On 8 February 2024, the Minister for Small Business, the Hon Julie Collins MP, released the Independent Review of the Franchising Code of Conduct (Code) by Dr Michael Schaper.
1. Summary
The Review assessed the fitness for purpose of the Code, with particular regard to the provisions relating to new vehicle dealerships and the operation of the Franchise Disclosure Register. Although Dr Schaper found that the Code was generally fit for purpose and should be remade, the Review made 23 formal recommendations and 34 implementation suggestions for Government.
Key recommendations from the Report include:
(a) the requirement that new vehicle dealership agreement must provide a reasonable opportunity to make a return on investment should be extended to all franchise agreements;
(b) the requirement that new vehicle dealership agreement must include provisions for compensation for franchisees in the event of early termination should be extended to all franchise agreements; and
(c) the Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship.
2. Return on investment & compensation for early termination
In 2021, new provisions were included in the Code to provide automotive franchisees greater protections.
Pursuant to these protections, a franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.
Further, a franchisor must not enter into a franchise agreement unless the agreement provides for the franchisee to be compensated in the event of a premature termination caused by the franchisor withdrawing from the Australian market, rationalising its network in Australia or changing its distribution model in Australia.
The Report found that an extension of these protections to all franchisees is likely to have a positive impact on franchising in Australia and, in any event, would likely reflect the obligations created by the unfair contract terms regime (which was recently subject to amendments).
The recommendation also followed a finding that misunderstanding of goodwill in franchising continues to be an issue. In various submissions to the ACCC, franchisees “could not understand how their hard work, staff training, additional promotion of the brand (outside of the franchisor’s marketing), and capital investments meant they had not created a degree of goodwill.” The Report found that an extension of the aforementioned protections would go some way towards clarifying the reasonable expectations of franchisees that they have the opportunity to profit.
Given the complimentary nature of the protections, the Report suggested that any extension of one should necessarily be accompanied by an extension of the other.
3. Recommended licensing regime
A number of stakeholders, including the existing regulator of the Code, the Australian Competition and Consumer Commission (ACCC), have advocated for the adoption of an ex ante licensing based regulatory system. This notion stems from a dissatisfaction in the current ex post approach to the franchising regulatory framework.
Under the existing framework, recourse for a franchisor’s misconduct is often after the fact and there is no pre-emptive management of problematic issues. The Report found that “The time and cost associated with court proceedings, and the financial position of the franchisor, limit the capacity for formal redress.”
Under an ex ante licensing regime, franchisors would be required to obtain approval to operate a franchise system and maintain ongoing approval by complying with certain requirements. Stakeholders have suggested that for a franchisor’s approval might include minimum qualifications or experience and/or a proven degree of financial security in the form of working capital or other means to support the operation of the business.
Dr Schaper has suggested that:
the licensing function might be outsourced to a new independent entity which is jointly run by franchisees and franchisors, and in which franchisors will be expected to pay fees. Membership of the entity will be a prerequisite to obtain a licence to operate a franchise system in Australia. [Alternative Dispute Resolution] and education functions might be run by this entity, which would also have the ability to sanction breaches of the Code, deal directly with complaints, and address systemic issues as they emerge. The role of the ACCC might therefore be limited to prosecuting the most serious breaches, and only after the licensing entity has been unable to satisfactorily resolve an issue.
However, before any such a licensing regime could be taken up, significant further evaluation would be required to fully understand the potential impacts of moving to an ex ante franchising model.
4. Next Steps
The Government is yet to formally respond to the Report.
However, the current Code is due to sunset on April 2025 and we can expect a new regulation prescribing a new code prior to this date.
A full copy of the Report can be accessed here
Anthony Conaghan, IDI Country expert for franchise in Australia
Jade Andrews
