; and  whether the term of the relevant lease or licence aligns with the term or period of the franchise agreement. 

Recommendation 20.3 

The committee recommends that the Franchising Taskforce examine the appropriateness of amending the Franchising Code of Conduct to provide that, notwithstanding any terms of a franchise agreement, when the franchisor holds the head lease and the franchisee is the licensee, money paid by the franchisee to the franchisor for the purposes of paying rent to a landlord must be held in trust and only used to pay the franchisee's rental expenses, with franchisors being liable. Further, in the event of the franchisor winding up, the money held in trust must be used to pay the rent owed to the landlord. 

Capital expenditure 

Recommendation 21.1 

The committee recommends that the Franchising Taskforce examine how clause 30 of the Franchising Code of Conduct should be amended:  to include a clear definition of 'significant capital expenditure'; and  so that there are appropriate constraints on the ability of franchisors to impose capital expenditure requirements on franchisees to ensure that franchisees:  are able to make an appropriate return on investment within the remaining franchise agreement, lease or licence terms; or  only have to pay for a pro-rata portion of the capital expenditure that would allow an appropriate return on investment within the franchise, lease or licence terms, with the franchisor to fund the rest of the capital expenditure; or  are paid appropriate compensation by the franchisor if the franchisor subsequently terminates the franchise agreement. 

Recommendation 21.2  

The committee recommends that the Franchising Taskforce consider updating Item 18 of Annexure 1 of the Franchising Code of Conduct to reflect any changes made to clause 30 of the Franchising Code of Conduct. 

Recommendation 21.3  

The committee recommends that the Australian Government amend Schedule 2 of the Franchising Code of Conduct to explain the effect of an amended clause 30 and any interaction with the law of unconscionability and unfair contract terms. 

Franchisees as a potential source of capital for franchisors 

Recommendation 22.1 

The committee recommends that the Franchising Taskforce examine the extent to which franchise systems and their agreements involve sufficient co-investment and risk sharing in an enterprise such that they should be regulated in a similar nature to financial products under the Corporations Act 2001.