Licensing Regime for Franchising in Australia

Last week while I was busy ensuring that our franchisor clients had updated their profile on the Franchise Disclosure Register, the Federal Government released its consultation paper on a licensing regime for the franchising sector.

Anyone who logged on to the Franchise Disclosure Register after 11 November 2024 was met with a bright yellow header announcing in bold letters "Have your say Licensing consultation paper now live".

If you would like to read the consultation paper, click on the link below.

Consideration of a licensing regime for the franchise sector

The closing date for submissions is 8 December 2024.

Background

In 2023 a review of the Franchising Code of Conduct was undertaken by the Federal Government.

One of the recommendations made as a result of the 2023 review, was that a licensing regime may provide a more efficient and effective way to address issues in the franchising sector, without increasing the regulatory burden of the Franchising Code of Conduct (the Franchising Code).

As a result of the recommendation, in May 2024, the Federal Government advised in its response, that it would establish a Taskforce in Treasury to conduct a comprehensive analysis of introducing a licensing regime for the franchising sector.

In October 2024, the Exposure Draft for the proposed 2025 Franchising Code was released. Submissions relating to the Exposure Draft closed on 29 October 2024.

Following the release of the Exposure Draft, the Federal Government has now turned its mind to the consideration of a  licensing regime.

What Feedback is the Consultation Paper Seeking?

The consultation paper is seeking submissions broadly in the following categories:

1. Regulatory Oversight;
2. Dispute Resolution;
3. Disclosure of Information;
4. Business Model Preconditions; and
5. Education and Resources.

The consultation paper is formulated by outlining the potential functions of a licensing regime in the franchising sector in the five areas set out above, and then asking a number of questions.

I have set out each of the questions asked in the consultation paper in the next section.

While the consultation paper does not detail any specifics of a proposed licensing regime, it provides glimpses into how the regime may operate.

For example, when considering Regulatory Oversight, it is noted:

If a licence holder breaches the terms of their licence, the regulator would then be able to immediately halt the licence holder's engagement in the regulated activity.

When considering Dispute Resolution, the topic of arbitration as a dispute resolution process is specifically highlighted:

However, a licensing regime could require licensees to participate in mandatory binding arbitration as a term of their licence. This would be like other determinative schemes, such as those attached to the AFSL.

You may recall that arbitration was introduced as a dispute resolution process under the Franchising Code in 2021. Unlike mediation and conciliation, arbitration as a dispute resolution process must be agreed on by the parties.

Since the inception of the 2021 amendments to the Franchising Code, I have reviewed many franchise agreements, of which, only one franchise agreement included arbitration as a dispute resolution process.

The main argument in favour of arbitration is that it is more cost effective than litigation (which continues to be by far the most costly and time consuming method of resolving disputes).

However, in my view,  any requirement that arbitration be made compulsory, should be carefully considered, particularly in light of the recent High Court decisions of  Tesseract International Pty Ltd v Pascale Construction Pty Ltd [2024] HCA 24 and CBI Constructions Pty Ltd & Anor v Chevron Australia Pty Ltd [2024] HCA 28. 

Perhaps one of the most interesting glimpses in the consultation paper into the possible structure of a licensing regime is made when outlining potential functions under the heading "Business model preconditions to franchise".

In Australia there have never been any preconditions to using franchising as a growth strategy. The consultation paper alludes to the introduction of requirements relating to the maturity of a business model, and sets out the following example of a possible pre-condition.

For example, a potential licensing regime may require a business model to operate for a set time and across 2 or more locations before being eligible to apply for a franchising licence.

While I understand the temptation to include these sorts of requirements as part of a licensing model, in my experience, there is no magic formula to a business being successful. There are many factors that contribute to the success of an individual franchise unit, for example the location of the franchise site.

Questions Included in the Consultation Paper

The following questions are included for comment in the body of the consultation paper and listed in Appendix A.

Questions – Understanding the nature of the issue

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?
   
   

Questions – Regulatory oversight

1. Does the regulator currently have sufficient powers to respond to and limit the impact of persistent issues in the sector?
2. What powers could the regulator have to incentivise better outcomes for all participants in the sector?
3. Would an early intervention power more efficiently and effectively address the current issues in the franchising sector?
4. What powers could the regulator have to incentivise better outcomes for both franchisees and franchisors? For example, giving the regulator powers to sanction in response to breaches of the Code.

1. Does the current dispute resolution framework under the Code offer meaningful, timely and cost effective dispute resolution?
2. How do you think the current dispute resolution framework under the Code could be improved or enhanced?
3. Are there any barriers to accessing the current dispute resolution options?
4. Do you think there is meaningful engagement and communication between franchisors and franchisees where changes under consideration impact the franchise system?
5. Are there existing internal change management systems that are effective in reducing future disputes that may be beneficial to the sector? Provide examples where possible.

For further discussion about dispute resolution in franchising see:
Dispute Resolution in Franchising
Franchising Code Amendments - Dispute Resolution

Questions – Disclosure of information

1. Excluding access for reporting purposes, for what purpose would you access data contained in the FDR?
2. What changes could occur to the FDR to improve its functionality as a disclosure portal?
3. Should data collected through the FDR be used to automatically generate information documents? For example, to generate clearly presented plain language comparison documents.
4. Considering all available information, did you have access to sufficient information to make an informed decision before entering into a franchise agreement? If not, what further disclosure would have been beneficial?
5. Are there other alternatives for reporting data about the sector that would better achieve the benefits of disclosure and increased transparency?

For further information about the Franchise Disclosure Register see:
Franchise Disclosure Register

Questions – Business model preconditions to franchise

1. Do you think the franchising system you operate in has performed as marketed to you?
2. How developed or mature should a business’ operating model be before it can expand through a franchising model?
3. How would a potential franchisor demonstrate that their business model has achieved the appropriate level of maturity?
4. Does your franchise model offer sufficient support to ensure franchisees are able to perform as expected under the franchise agreement? i.e. do you have access to appropriate training, support and guidance to ensure consistency of product and service delivery.
5. Before entering a contract, should franchisors have to provide opportunities to determine whether a potential franchisor-franchisee relationship is suitable for both parties? For example, a requirement for perspective franchisees to work in an existing franchise business as an employee for a specific period before being eligible to enter into a franchise agreement.

Questions – Education and resources

1. When were you first made aware of the Franchising Code of Conduct? Do you understand your obligations under the Code?
2. If you are a franchisor, do you direct potential franchisees to any external information or educational resources prior to entering into or during a franchise agreement?
3. If you are a franchisee, have you accessed any external information or educational resources relating to franchising? If so, what resources did you access and what prompted you to seek this information?
4. Do you think the current educational resources are sufficient and provide a benefit to prospective franchisees? How could these resources improve to better inform decision making?

Questions – Broader considerations for a proposed licensing regime

1. How can the Government more effectively engage the franchise sector to inform them of changes to regulations, or future consultations that impact the sector?
2. What do you think would be the most effective funding model to establish and maintain a licensing regime for the franchising sector? 

Takeaways

As foreshadowed, the Federal Government has set up a taskforce to consider the introduction of a licensing regime for the franchising industry.

A consultation paper was released on 11 November 2024, with submissions due by 8 December 2024.

Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.