Key Takeaway points
- The recent independent review of the Franchising Code of Conduct conducted by Dr Michael Schaper (the Schaper Review) identified power imbalances and information asymmetry between franchisors and franchisees as ongoing problems.
- Recommendation 23 of the Schaper review suggested exploring the feasibility of introducing a licensing regime as a more effective regulatory solution to these issues.
- It is also proposed that Licenses could be revoked or suspended to prevent offending franchisors from continuing to sell their franchisees.
- A licensing regime would establish criteria that businesses must meet to operate as franchisors, creating more proactive oversight and ensuring fairness and transparency within the sector.
- This consultation seeks to gather feedback on whether a licensing system would effectively address the challenges with the franchising industry identifies by the Schaper Review.
Purpose of this Consultation
The Department of the Treasury has set up a Taskforce to explore the possibility of a licensing regime for the franchising sector and has sought input from stakeholders on the benefits and challenges of implementing such a system. It will consider various aspects, of the proposed regime including regulatory oversight, dispute resolution, disclosure of information, and education. Key questions focus on the potential for early intervention, the feasibility of mandatory dispute resolution, and the types of data required for improved transparency.
Key Issues for consideration
Regulatory Oversight
The current ex-post regulatory model, where regulators intervene only after harm occurs, is seen as insufficient. An approach that requires franchisors to meet regulatory standards before being licensed to operate, could prevent issues from arising.
Questions to consider:
- Should the regulator have more proactive powers to intervene earlier?
- What powers could the regulator have to incentivise better outcomes for all participants in the sector?
- Do franchisors and franchisees engage in meaningful communication when considering changes that could affect the franchise system?
Dispute Resolution
The Code currently requires franchisors and franchisees to participate in alternative dispute resolution (ADR). However, there are concerns over the effectiveness and accessibility of the process.
Questions to consider:
- Can mandatory binding arbitration as part of a licensing regime improve dispute resolution and lead to more timely, cost-effective outcomes?
- In what ways could the current dispute resolution framework under the Code be improved or strengthened?
- Are there any challenges preventing access to the available ADR options?
- Are there existing internal change management systems that are effective in reducing future disputes that may be beneficial to the sector?
Disclosure of Information
The Franchise Disclosure Register (FDR) provides important information to potential franchisees, but improvements could be made to enhance transparency and support informed decision-making.
Questions to consider:
- What additional data would improve transparency and help franchisees make more informed decisions?
- What changes could be made to the FDR to enhance its functionality as a disclosure portal?
Education and Resources
The existing education and resources available to franchisors and franchisees are not optimal. A licensing regime could require pre-entry educational requirements to ensure participants understand their rights and obligations.
Questions to consider:
- Would mandatory educational courses for both franchisors and franchisees before entering into agreements improve outcomes?
- If you are a franchisor, do you refer potential franchisees to any external information or educational resources before or during the franchise agreement stage?
- If you are a franchisee, have you consulted any external information or resources about franchising?
- Are the current educational resources for prospective franchisees adequate and beneficial?
Business Model Preconditions
A licensing regime could set minimum standards for franchise systems, ensuring that only mature, well-supported business models are allowed to franchise.
Questions to consider:
- What should be the minimum requirements for a business to be eligible for a franchise license?
- How developed or mature should a business’ operating model be before it is considered suitable for expansion through franchising?
- What would be the best way for a potential franchisor to demonstrate that their business model has reached the necessary level of maturity for franchising?
Broader considerations
In addition to the above considerations, the consultation paper seeks input on broader issues considerations, such as:
Industry Engagement: How can the Government improve communication with the franchising sector to ensure all parties are aware of new regulations or consultations?
Funding Models: What is the most effective way to fund a new licensing regime? This could include fees or levies on the sector, similar to the AFSL model for financial services.
Questions for Stakeholders
- How can the current system be improved to better protect both franchisees and franchisors?
- What are the main barriers to effective dispute resolution and how can a licensing regime address these?
- What additional data or disclosures would enhance transparency and improve decision-making for potential franchisees?
Next steps
This consultation paper is a first step in determining the feasibility of a licensing regime for franchising in Australia. The Taskforce invites all stakeholders to submit their views on the potential benefits, challenges, and design of a new licensing system. This feedback will inform the development of any future regulatory changes to the sector.
For more information or to submit feedback, please visit https://consult.treasury.gov.au/c2024-595641/consultation
Please contact our Commerce, Franchising and Brands expert Guy Cosgrove–RedeMont for assistance or any other queries you may have.
