Coalition supports ACCC’s concerns on franchising, but cautious on good faith provisions

Shadow Small Business Minister Bruce Billson says he supports the concerns raised by the competition regulator over the health of the $128-billion franchising industry.

Billson says while he is yet to come to a firm view on the need for “good faith” provisions in contracts, he’s hearing plenty of legitimate complaints about the power imbalance between franchisors and franchisees, input costs requirements and unmet profit promises.

Billson told SmartCompany this morning that the relationship between franchisees and franchisors is “potentially a brittle one”, with data suggesting a “certain degree of wariness between the two”.

“If difficulties arise, the franchisors clearly have the whip hand, and that tends to escalate tensions if people don’t feel they’re not getting the respect they deserve,” Billson says.

“And the circumstances where the relationship doesn’t recover seem to happen too frequently.”

One concern raised to Billson is that the relationship seems to flip very quickly from an adult one to a parent/child one, when the “franchisee feels they’re being told what’s good for them by the franchisor.”

He adds that concerns have been raised about input obligations that “don’t always represent the best value for the franchisees”, such as deals with suppliers, tenancy arrangements and fit-out obligations.

There are also issues with how franchisors deal with franchise arrangements when they wind up.

“The pre-preparation phase needs some thought,” he says.

“The training that’s available, the due diligence that precedes entering into an agreement could be improved, in our view.”

Billson says there’s also additional scope to address disclosure documents and a “broader suite of remedies” to address circumstances in which the reality in franchising is “wildly removed” from disclosure documents.

He also advises potential franchisors to consult with past and present franchisors to “get a reality check”.

According to Billson, there’s an opportunity for the respective small business ombudsman to play an active role in dispute resolutions, saying many participants feel there may be a vested interest involved in current mediation methods.

And there’s the idea of extending unfair contracts law where the “contract itself is so incredibly unbalanced that it doesn’t pass the fairness test,” Billson says.

On good faith, Billson says the idea is a “reasonable one” but it does become difficult to codify.

“We’re consulting widely and looking at what models might work to maintain a collaborative relationship”.

Billson says although he doesn’t support moves by South Australia and Western Australia to introduce state-based franchising laws, in addition to existing federal legislation, the states are reflecting displeasure at the current stewardship of franchising issues by the Federal Government.

“That is why you see state Parliaments entering into this area when really it should be a federal issue, but [Small Business Minister] Nick Sherry has packed up his bag on franchising.”

In a speech this week, Sherry said the Government did not intend to review the Franchising Code of Conduct before 2013, saying more time was needed to review recent amendments to the code.

At the start of the week, Australian Competition and Consumer Commission chairman Rod Sims said, “while the franchising sector is an important part of our economy, it does have some image issues.”

“The ACCC’s complaints data supports the proposition that there are problems in the sector,” he said, noting the regulator had received more than 600 franchise-related complaints in the last financial year. These complaints related to allegations of misleading and deceptive conduct, concerns over disclosure, allegations of unconscionable conduct by franchisors, and allegations of the unlawful termination by the franchisor of the franchising agreement, Sims said.

“As the chairman of the ACCC, it is difficult for me to ignore these statistics.”

In response to the Sims speech, Jason Gehrke, director of the Franchising Advisory Centre, says given there are about 1,000 franchisors and about 70,000 outlets Australia-wide, 600 complaints is a creditable result.