The Federal Government yesterday released its response to the Franchising Code Review undertaken by Dr Michael Schaper on behalf of the Government. In its response, the Government has agreed, or agreed in principle, to all of Dr Schaper’s 23 recommendations.
Dr Michael Schaper was appointed to undertake an independent review (Review) of the Franchising Code of Conduct (Code) to evaluate the effectiveness of current regulatory settings and provide recommendations on how to ensure they are fit for purpose. Dr Schaper’s Review made 23 recommendations supported by findings and implementation suggestions. It found that the Code is generally fit-for-purpose and should extended beyond its sunset date, with some changes to improve its operation. It also found that non-regulatory changes can be implemented to improve the broader operating environment through enhanced information and guidance on best practice. In addition, the Review recommended the Government consider a comprehensive analysis of whether to shift to a licensing scheme.
The Government’s response to the Review provided motor vehicle dealers with one practical ‘win’ whereby the Government agreed to the recommendation that service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code. This recommendation was off the back of strong industry lobbying by AADA and MTAA following the adoption of agency models by Mercedes-Benz and Honda. In both cases, the selling of cars as agents and servicing of vehicles was separated into separate agreements and doubt was created over whether the service agreements were captured by the Code.
The AADA and MTAA lobbied for wider protections from motor vehicle dealers, including compensation for loss of goodwill where a distributor adopts an agency model, but Dr Schaper made no further recommendations in that respect and therefore no such recommendations were adopted by the Federal Government.
The Government has agreed to Dr Schaper’s recommendation that many of the dealer specific protections in the Code be extended to all franchisees.
A list of all Dr Schaper’s recommendations and the Government’s response is set out below:
| Recommendation | Government Statement |
|---|---|
| Recommendation 1: The Australian Government should ensure the provision of more comprehensive, robust statistics about the franchising sector. | Agree. The Government notes the limitations of existing data collected by public and private bodies about the franchising sector. The Government agrees that improved data on the franchising sector will support policymakers and the franchising community to better understand the sector, including the true level of disputation within it and assess the sector’s health and the effectiveness of regulation. In the first instance, the Government will require the ASBFEO to lead on improving comparability and publication of existing data sets held by the ASBFEO, the ACCC, the state small business commissioners and the Treasury. Once a decision on licensing occurs, the Government will revisit enhancements to data collection. |
| Recommendation 2: The Code should be remade, largely in its current format. | Agree. The Governments agrees that the Code should be remade prior to sunsetting in April 2025. The Government will remake the Code, having regard to the changes recommended by the Review. |
| Recommendation 3: A clear statement of purpose should be inserted into the Code. | Agree. The Government agrees that it is important for there to be a common understanding of the purpose of the Code and what it is intended to achieve for franchisees and franchisors. When remaking the Code, the Government will insert a clear statement of the purpose into the Code. This will provide clarity to the franchising community and assist in future reviews of the effectiveness of the Code (see Recommendation 5). |
| Recommendation 4: Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code. | Agree. Service and repair work is an essential part of motor vehicle dealerships. When remaking the Code, the Government will clarify that service and repair work performed by motor vehicle dealerships is within the scope of the Code. |
| Recommendation 5: Reviews of the Code should be conducted in five yearly cycles in the future. | Agree. The Government agrees there should be future statutory reviews of the Code every 5 years to ensure the Code is delivering on its updated purpose and operating efficiently and effectively. When remaking the Code, the Government will implement this recommendation. |
| Recommendation 6: Simplify and consolidate the pre-entry information given to prospective franchisees. | Agree. The Government supports streamlining information made available to franchisees in a way that will reduce unnecessary compliance burden and cost, but at the same time maintain important protections for franchisees. The Government will amend the Code to effectively merge the key facts sheet into the disclosure document. |
| Recommendation 7: Franchisor obligations under the Code in relation to existing franchisees should be simplified. | Agree. The Government recognises there is an opportunity to streamline requirements in the case of established relationships, such as where a franchisee is renewing or extending an existing agreement. When remaking the Code, the Government will simplify disclosure obligations in relation to existing franchisees. |
| Recommendation 8: The existing requirement that new vehicle dealership agreements must provide a reasonable opportunity to make a return on investment should be extended to all franchise agreements. | Agree. The Government agrees that all franchise agreements should provide a reasonable opportunity for the franchisee to make a return on their investment. When remaking the Code, the Government will extend this requirement to all franchise agreements. |
| Recommendation 9: The existing requirement that new vehicle dealership agreements must include provisions for compensation for franchisees in the event of early termination should be extended to all franchise agreements. | Agree. The Government agrees that franchise agreements should include provisions for compensation in the event of early termination. When remaking the Code, the Government will extend this requirement to all franchise agreements |
| Recommendation 10: Enhance the public visibility and usage of the Franchise Disclosure Register. | Agree. The Government notes widespread support for the Franchise Disclosure Register to remain a part of the regulatory environment. The Government’s immediate priority is to leverage existing mechanisms to promote the public visibility and use of the Franchise Disclosure Register. Once a decision on licensing occurs, the Government will consider if there are other initiatives that could enhance visibility and usage, such as mandating the disclosure of franchise agreements |
| Recommendation 11: Additional information should be included on the Franchise Disclosure Register relating to dispute resolution and adverse actions brought by enforcement agencies. | Agree. The Government agrees there may be value in requiring the inclusion of additional information on the Franchise Disclosure Register. The Secretary to the Treasury has discretion to require the inclusion of additional information on the Franchise Disclosure Register by determination in accordance with Part 5A of the Code. Implementation of this recommendation will occur in accordance with the established legislative arrangements. |
| Recommendation 12: Franchise systems should be encouraged, through education, to consult franchisees regarding any major change to the business model during the term of the franchise agreement. | Agree. The Government acknowledges there is an opportunity to support improved franchise relationships through improving the nature and access to education and guidance materials for the sector. The Government will require the ASBFEO to lead the development of best practice guidance in consultation with the sector and the ACCC. |
| Recommendation 13: Provisions relating to termination for serious breaches should be simplified. Changes made in 2021 relating to termination under clause 29 of the Code should be revisited. | Agree. The Government recognises there is an opportunity to simplify provisions relating to termination for serious breaches and the importance of doing this in a way that will not diminish protections for franchisees. When remaking the Code, the Government will work with the sector to simplify termination provisions relating to serious breaches by franchisees. |
| Recommendation 14: Best practice guidance should be provided to franchisees and franchisors regarding franchisee-initiated exit, to enhance the effectiveness of clause 26B of the Code. | Agree. The Government acknowledges there is an opportunity to improve the nature of, and access to, education and guidance materials for the sector. The Government will require the ASBFEO to lead the development of best practice guidance, in consultation with the sector and the ACCC. |
| Recommendation 15: Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements. | Agree. The Government will direct the Competition Taskforce to consider how restraints of trade and other uncompetitive terms in franchise agreements may be affecting franchise workers, as part of the Taskforce’s review into the use of non-compete and related clauses that restrict workers from shifting to a better-paying job. The Government will also request the ACCC to consider providing further guidance on when a restraint of trade provision may constitute unfair contract terms. |
| Recommendation 16: A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (‘FranchiseSmart website’). | Agree in principle. Education and awareness-raising are important elements of an effective regulatory regime. Once a decision on licensing occurs, the Government will revisit creating an online resource on franchising. |
| Recommendation 17: Australian Government agencies should work with relevant sector participants to improve standards of conduct in franchising by developing best practice guidance and education. | Agree. The Government agrees that small businesses need greater support to recognise and act against unfair contract terms and prospective new unfair trading practices under Australian Consumer Law. The Government will require the ASBFEO to lead the development of best practice guidance in consultation with the sector and the ACCC. |
| Recommendation 18: ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution. | Agree. The Government recognises there are benefits in allowing for the naming of franchisors who have not participated meaningfully in dispute resolution, such as encouraging active participation. The Government will amend relevant legislation to provide the ASBFEO with the power to publicly name franchisors that fail to participate meaningfully in alternative dispute resolution. |
| Recommendation 19: The Australian Government should assist franchisees to access low-cost legal advice on prospects prior to formal ADR. | Agree. Being able to obtain low-cost assistance for resolving franchising disputes is important for supporting access to justice for franchisees. The Government will expand the ASBFEO’s Tax Concierge Service to support small businesses, including franchisees to access low-cost legal advice on alternative dispute resolution prospects |
| Recommendation 20: The Australian Government should consider an appropriate role for franchise interests when implementing its commitment to a designated complaints function for the ACCC. | Agree. The Government has progressed its commitment to establish the designated complaints function within the ACCC. There will be a process for interested parties that represent the interests of small businesses (such as franchisees) to apply to become a designated complainant. |
| Recommendation 21: Franchisees should be able to seek a ‘no adverse costs’ order when bringing a matter against a franchisor for breach of the Code or the Australian Consumer Law. | Agree in principle. The Government supports improving access to justice for franchisees and low-cost means to resolve franchising disputes. However, the Government notes that ‘no adverse costs’ orders are not common in Commonwealth legislation. The Government will consult further on extending arrangements for seeking access to ‘no adverse cost orders’ for franchising matters to assess the efficacy of such arrangements in the context of the administration of justice and ensure there are no unintended consequences. |
| Recommendation 22: The scope of penalties under the Code and associated investigation powers and infringement notice regime in Part IVB of the Competition and Consumer Act 2010 (CCA) should be increased. | Agree. The Government will increase the scope of penalties to all substantive obligations placed on parties under the Code and set those penalties at 600 penalty units. The Government will consider the suitability of increasing the amount of penalty units to 60 penalty units for infringement notices issued under the CCA for a breach of the Franchising Code |
| Recommendation 23: The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship. | Agree. The Government will establish a Taskforce in Treasury to conduct a comprehensive cost benefit analysis of introducing a licensing regime for the franchising sector. |
Click here to access the full copy of the Federal Government’s response to the Code Review.
This article was written by Evan Stents, Lead Partner – Automotive Industry Group
