The Australian Competition and Consumer Commission (ACCC) is responsible for the administration and enforcement of the Code.
On 2 April 2014, the Minister for Small Business released a ‘Future of Franchising’ statement, which outlines the Government’s proposed franchising policy reforms based on a recent review of the Code. Its proposed reforms involve the following objectives:
- ensuring franchisees and franchisors act in good faith in their dealings with each other;
- introducing penalties for a breach of certain provisions of the Code along with enhanced audit powers for the ACCC;
- improving disclosure regarding marketing funds; and
- improving disclosure, including short form, easy to understand information for prospective franchisees.
By making the following changes:
Reducing red tape
- The removal of the ‘double disclosure’ currently imposed on master and foreign franchisors.
- The removal of disclosure obligations in relation to summarising provisions of the franchise agreement in the disclosure document.
- Removing the redundant short form disclosure document from Annexure 2 of the Code.
- Making a range of other drafting improvements to the Code to address ambiguity and improve consistency of practice in the industry.
Improving information available to franchisees
- Requiring franchisors to provide prospective franchisees with a short information sheet which gives them an overview of the risks and rewards of franchising. This will include information on unforeseen capital expenditure, the importance of education and conducting due diligence, and the prospect of franchisor failure.
- Improving the disclosure of the online trading activities of franchisors, accounting for the growth in online trading and the potential impact of this on traditional stores. This is relevant to a franchisee’s assessment of the viability of the business they are proposing to operate.
- Ensuring that franchisors remind franchisees that they are entitled to a current disclosure document when the franchisor indicates it intends to renew the franchise agreement.
- Improving accountability regarding the use of marketing funds. This will include:
- requiring additional disclosure on the types of expenses marketing funds are being used for;
- giving franchisees the option to vote for an annual audit of the marketing fund; and
- requiring franchisors to keep marketing funds in a separate account to the rest of their monies.
Strengthening the balance in franchise agreements
- Enhancing protections for franchisees against significant capital expenditure imposed by a franchisor. The reforms will prevent franchisors from imposing significant capital expenditure unless:
- the expenditure is disclosed in the franchise agreement;
- a majority of franchisees in a system agree to the expenditure; or
- the expense is considered necessary by the franchisor and can be justified by a statement which provides the rationale, costs and anticipated benefits associated with making the investment.
- Preventing franchisors from charging their costs in dispute resolution to the franchisee.
- Ensuring that franchisors cannot require franchisees to conduct dispute resolution outside the State where the franchisee’s business is located, unless otherwise agreed at the time of the dispute.
- Preventing franchisors from unreasonably imposing restraints of trade on former franchisees.
- Ensuring franchises owned by the franchisor itself also contribute to the system’s marketing and other cooperative funds.
Improving conduct in the sector and the overall effectiveness of the Code
- Introducing an obligation to act in good faith into the Code. This obligation will apply to all aspects of the franchising agreement including during negotiations, throughout the agreement, in dispute resolution and as part of renewal discussions.
- Improving compliance and enforcement outcomes through a range of flexible tools for use by the regulator, the ACCC. The Government intends to introduce penalties of up to $51,000 for serious breaches of the Code. Whether that amount will be a significant disincentive to franchisors, in particular, in breaching the Code remains to be seen.
- Allowing the ACCC to use its audit powers to obtain documents that the franchisor has relied upon to support statements and claims made in their disclosure document.
- Preventing franchisors from improperly interfering with prospective franchisees’ ability to speak with ex‑franchisees.
Please contact us if you have any questions regarding the issues covered in this article. This summary is for general guidance only and should not be regarded as legal advice. Legal advice should be obtained before taking any action on any issue covered in this article.