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Government commits to every recommendation from Independent Review of the Franchising Code of Conduct

In a bid to improve the franchising model in Australia, small business expert Dr Michael Schaper was commissioned to conduct an Independent Review (Review) of the Franchising Code of Conduct (Code) in August 2023.

As of May 7, 2024, the Federal Government has officially responded to the review, formally agreeing – or agreeing in principle – to all 23 recommendations made by Dr Schaper.

This response will go a long way to addressing the power imbalances between franchisors and franchisees, improving transparency within the $135 billion franchising sector and, ultimately, promoting fairer business practices across Australia.

Key findings

In his Review, Dr Schaper, a former ACCC Deputy Chair, found the Code to be generally fit for purpose. However, to improve the Code’s effectiveness and address any shortfalls, he has made recommendations based on feedback from regulators and other stakeholders. Broadly, these include:

• Clarifying intent: With confusion around what the Code does and why it exists, include a clear statement of purpose: “to improve standards of conduct and ensure access to information and dispute resolution.”
• Battling reviewer fatigue: After considerable and frequent review in recent years, the Code should undergo amendments only every five years.
• Better potential for ROI: Franchisees should be given ‘reasonable opportunity’ to make a return on investment. Clause 46B currently provides this only to new vehicle dealership agreements, and therefore should be extended to all franchising agreements.
• Early termination compensation: Similarly, clause 46A currently requires a compensation mechanism for franchisees in new vehicle dealership agreements where their reasonable opportunity to make a return on investment has been cut short. 46A should also be amended to include all types of franchising agreements.
• Exploring a licensing regime: To better regulate the industry, determine the feasibility of requiring franchisors to obtain a license to operate a franchise. The Government is establishing a Treasury Taskforce to consult and conduct a cost benefit analysis of such an arrangement.
• Simplifying disclosure: While the lengthy disclosure information that is needed before entering into a franchise agreement needs to be retained, it can be simplified, consolidated, and merged with the key facts sheet.
• Better dispute resolution: Franchisees should be given easier access to justice in the event of resolving a dispute, and there needs to be more awareness of the process as well as the financial contingencies they have available to them.
• More resources are needed: Government agencies have a responsibility to develop resources that outline best practice guidance, as an accessible and easy-to-understand source of truth for the sector.

Benefits of the response

In responding to the Report, the Albanese Labor Government has shown a commitment to improving protections and streamlining processes within the franchising sector, helping to strengthen the businesses of both franchisees and franchisors. More key benefits include:

• Increased transparency: Streamlined disclosure requirements will give prospective franchisees the confidence and knowledge to make more informed decisions.
• Fairer treatment: Provisions like compensation for early termination and fair return on investment aim to level the playing field between franchisors and franchisees.
• Regulatory certainty: Regular revisions to the Code will provide a stable regulatory environment, which is essential for long-term planning and investment.
• Improved compliance: Higher penalties will deter non-compliance and help to ensure that franchisors adhere to ethical business practices.
• Support for small businesses: Better dispute resolution services and access to low-cost legal advice will provide crucial support for small business owners in the franchising sector.

The full 23 recommendations

1. The Australian Government should ensure the provision of more comprehensive, robust statistics about the franchising sector.
   
2. The Code should be remade, largely in its current format.
3. A clear statement of purpose should be inserted into the Code.
4. Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code.
5. Reviews of the Code should be conducted in five yearly cycles in the future.
   
6. Simplify and consolidate the pre-entry information given to prospective franchisees.
7. Franchisor obligations under the Code in relation to existing franchisees should be simplified.
8. 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.
9. 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.
10. Enhance the public visibility and usage of the Franchise Disclosure Register (FDR).
11. Additional information should be included on the FDR relating to dispute resolution and adverse actions brought by enforcement agencies.
    
12. Franchise systems should be encouraged, through education, to consult franchisees regarding any major change to the business model during the term of the franchise agreement.
    
13. 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.
14. Best practice guidance should be provided to franchisees and franchisors regarding franchisee-initiated exit, to enhance the effectiveness of clause 26B of the Code.
15. Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements.
    
16. A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (‘FranchiseSmart website’).
17. Australian Government agencies should work with relevant sector participants to improve standards of conduct in franchising by developing best practice guidance and education.
18. ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution.
19. The Australian Government should assist franchisees to access low-cost legal advice on prospects prior to formal ADR.
20. The Australian Government should consider an appropriate role for franchise interests when implementing its commitment to a designated complaints function for the ACCC.
21. 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.
22. The scope of penalties under the Code and associated investigation powers and the infringement notice regime in Part IVB of the CCA should be increased.
23. The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee / franchisor relationship.

New Code slated for mid-year

A draft of the updated Code is expected later this year, with time to feedback before the current iteration automatically sunsets on 1 April 2025.

For more detailed information, please refer to the Government response available on the Treasury website.

Are you a franchisee or franchisor and want to know how the changes to the Code will impact you? Our franchising lawyers are here to help. Contact our team today.