Weeks ago, the Australian Competition and Consumer Commission (ACCC) indicated that franchisers and franchisees were on their enforcement priority list for 2019.
Last week, the Government made an official statement of its intent to change the Franchising Code of Conduct (FCC).
Yet, the move to update the franchising code to make it more effective has been part of an evolving conversation.
Last year, the competition regulator indicated that they received over 400 reports relating franchising and over 250,000 enquiries.
The existing framework, it seems, has proven itself inadequate to the task of protecting franchisees.
According to the ACCC, “Disclosure and transparency are still necessary but are insufficient to protect franchisees operating small businesses against the abuse of contractual power by some franchisers.”
What the changes might mean
GRC Professional reached out to Bronwyn Gallacher from CCL Consultants about the review of the Franchising Code of Conduct.
“It is interesting that the report identified systemic issues in the franchising sector and a regulatory framework that is not effective in protecting franchisees from practices that are opportunistic and exploit power imbalances. Disclosure and increased transparency were meant to address such behaviour and imbalances, but the report notes that, whilst it remains an important tool, more is needed,” Gallacher explained.
She added that the report not only recommends changes to the Franchising Code, but also an increased role and powers for the regulator.
For Gallacher, the challenge is that many prospective franchises lack experience and, as a result, fail to do their own due diligence.
Speaking to the Franchise Council of Australia at the Law Symposium last October, ACCC Commissioner Mick Keogh highlighted concerns of his own regarding franchisees and prospective franchises failing to do their own due diligence.
“We noted in our submission that we believe due diligence investigations are an essential step in considering a franchise, and the ACCC remains concerned that many franchisees do not seek independent professional advice as part of this process. Recent research commissioned by the Department of Jobs, for example, has indicated this may be driven by an assumption by prospective franchisees that franchise systems are proven business models.”
But why is due diligence important? Gallacher explained that this is something some franchisors have taken advantage of in the past, with reports some franchisors instead rely on the constant ‘churn-over’ of franchisees.
“Thereby, they profit from continuously rolling-over failing franchisees and re-selling to new prospective franchisees, rather than supporting and building new and existing franchisees into a successful network,” she added.
Something not recommended in the report but which had been called for in the past was the mandating of franchisees to obtain legal and accounting advice.
Areas in focus for the review will be:
unfair contract terms;
cooling off periods;
binding commercial arbitration;
alignment of industry codes;