Remaking the Code: Australian government unveils franchising reforms

In December 2023, Dr Michael Schaper published a final report (Report) on the Independent Review of the Franchising Code of Conduct (Code) in Australia.  There were several rounds of consultation with various stakeholders in Australia’s $135 billion franchise sector, which resulted in the 23 recommendations in the Report. 

On 7 May 2024 the Australian government published its response to Dr Schaper’s recommendations. 

A week later, the government delivered the 2024–25 Federal Budget, which set aside $3 million over two years for implementation of the Code reforms, an additional $2.6 million for the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to support more small businesses through alternative dispute resolution.

The government’s response to the Report promised reforms in numerous aspects.  The key changes that are on the horizon are as follows:

1. Data collection: The government is supportive of the collection of comprehensive, robust statistics about the franchising sector by first requiring the ASBFEO to improve the comparability and publication of existing data sets.

    

2. Remaking the Code: The Code will sunset in April 2025.  The government proposes to remake the Code, largely in its current form but it has indicated that the following recommendations from the Report will be adopted:
   • a clear statement of purpose;
   • clarifications in respect of service and repair work conducted by motor vehicle dealerships;
   • 5-year reviews of the Code to ensure it is operating efficiently and effectively;
   • merging pre-information requirements, namely the key facts sheet into the disclosure document;
   • simplifying disclosure obligations in relation to existing franchisees;
   • extending requirements for new vehicle dealership agreements to all franchise agreements, namely providing a reasonable opportunity to make a return on investment (ROI) and providing compensation to franchisees in the event  of early termination;
   • simplifying provisions relating to termination for serious breaches in a way that will not diminish protections for franchisees; and
   • increasing penalties under the Code and enhancing associated investigation powers and the infringement notices regime in Part IVB of the Competition and Consumer Act 2010 (CCA).

      

3. Visibility of the Franchise Disclosure Register (Register): The government has agreed to leverage existing mechanisms to promote the public visibility and use of the Register. Once a decision on licensing occurs (see below), the government will consider other initiatives to enhance visibility, such as mandatory disclosure of franchise agreements.

    

4. Complaints: The government is continuing to progress its commitment to establish the designated complaints function within the ACCC.

    

5. Dispute resolution: The government will consider the inclusion of additional information on the Register relating to dispute resolution and adverse actions brought by enforcement agencies.  It has also indicated that it will give ASBFEO additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution.  As highlighted with the budget allocation to ASBEO, the government has undertaken to assist franchisees access low-cost legal advice on prospects prior to formal ADR.

    

6. Communication between franchisors and franchisees: The government will encourage franchise systems, through education, to consult franchisees regarding any major change to their business model during the term of the franchise agreement.  It has also agreed to issue best practice guidance to franchisees and franchisors regarding franchisee-initiated exit.

    

7. Restraints: The government is taking steps to limit unreasonable restraints of trade in franchise agreements, together with the Competition Taskforce and the ACCC (the latter, particularly in relation to further guidance on when a restraint of trade provision may constitute unfair contract terms).

    

8. Education and awareness: The government agreed in principle to establish a ‘FranchiseSmart’ website which will serve as a comprehensive online government resource to educate and raise awareness about the franchising regime.  In addition, it will work with relevant sector participants to improve standards of conduct in franchising by developing best practice guidance and education.

    

9. Costs orders: The government has agreed in principle that 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.

    

10. Licensing regime: The government has agreed to establish a Taskforce in Treasury to conduct a comprehensive cost benefit analysis of introducing a licensing regime for the franchising sector.  The licensing regime has been advocated for the ACCC, on the basis that the existing system causes power imbalances between franchisors and small business franchisees.  However, this review and any rollout will take longer than changes to the Code that are anticipated before April 2025.

On 19 May 2024 at the Franchise Council of Australia’s National Convention (Convention), Dr Schaper commented that this will be the Australian government’s 11^th attempt at redrafting the Code.  Dr Schaper stated that although he did not have a view on the mechanics of a licensing system, this is something the government should seriously consider implementing in Australia.  He commented that this would ease the burden on the ACCC which was already stretched, in handling all disputes relating to franchising and under the current dispute resolution pathways available to franchisors and franchisees, courts were slow, expensive, and adversarial.  Dr Schaper stated that the benefits of a licensing regime were that there would be rule about who can hold a franchise licence, there would be powers to prevent (rather than react to) harm and it would create a binding dispute resolution process, which could for instance, be used to determine disputes up to a certain threshold. 

The raft of changes that are imminent present a number of issues for franchisors and franchisees alike.  Some concerns include:

• the difficulty of overlaying another licensing regime when some sectors involved in franchising are already heavily regulated through licensing – for example, pharmacies;
• franchisees may not necessarily consider “return on investment” in the same way as motor vehicle dealerships (which is where the concept is currently rooted) as there are other nuances to this concept.  It was clarified by Dr Schaper at the Convention that this term is not to be taken as its strict accounting definition but that he had intended it to be a broad requirement;
• whether the government will address the lack of consistency in the Code around penalty provisions;
• what action the government will take around restraints of trade clauses.  The recent trend in many overseas jurisdictions are to restrict these clauses in a franchising context (for example, in Canada) or heavily scrutinise these clauses (for example, in the US).  There is an open question about how the government will legislate on this issue, as it could significantly impair a franchisee’s ability to do business once a franchise relationship is terminated or expires.

It will be important to see what approach the government takes, but as mentioned above, the imposition of any licensing regime is some way off the next iteration of the Code which is expected to be delivered in under a year. 

We will continue to monitor this space and provide a further update in our next article in the series – stay tuned!