Have your say: Is a franchise licensing regime a welcome shift or an unnecessary change?

05 December 2024

On 11 November 2024, the Department of Treasury (Treasury) released a consultation paper seeking feedback and comments relating to the potential introduction of a licensing regime for the franchising sector (Consultation Paper). The step aligns with recommendation 23 of Dr. Michael Schaper’s review of the Franchising Code of Conduct (Code), which resulted in the release of an exposure draft of a new Franchising Code of Conduct (Exposure Draft) in early October. For our previous articles about Dr. Schaper’s 2023 report and the Exposure Draft, click here and here.

This article provides a brief overview of the Consultation Paper and how stakeholders may respond. Responses to the Consultation Paper are due by 8 December 2024.

Overview and some background context

Recommendation 23 of Dr. Schaper’s 2023 report, Independent Review of the Franchising Code of Conduct, provided that the “Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship“. If such a regime were to be implemented, it would fundamentally shift the regulatory approach in the franchising sector by establishing obligations for franchisors (and possibly franchisees) to meet in order to obtain and hold a licence to operate a franchised business.

Treasury has now established an internal taskforce (Taskforce) to action Dr. Schaper’s 23rd recommendation, and the Consultation Paper is the first substantive step taken by the Taskforce to, as Dr. Schaper suggested, investigate the feasibility of introducing such a regime. As such, the Consultation Paper says little about what the regime may look like and is more focussed on obtaining information.

Is a regime necessary?

The Consultation Paper suggests that a licensing regime could counter perceived shortcomings under the current Code. To better understand those shortcomings, the Consultation Paper poses three preliminary questions relating to the current regulatory framework:

  1. What issues have you identified in the current regulatory framework for franchising? How significant are they?
  2. Considering the issues you have identified, are they significant enough to require government intervention?
  3. Have previous attempts to regulate failed, or failed to keep up with new circumstances?

In our opinion, these three questions are possibly the most important three questions in the Consultation Paper, as they go to the core question of whether such a regime is even needed (rather than the remainder of the questions which look more at what a regime may cover and how it may be implemented).

If franchisors are intending to respond to any questions, we would recommend considering and responding to at least these three questions (noting that you do not need to respond to all questions posed in the Consultation Paper).

What would such a licensing regime cover?

The Consultation Paper does not present a proposed regime, or details on what such regime would cover; as noted above, it is only seeking to obtain information at this point.

However, the Taskforce has identified five potential functions of any such regime, and much of the Consultation Paper has been prepared with a focus on those five functions (specifically seeking views on how one or more of the functions could best address the needs of the sector). The functions covered by the Consultation Paper are:

  1. Regulatory oversight;
  2. Dispute resolution;
  3. Disclosure of information;
  4. Business model preconditions to franchise; and
  5. Education and resources.

Function 1: Regulatory Oversight

The Consultation Paper notes that the current franchising regulatory regime operates under an ‘ex post’ model, which prohibits enforcement action and dispute resolution until harm has occurred. The proposed ‘ex ante’ model would allow the regulator (i.e. the Australian Competition and Consumer Commission (ACCC)) to be proactive and halt a licence holder’s activities immediately if licence terms are breached.

In order to assess this function, the Taskforce has posed a number of questions about whether the ACCC currently has sufficient investigative and enforcement powers, whether early intervention would effectively assist with addressing issues in the sector and what powers should a regulator have to incentivise better outcomes. Refer to Schedule 1 of this article to see the list of questions associated with Function 1.

Function 2: Dispute Resolution

Currently, under the Code, a franchise agreement must provide for a dispute handling process that is consistent with clauses 40A(1) to (4) of the Code. Arbitration is an option under the Code, but must be agreed between the parties.

Dr. Schaper’s 2023 review raised stakeholder concerns about the cost, timeliness and awareness of the existing processes.

The Consultation Paper suggests that “a licensing regime could require licensees to participate in mandatory binding arbitration as a term of their licence“. Other alternatives suggested by Dr. Schaper that would encourage arbitration in franchise arrangements include publicising, through the franchise disclosure registry, franchise systems that elect to use arbitration as a dispute resolution process.

To assess this function, the Consultation Paper asks a number of questions about the current dispute resolution processes under the Code and how they can be improved. Refer to Schedule 1 of this article to see the list of questions associated with Function 2.

We strongly recommend that any franchisors that have engaged in arbitration respond to these questions and provide commentary on that process, as the wording of the Consultation Paper on this issue seems to be focussing solely on arbitration as a panacea for all ills. However, as many lawyers can attest, arbitration itself can still be a very costly and time consuming process, so may not be the answer the Taskforce is looking for.

Function 3: Disclosure of Information

Function 3 relates to the franchise disclosure registry (FDR). The Consultation Paper notes that changes could be made to the FDR to improve transparency. Such changes could include introducing a comparison function between franchise systems and including more data fields, such as the number of franchise disputes.

The Consultation Paper seeks stakeholder input on why and how people access sectoral data and what additional data would assist franchisees and interested parties with making informed decisions about a franchise. Refer to Schedule 1 of this article to see the list of questions associated with Function 3.

We recommend franchisors give consideration to responding to the questions relating to the FDR. At the moment, the FDR is relatively easy to manage and use (once you have logged in!), but some improvements/extra detail may be valuable. Nevertheless, there must also be a balance to ensure that the confidentiality of franchise systems is being maintained.

Function 4: Business model preconditions to franchise

According to the Consultation Paper, if a licencing regime were introduced it would set minimum standards for franchise systems, “ensuring franchise opportunities brought to the market possess the required process and supports to successfully operate as a franchise system in Australia“. This seems like a big commitment for such a regime.

In any case, the Taskforce is considering what minimum requirements might be required for registration. These may include operating the franchise business model for a set time from two or more locations before becoming eligible to apply for a licence.

The Consultation Paper seeks stakeholder feedback on issues such as how systems are currently performing (as against how they were marketed), whether there is sufficient support offered by networks and a business’ level of maturity before franchising. Refer to Schedule 1 of this article to see the list of questions associated with Function 4.

Function 5: Education and Resources

Dr. Schaper’s review noted that while education and advice resources are available under the current system, they are dispersed and difficult to locate.

A licensing regime could impose obligations on stakeholders to undertake education tailored to their position as franchisee or franchisor, rather than relying on self-education. For instance, franchisees could be required to complete a course on the Code and due diligence it should undertake prior to entering into a franchise agreement. On the other hand, franchisors could be required to complete training on selling franchise opportunities and their obligations under the Code. Such initiatives could improve awareness of all stakeholders and the relationship of parties under a franchise arrangement.

The Consultation Paper seeks stakeholder input on their knowledge of the Code, the resources offered to/by them and what resources could improve decision making. Refer to Schedule 1 of this article to see the list of questions associated with Function 5.

Other considerations

The Consultation Paper flags concerns around a lack of communication between the Government and the franchise sector. The rollout of the FDR provided an example of this, with the Consultation Paper noting that not all franchisors have yet complied with the requirement to set up a profile on the FDR (despite this being mandatory).

In this regard, the Consultation Paper seeks stakeholder input on how the Government can engage more effectively with the franchise sector to inform them of changes to regulations, or future consultations that impact the sector.

Additionally, conversations regarding costs to implement a licensing regime are inevitable and are posed in the Consultation Paper. Some suggested examples of financing include reimbursement by the industry to the Government for funding the establishing of the scheme. Costing of such a regime is a critical consideration as practically, if the cost is imposed on franchisors, we’d imagine that this will simply be passed on to franchisees and, in turn, end consumers.

Submitting a response

The Consultation Paper raises a considerable number of questions about a topic that could fundamentally change the way in which franchising is regulated in Australia. Franchisors (and franchisees) should carefully consider their position on the concept of a licensing regime and, if appropriate, provide a submission in response to the Consultation Paper.

The closing date for submissions is midnight (AEST) on 8 December 2024.

Please click here to view the questions posed in the Consultation Paper.

We have already provided a number of clients with assistance in preparing responses to the Consultation Paper. If you have any questions, or would like any assistance, please reach out to a member of our national franchising team.

This article was written by Allison McLeod, Partner and Katie Lau, Associate.

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