More to the new Franchising Code than meets the eye

A new Franchising Code of Conduct announced in April this year is the most significant regulatory change to the $132 billion Australian franchise sector since it was first regulated in 1998, and will come into effect from January 1 next year.

However, in contrast to the the extended implementation timeframe, the consultation period for the new code was opened and closed in the same month, allowing just 17 business days for the franchise sector to provide input into the most sweeping changes to franchise regulation in nearly 16 years.

Announcing the new code on April 2 last month, Federal Small Business Minister Bruce Billson said the new code followed the recommendations of the 2013 Wein Review, and subsequent consultation with the franchise sector.

In a six-page media statement titled “The Future of Franchising”, the Minister announced key elements of the new code included the introduction of an obligation to act in good faith, financial penalties of up to $51,000 for major breaches, and new powers for the Australian Competition and Consumer Commission to issue infringement notices up to $8500 without having to seek a court order.

It should be noted this will be a new Franchising Code of Conduct to apply to franchise agreements entered into on or after January 1, 2015, and is not just a series of changes to the existing code.

The government contends the new code will be good for the sector because it will:

1. Reduce red tape;
2. Improve information available to franchisees;
3. Strengthen the balance in franchise agreements;
4. Improve conduct in the sector and the overall effectiveness of the code.

Two codes instead of one?

The government’s statement claims that red tape will be reduced by the elimination of short-form Annexure 2 disclosure, so-called “double-disclosure” for international franchisors operating in Australia; removing the need to summarise agreement provisions in the disclosure document, and other changes to the code to reduce ambiguity.

The regulatory impact statement prepared by government suggests that this will save the sector several million dollars per year in legal costs. However, for the first few years this will most likely be negated by the very real prospect that the franchise sector will be subject to two simultaneous franchising codes – the current version, and the new code to commence in 2015.

This two-code scenario was not flagged in the Minister’s original statement or RIS, and appears to be an unexpected complication in legal implementation that risks actually causing greater confusion and red tape for the franchise sector, not less.

Operating two simultaneous codes would be at odds with the government’s claim of reducing red tape and defies common sense. Further clarity on the need for a two-code environment is expected later this year as the government looks at this development in more detail.

More information for franchisees

In improving information available to franchisees, the new code will require franchisors to provide potential franchisees upfront with a risk statement about franchising and to disclose how the proceeds from online sales are dealt. Additionally, franchisors will also need to be more transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to be allocated to the fund, as well as giving franchisees an option to vote for an annual audit.

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Changing the balance

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements must be disclosed in the franchise agreement and justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they are willing to be renewed but the franchisor does not offer a renewal.

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