FCA cautious on franchising inquiry results

The Franchise Council of Australia has cautioned the government against uptake of some recommendations in the just-released Federal Parliamentary inquiry into franchising that it believes will add undue strain and costs to the franchising process. 

FCA executive director Steve Wright told Franchising magazine, "Most recommendations are constructive, but there are a few which could cause more harm than good if poorly implemented. If the Government is to consider the recommended changes to the Franchising Code of Conduct, it will need to do so with extreme care, as there is a serious risk of a flight of investment capital away from franchising."

Eleven recommendations came out of the report which focuses on improving disclosure and readjusting the rights of franchisees in relation to termination of agreements or franchisor failure.

Among the recommendations: the disclosure document should include a statement outlining liabilities and consequences to franchisees in the event of franchisor failure; a better balance of the rights and liabilities of franchisees and franchisors in the event of franchisor failure; the introduction of a good faith clause into the Franchising Code of Conduct; an online registration system in which franchisors update annually the nature and extent of their network; a review of the effectiveness of new disclosure provisions introduced on March 1, 2008 to be conducted within two years; franchisor disclosure of the process that will apply at the end of a franchisee’s term in regard to selling the business as a going concern; the introduction of financial penalties for breaches of the Franchising Code of Conduct through amendments to the Trade Practices Act; the ACCC to have greater freedom in investigations based on credible information about breaches of the Franchising Code; the Australian Bureau of Statistics to collect better data on the franchising sector.  

Highlighting specific issues, Wright continued "It is hard to imagine, for example, how franchise businesses could be expected to welcome pecuniary penalties which single out franchising and do not apply to other sectors within small business. Franchise registration is an issue which is promoted within the report as a way of gathering data, but without other apparent justification. The ACCC, the FCA and the International Franchise Association have warned against the dangers and the added cost of this approach, but the report does not appear to give much weight to these warnings.

"Good faith is a good concept, supported by the FCA and most other groups. But it is already part of the Trade Practices Act and to specifically add it to the Code implies the potential for a new meaning - a possibility which may be rigorously explored by lawyers for commercial reasons but at what cost to the sector? Franchisees and franchisors have noted the shortcomings of this suggested approach, which has been questioned by the ACCC and a number of representative groups."

In relation to the suggestion that the Franchising Code of Conduct is amended to ensure disclosure documents outline liabilities and consequences for franchisees in light of franchisor failure, the FCA view is that such a role is best fulfilled by franchisee advisors and government agencies, not franchisors. “It is contrary to the structure and purpose of the Code to have the franchisor endeavour to advise the franchisee on risk issues," said FCA director, Stephen Giles of law firm Deacons.

This article appears courtesy of Franchising Magazine Newsletter