Parliamentary Committee Releases Franchising Report; Recommends Major Overhaul of the Sector

Friday 22 March 2019 @ 11.40 a.m. | Legal Research | Trade & Commerce

After receiving more than 200 submissions from interested parties, the much anticipated Final Report from the Parliamentary Joint Committee on Corporations and Financial Services - Fairness in Franchising (the “Committee”) into Australia’s $180 billion franchise sector was released on 14 March 2019.  The 300+ page report identified evidence of systemic abuse, recommending an overhaul of the Franchising Code of Conduct (the “Code”) (contained in Schedule 1 to the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (SR No 168 of 2014) (Cth).

An article in The Guardian noted:

“… The committee investigating franchising has recommended sweeping reforms to the sector, including enhanced financial disclosure obligations for franchisors, greater regulatory powers for the Australian Competition and Consumer Commission, and whistle-blower protections for franchisees … [the Report] found the exploitation of small business owners by their master franchise operators was ‘systemic’ and that the system gave rise to wage theft”.

Background to the Report

On 22 March 2018, the Senate referred an inquiry into the operation and effectiveness of the Code to the Committee, and according to a recent article in MyBusiness:

“…The committee was overwhelmingly critical of the existing regulatory framework for the franchise industry, stating that it has ‘manifestly failed to deter systemic poor conduct and exploitative behaviour’, and that current rules had also ‘entrenched the power imbalance’ favouring franchisors.”

A Media Release issued by the Federal Government also outlined the need for an inquiry:

“… The committee has completed its inquiry into franchising in Australia … A decade ago, the committee's inquiry into franchising identified relatively isolated opportunistic behaviour by franchisors. The current inquiry has identified something much worse: systematic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against such practices …”

Franchise Business reports the Committee put the spotlight firmly on Retail Food Group (“RFG”) in the report with a case study on the company. The report calls for further inquiries into the multi-brand franchisor’s operations and dealings. Executive Chairman of RFG, Peter George said:

“The current management team and board completely understand that RFG’s future success is directly linked to the profitability of its franchisees … We have instituted a comprehensive program of investment and improvement to materially help existing and new franchisees grow and prosper.”

RFG confirmed it will support any changes which will benefit the franchising industry.

Key Recommendations put Forward

SmartCompany reports that the Committee made a total of 71 recommendations, with one recommendation being:

“… [the] Australian Competition and Consumer Commission (“ACCC”) should be given more powers and responsibilities for policing bad behaviour in the sector, criticising the regulator for past inaction, alongside ASIC … It also advised expanding civil penalties and infringement notices to all breaches of the franchising code as well as increasing maximum penalties to bring them in line with Australian Consumer Law (“ACL”).

The Committee noted at page xvi of the Report:

“…The committee recommends that the Australian Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the committee's recommendations. The Franchising Taskforce should include representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the ACCC.”

Comment on the Report

Commenting on the Report in an opinion piece for the Sydney Morning Herald, Senator Deborah O’Neill (who was the Deputy Chair of the Franchise Inquiry Committee) said:

“…During the course of the inquiry, the evidence heard in public – and in confidence, when many franchisees were too scared of their franchisor bosses – made clear that far too many franchisors are abusing the power imbalance between themselves and franchisees. The list of complaints documented failure points too numerous to mention in this small piece, ranging from unconscionable contract terms to intimidation, gross exploitation and complete abandonment. Whilst some franchisors operate in an ethical manner, sadly the franchising industry has come to be defined by the systemic poor conduct and exploitative behaviour of many franchisors – to the detriment of franchisees and their workers.”

Franchise expert and UNSW Professor Jenny Buchan noted that the Committee had created a lot of work for the proposed taskforce [the Franchising Taskforce]. Speaking to SmartCompany she said:

“They’ve recognised the limitations of what the code can do … Anything that’s beyond an amendment to the Code is going to be more tricky to achieve, so a lot of that stuff has been palmed off or given away to this Taskforce … [They’ve] expressed a very good understanding of what is needed to make franchising work for franchisors, and franchisees — economically, legally and in relationship terms.”

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