As many people would have read, the Federal Government has released its response to the Franchising Code review undertaken by Dr Michael Schaper on behalf of the Government. Not surprisingly and as anticipated, the Government has agreed, or agreed in principle, to all of Dr Schaper’s 23 recommendations.
Of critical importance, the Government has agreed that all franchise agreements should provide for a reasonable opportunity to make a return on investment and provide compensation to a franchisee upon early termination of the franchise agreement. The Government also agrees to investigate a potential licensing scheme, and again increase penalties. Each of these items has the potential to have significant repercussions for franchisors.
Background to review
Dr Michael Schaper (former Deputy Chair of the ACCC) was appointed in August 2023 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. At the time of the announcement in August 2023, Minister Julie Collins on behalf of the Federal Government said “A transparent and effective regulatory framework which underpins the relationship between franchisors and franchisees is critical to ensuring confidence in the sector“.
Dr Schaper’s Review, published in December 2023, made 23 recommendations supported by findings and implementation suggestions. Importantly, it found that the Code is generally fit-for-purpose and should be extended beyond its sunset date but with some changes to improve its operation. In summary, 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.
Interesting statistics and observations about the Review
Dr Schaper found that there were 1,144 franchise systems operating in Australia, and within these systems there was 70,735 franchisees. Interestingly, the Review also found that 3 quarters of franchisors have 16 or less franchisees but 80.4% of all franchisees are employed in large or complex franchise systems.
Of slight concern for the sector, the Review also found that the number of franchise systems has not increased in the past 10 years and the overall number of franchisees has declined, whereas the overall number of businesses in Australia has grown by about 28% in the past 10 years.
Whilst Dr Schaper observed that there was a lack of a “robust system of comprehensive” statistics, it was disappointing that only 95 written submissions were received, a figure markedly down from previous franchise reviews. Likewise, although 2 surveys were undertaken, including a franchisee survey, there were only 381 responses received from franchisees and 163 responses with respect to the Franchise Disclosure Registry. The reasons for this poor response rate are speculative but it should caution Government about any amendments sought to be made to the Code, unless proper consultation reflective of the actual sector is sought from key and objective stakeholders.
Government position and timing
The Government has now announced that it agrees with 21 of Dr Schaper’s recommendations and agrees in principle with the remaining 2 recommendations which deal with the potential creation of a website similar to ‘MoneySmart’ and no adverse costs orders against franchisors.
The Government has announced that it intends to remake the Code (before it sunsets in April 2025) and will take a “staged” approach to the implementation of each recommendation. Other than saying that it will seek to implement some changes in the short term, it is not entirely clear which recommendations will potentially be part of any remade code. It is hoped that changes to simplify disclosure obligations are introduced in the new Code. However, what is clear is that the controversial and foreshadowed licensing scheme will be the subject of further consultation with key stakeholders in the sector. Given that a federal election may be called in the next 9 months, it remains to be seen if some of the recommendations will ever be implemented.
Set out below are a selection of key recommendations which franchisors should note together with the Government’s response. We anticipate these recommendations will ultimately become part of any remade/new Code.
| Recommendation | Government Statement |
|---|---|
| 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 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 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 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 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. The Taskforce will consult widely and provide advice to Government. |
A full copy of the Federal Government’s response to the Code Review can accessed from this link.
Final comments
When publishing his Review, Dr Schaper said the Code should “not be overly prescriptive or attempt to guide all actions by sector participants. It must also continue to support entrepreneurial innovation and flexibility, so the notion of franchising remains viable…“. It is genuinely hoped that this statement is at the forefront of any further amendments to the Code, as many sector participants and advisors are already concerned about the current level of regulation impacting franchising.
The proposed licensing scheme has been deferred but it remains a controversial aspect of the Review and all franchisors need to be actively involved in consultation going forward to avoid any unintended consequences and to ensure that franchising remains viable.
This article was written by Sean O’Donnell, Partner.
