Proposed Changes to Franchising Code of Conduct
By Louise Wolf, Senior Associate, MST Lawyers
In August 2020, the Australian Government released its response to the Parliamentary Joint Committee Inquiry into the operation and effectiveness of the Franchising Code of Conduct report, Fairness in Franchising. The Government agrees that improvement in fairness and transparency for franchisees is required and says it has listened to the Franchising Taskforce which was established to examine the feasibility and implementation of the report’s recommendations.
The Government’s response includes making changes to the Franchising Code of Conduct (Franchising Code) which include:
- Doubling the penalties that apply for a breach of the Franchising Code;
- Allowing conciliation and voluntary binding arbitration, in addition to mediation;
- Improved disclosure, especially in relation to supply arrangements, marketing funds, exist arrangements and significant capital expenditure;
- Requirement for franchisors to provide a Key Disclosure Information Fact Sheet which would highlight key information and assist franchisees to make better informed decisions whether or not to enter into a franchise agreement.
For more detail on the proposed changes, please visit this link.
Further industry consultation will take place in relation to certain matters that are still under consideration by the Government, including the development of a public register of franchisors, a Key Disclosure Information Fact Sheet and a franchising specific website. Consideration will also be given to franchisees having the ability to negotiate early exits from franchise agreements in ways that balance the rights and interests of franchisors and franchisees.
In early September 2020, the Federal Opposition responded by introducing a private bill Franchising Laws Amendment (Fairness in Franchising) Bill 2020 into the Senate which attempts to make up for what they describe as an ‘underwhelming’ response by the Government. Instead of doubling penalties for breaches of the Franchising Code (from $66,600 to $133,200), it provides for fines of $10 million, or 10% of the turnover of a franchisor, or 3 times the benefit that the franchisor directly or indirectly obtained from the breach, whichever is higher. It also empowers Australian Small Business and Family Enterprise Ombudsman (ASBEFEO) to conduct mediation and recommend arbitration in franchising disputes, which seems similar to the changes proposed by the Government in that regard.
The specifics of the proposed Franchising Code changes and the degree to which franchisors will be required to amend their disclosure document, franchise agreement and their franchisee recruitment policies and processes will not be known until the legislation is drafted. However, the draft legislation might not be released until after the industry consultation process is complete, which could take some months. By way of preparation for impending changes, franchisors should consider how they could improve their disclosure document, especially in relation to:
- suppliers and rebates (Item 10);
- significant capital expenditure (Item 14.10), such as premises refurbishments, upgrades to IT and replacement equipment and vehicles; and
- financial disclosure (including earnings information) that may have been given separately in the past (Item 20).
Given that most Australian franchisors are required to conduct the annual update of their disclosure document by 31 October 2020, now would be an appropriate time to consider how disclosure could be improved, especially in the light of the proposed changes.
For advice regarding how these changes might affect your franchise, please email the Franchising Team at MST Lawyers.