Overview
The Minister for Small Business has released the Independent Review of the Franchising Code of Conduct (the Code) by Dr. Michael Schaper. While the review found that the Code is generally fit for purpose, it recommends a number of areas for improvement.
Key Takeaway Points
- Ahead of the Franchising Code of Conduct’s automatic expiry on 1 April 2025, the Australian Government appointed Dr Michael Schaper, small business expert and former Deputy Chair of the Australian Competition and Consumer Commission (ACCC), to carry out an independent review of its effectiveness.
- The Minister for Small Business has now released the report of the review which found that while the Code is generally fit for purpose, it recommends a number of areas for improvement.
- The report contains 25 findings, 23 formal recommendations and 34 implementation suggestions for consideration by the Government. In this article, we look at the recommendations and what they mean for the sector.
The Review
Ahead of the Code’s automatic expiry on 1 April 2025, the Australian Government appointed Dr Michael Schaper, small business expert and former Deputy Chair of the Australian Competition and Consumer Commission (ACCC), to carry out an independent review of the effectiveness of the Code.
The review considered input from 95 formal submissions, 40 meetings and roundtables with individuals and organisations linked to franchising, and two surveys. It broadly addressed the following:
- the general fitness of the Code;
- the role of the ACCC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in supporting enforcement and dispute resolution under the franchising regulatory framework;
- the role of the Code in regulating the automotive sector;
- the impact of the 2022 penalty increases; and
- the Franchise Disclosure Register.
Dr. Schaper’s review was completed in December 2023. His report was tabled in Parliament on 8 February 2024.
The Report
The report outlines that almost all parties engaged in the review see merit in the continued operation of the Code (in some form). It is recommended that the Code be remade, and not allowed to expire on 1 April 2025. However, the report acknowledges that the Code requires changes to address existing shortfalls in the regulatory framework governing the franchising industry.
The report contains 25 findings, 23 formal recommendations and 34 implementation suggestions for consideration by the Government.
The review highlights the merits of introducing a franchisor licensing system as a mechanism to ensure compliance with the Code.
However, it also acknowledges that a comprehensive analysis is needed to understand the nature, extent and implications of such a change.
The Minister for Small Business, the Hon. Julie Collins MP, has confirmed that the report’s findings and recommendations will be carefully considered before the Government will make a response.
In relation to the report, the Minister for Small Business has stated:
“Having the right settings underpins positive relationships between franchisors and franchisees and ensures confidence in the sector. This review is an opportunity for Government [sic] to make sure the regulatory settings support the sustainability and growth of franchising into the future.”
The Recommendations
The 23 recommendations of the Review are spread across six broad headings as follows:
About the franchising sector
- The Australian Government should ensure the provision of more comprehensive, robust statistics about the franchising sector.
Scope and structure of the Code
- The Code should be remade, largely in its current format.
- A clear statement of purpose should be inserted into the Code.
- Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code.
- Reviews of the Code should be conducted in five-yearly cycles in the future.
Entering into a franchise agreement
- The pre-entry information given to prospective franchisees should be simplified and consolidated.
- Franchisor obligations under the Code in relation to existing franchisees should be simplified.
- 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.
- 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.
- The public visibility and usage of the Franchise Disclosure Register should be enhanced.
- Additional information should be included on the Franchise Disclosure Register relating to dispute resolution and adverse actions brought by enforcement agencies.
- During a franchise relationship
- 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.
Ending a franchise relationship
- 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.
- Best practice guidance should be provided to franchisees and franchisors regarding franchisee-initiated exit, to enhance the effectiveness of clause 26B of the Code.
- Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements.
Regulatory oversight and dispute resolution
- A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (‘FranchiseSmart website’).
- Australian Government agencies should work with relevant sector participants to improve standards of conduct in franchising by developing best practice guidance and education.
- ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution.
- The Australian Government should assist franchisees to access low-cost legal advice on prospects prior to formal alternative dispute resolution.
- The Australian Government should consider an appropriate role for franchise interests when implementing its commitment to a designated complaints function for the ACCC.
- 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.
- The scope of penalties under the Code and associated investigation powers and infringement notice regime in Part IVB of the Competition and Consumer Act 2010 (Cth) should be increased.
- The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship.
If you would like to discuss the potential impact of the review on your franchise, or would like advice on your obligations generally, please contact our Commerce, Franchising and Brands experts.
