Cheat’s guide to franchise inquiry report: what you need to know

By Sarah Stowe | 18 Mar 2019 View comments

What do you need to know about the franchise inquiry report? Check out our easy guide to the essential information – what’s in the report, expert opinion and what you need to do now.

Senate’s franchise inquiry report

Change is coming. The 369 page report entitled Fairness in Franchising included 18 pages of more than 70 recommendations. Key among recommendations is the formation of a Franchising Taskforce to evaluate the proposals. So at this stage we don’t know what will be taken up by government.

The report is a far reaching analysis of the franchise sector’s performance and the regulatory landscape it operates in. It discusses pre-purchase education, disclosure, marketing funds, the cooling off period, goodwill, exit terms, restraint of trade, unfair contracts, third line forcing, supplier rebates, dispute resolution,  finance and lending, collective action, retail lease arrangements, wage theft, capital expenditure, industry associations and the role and reach of the ACCC.

So what are the key conclusions?

Franchising is in need of a major overhaul

There’s no doubt the committee views the franchising sector as ripe for regulatory and cultural change. It

drew comparisons with the banking industry: “disclosure alone is an insufficient regulatory response to power imbalances and exploitative behaviour by powerful corporations” it said.

For a franchisee to be well-informed is not enough “because the franchise agreement embeds the power disparity between franchisor and franchisee for the duration of the contract, including the exit arrangements”.

In seeking to achieve fairness in franchising as its framework, the committee acknowledged franchise models exist which do recognise the “mutual importance” of franchisor, franchisee and supplier.

So it has been careful not to impose “unnecessary burdens” on franchisors treating 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.”

Regulators need to be aware that franchisors have a greater voice  than do franchisees and are therefore more likely to influence any debate about franchise policy.

Franchise inquiry report highlights

  1. Form a Franchising Taskforce with representation from the Departments of Treasury and Jobs and the ACCC.
  2. Apply whistleblowers’ protections to franchisees and their employees
  3. Empower the ACCC to stop marketing and sales of franchises if a franchisor shows a track record of churning.
  4. Establish a register of franchises
  5. Franchisees to form a national association
  6. Increase disclosure particularly around third line forcing, supply chains and marketing funds
  7. Harsher penalties for misconduct
  8. Improved financial information access for franchise buyers
  9. Greater accountability of franchisors
  10. Create a FranchiseSmart site comparable to ASICs MoneySmart

The committee’s wishlist

A whole host of amendments to the Franchising Code have been suggested. These include:

Greater transparency and disclosure

Franchisors should provide more information such as assurances of accounting and code compliance, the disclosure document and franchise agreement to be available electronically as well as on paper, quarterly financial statements provided.

Vendors (either franchisee or franchisor) to supply two years of Business Activity Statements and key financial data to the buyer – information for a comparable franchise must be provided if a greenfield franchise.

Ending a franchise agreement

In certain circumstances, franchisees should be allowed to end a franchise agreement.

On the other hand, franchisees can only be terminated for special circumstances on seven days notice – providing there is no notice of dispute lodged by the franchisee in that time.

More restrictions on terminating a franchise agreement for fraud or public health and safety.

Arbitration for disputes

Binding arbitration that can award compensation and costs if mediation is unsuccessful.

Merging the Office of Franchising Mediation Advisors with the Australian Small Business and Family  Enterprise Ombudsman.

Collective action

Franchisees could collectively bargain with a franchisor without breaching the Competition and Consumer Act.

Retail leases

Additional disclosure of occupancy details

Franchisee power to terminate an agreement within six months if franchisor has failed to comply with lease disclosure rules.

Third line forcing

Amend the code to include two years of information on cost of production, margins and product prices.

The task force to consider an inquiry into agreements that allow franchisors to exploit franchisees through over-ordering of supplies.

These are just some of the points the committee has raised in its report.

What you need to do now

The Senate Inquiry’s proposals are right now just recommendations. An industry task force to further consider and implement key matters is the report’s first suggestion. However it may be months before any such task force is established.

There is a federal election due this autumn, adding uncertainty and delay into the mix.

While it is clear that the details of the report and the public sentiment lean towards regulatory changes implementation of any amendments to the Franchising Code is likely to be some time off.

In the meantime franchisors would be advised to take heed of the content of the report and look to their own franchise systems.

Franchisors can evaluate and fine tune rules and processes in line with the Senate’s franchise report’s theme of ‘Fairness in Franchising’.

Don’t wait for legislation to do the right thing.

Read the full report here.

Find out what the FCA, ACCC and Franchise Redress make of the report.