2023 Review of the Franchising Code - Key Findings and Recommendations

Does the general scope of coverage of the Franchising Code remain appropriate? Is the scope of coverage flexible enough having regard to the diversity of the franchising industry?

Have the amendments regarding the exclusion of cooperatives from the provisions of the Franchising Code effectively clarified that they fall outside the scope of the Code?

What evidence is available to suggest additional protections in the Franchising Code for new car dealerships should be extended beyond new car dealerships (for example to truck, motorcycle and farm machinery dealerships)?

Should agreements between automotive manufacturers and dealerships that relate only to service and repair work (which do not cover matters relating to vehicle sales) be considered as franchise agreements and covered by the Franchising Code protections? Why or why not?

Has the amended definition of motor vehicle dealership effectively clarified that agency sales models remain within the scope of regulation under the Franchising Code?

The Code is generally fit for purpose.

There is significant misunderstanding, especially amongst franchisees, about what the Code is meant to achieve. 

The sector requires some respite from a constant process of review.

Amendments made to the Code in 2022 to exempt cooperatives and mutual entities are effective and have not produced any unintended consequences.

Part 5 of the Code relating to new vehicle dealerships is operating as intended and not producing any unintended consequences.

Recommendations: The definition of motor vehicle dealership in the Code should be amended to clarify that it includes all sales, service and repair work.

The next review of the Code should consider whether Part 5 should be retained and, if so, whether it should be extended to other subsectors such as trucks, farm machinery and motorcycles.

How effective are the requirements of the Franchising Code that ensure franchisors make information available to franchisees prior to entry into a franchise agreement? If possible, please comment on the effectiveness and content required for inclusion in each of the Franchise Disclosure Register, Information Statement, Key Facts Sheet and Disclosure Document.

How have changes to unfair contract terms laws impacted franchise agreements? Is the approach in the Franchising Code to regulating certain types of contract terms still appropriate?

Do you have any other comments on how the Franchising Code regulates the relationship between franchisors and franchisees at the point of entry into a franchise agreement?

What impact have the 2021 changes relating to compensation and return on investment had on franchisors and franchisees entering into new vehicle dealership agreements? Where possible, please provide detail on the costs and benefits the new car dealership sector has experienced because of these changes.

The Code requirements relating to disclosure are comprehensive. They can sometimes be burdensome for franchisors to comply with, and burdensome for franchisees to comprehend and act on. Any further attempt to address concerns by mandating greater disclosure is likely to be counterproductive.

Certain disclosure and cooling off obligations in the Code create unnecessary regulatory burden when applied to the renewal of an existing franchise relationship.

It is impractical to mandate compulsory pre‑entry education and advice, however enhancements to education and advice by government would be beneficial.

All franchise agreements ought to provide a reasonable opportunity to make a return on investment (including provision for compensation in the event of early termination).

The FDR is a valuable addition to the regulatory landscape, but awareness and utilisation of the Register is low and greater enforcement of the listing requirements is likely to be needed.

Recommendations: Merge the disclosure document and key facts sheet.

Existing franchisees entering into a new franchise agreement (or renewing or extending an existing agreement) should be able to opt out of disclosure and cooling off requirements designed to protect new franchisees.

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.

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.

Enhance the public visibility and usage of the Franchise Disclosure Register.

Additional information should be included on the FDR relating to dispute resolution and adverse actions brought by enforcement agencies.

How well does the Franchising Code support franchisors and franchisees during the term of the franchise agreement? In particular, does the Franchising Code provide adequate minimum standards relating to structural and/or operational change management?

How effective are the 2021 reforms which restricted the franchisors' capacity to require a franchisee to undertake significant capital expenditure?

What impact have the 2021 amendments to the obligation to act in good faith in relation to new car dealerships had? Where possible, please provide detail on the costs and benefits the new car dealership sector has experienced because of these changes.

Over time, decisions made by the courts are providing guidance to franchisors and franchisees on what is required to act in good faith under the Code. Such decisions should be used by regulators to develop education, particularly for franchisees, as to the limitations of good faith in a grievance.

Change management continues to be a problematic area for many franchise relationships.

Some franchisors are not employing best practice relating to the transparent and effective operation of marketing and cooperative funds.

Recommendations: Relevant Australian Government agencies should support franchisor‑targeted education and provide best practice guidance on how to manage change and support productive working relationships with franchisees. Sector participants could work together with the ACCC and ASBFEO to develop appropriate guidance. 

How effective are the 2021 reforms to the Franchising Code which created a process for franchisees to formally request early exit from their franchise agreements?

Where possible, please comment on the impact, or expected impact, of reforms to the Franchising Code which seek to ensure franchisees are paid compensation if the franchisor terminates a new vehicle dealership agreement early. Where possible, please provide detail on the costs and benefits (or expected costs and benefits) to the new car dealership sector resulting from these changes.

There needs to be more awareness and clarity regarding the process and circumstances in which a franchisee can negotiate an early exit from a franchise agreement.

Misunderstanding of goodwill in franchising continues to be a source of complaints that arise at the end of an agreement. Goodwill issues are driven by concerns relating to adequate compensation, uncertainty, and the opportunity to make a return on investment.

Unreasonable – and unenforceable – restraints of trade are unduly limiting franchisee opportunities at the end of a franchise relationship. While many existing restraints of trade terms may be difficult to enforce, they may unduly inhibit and dissuade competition in the sector.

Changes made in 2021 relating to delayed termination have made it unacceptably difficult for franchisors to act decisively in the context of serious breaches.

Recommendations: The Australian Government should consult the sector when re‑making the Code on options for simplifying these provisions without diminishing protection for franchisees. Options could include strengthening the rights of franchisors to terminate immediately if appropriate compensation is paid to a franchisee.

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.

The Australian Government’s Competition Taskforce should consider how to limit the use of restraints of trade and other uncompetitive terms in franchise agreements.

The ACCC should issue guidance on when a restraint of trade may constitute an unfair contract term.

Is the current role of the ACCC in relation to enforcement of the Franchising Code appropriate?

How useful and effective are the educational resources provided by regulators (such as from the ACCC)? Do they ensure prospective entrants to the franchising sector are sufficiently aware of their rights and responsibilities? Is the level of industry engagement appropriate?

What has been the impact of the 2022 reforms which increased certain penalties available under the Franchising Code? Particular comment is sought on penalties which were increased to the greater of $10 million, three times the benefit obtained, or 10 per cent of annual turnover?

Is the role and activity of the ASBFEO in relation to supporting dispute resolution under the Franchising Code appropriate?

Do the dispute resolution provisions in the Code provide an effective framework for the resolution of disputes? In particular, are you aware of whether 2021 reforms relating to multi-party dispute resolution and voluntary arbitration have been utilised by participants in the franchising sector? If not, why not?

Franchisees would benefit from greater access to early advice on the merits of their claim against a franchisor. ASBFEO’s existing Small Business Tax Concierge Service provides a useful model as to how this might work.

The existing approach to online education and advice resources for the franchising sector is not optimal. The spread of resources across the ACCC, ASBFEO, business.gov.au and Treasury websites increases search costs for participants in the sector and decreases the chance that the resources will be utilised.

Code compliance would be enhanced by increasing both the number of penalty provisions and the capacity to issue infringement notices.

Powers for ASBFEO to name franchisors who have not meaningfully participated in dispute resolution mechanisms can be a useful tool.

While the current Code remains fit for purpose, it would be beneficial to examine the merits and feasibility of a shift to an ex ante licensing regime prior to the next review of the Code.

Recommendations: A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (‘FranchiseSmart website’).

Australian Government agencies should work with relevant sector participants to improve standards of conduct in franchising by developing best practice guidance and education.

ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution.

The Australian Government should assist franchisees to access low‑cost legal advice on prospects prior to formal ADR.

The Australian Government should consider an appropriate role for franchise interests when implementing its commitment to a designated complaints function for the ACCC.

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.

Subsection 82(3) of the CCA could be amended to provide that applications for no adverse costs orders can be made in relation to contraventions of Part IVB and the ACL.

The scope of penalties under the Code and associated investigation powers and infringement notice regime in Part IVB of the CCA should be increased.

Infringement notices should impose a penalty equivalent to the upper limit of infringement notices issued under the ACL (60 penalty units for a body corporate).

The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee‑franchisor relationship.