Disclosure and transparency are still necessary, according to the Fairness in Franchising report, but are insufficient to protect franchisees operating small businesses against the abuse of contractual power by some franchisors.
The Fairness in Franchising report was released by the Parliamentary Joint Committee on Corporations and Financial Services on March 14.
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.
The committee is therefore proposing substantial changes to the Franchising Code of Conduct and to the responsibilities and powers of the ACCC.
Recommended regulatory changes address: disclosure, franchise registration, supplier rebates, whistleblower protections, unfair contract terms, cooling off periods, exit rights, collective action, dispute resolution, binding commercial arbitration, alignment of industry codes, churning, education, and leasing arrangements.
The committee acknowledges that many franchisors have developed franchise systems that operate to the mutual benefit of the franchisor and their franchisees. In developing its recommendations, the committee says it has been mindful to avoid imposing unnecessary burdens on franchisors who treat franchisees fairly.
“That said, the recommendations are designed to lift standards and conduct across the entire industry because, on the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees,” the report stated.
Ombudsman calls for actions to be adopted
The Australian Small Business and Family Enterprise Ombudsman Kate Carnell has welcomed the recommendations made in the report.
Ms Carnell says franchisors continue to breech the ‘good faith’ obligation of the Franchising Code of Conduct and include unfair contract terms in franchising agreements without penalty, further entrenching the power imbalance between the franchisee and franchisor.
“At the moment, if a franchisor breaches the code, franchisees take no action for fear of repercussions, such as losing their franchise agreement. If they do go to mediation, the franchisor brings a legal team, while the franchisee is often unrepresented and suffers because of this,” she said.
“We agree all franchise agreements must comply with unfair contract term legislation; the majority of calls my office receives from franchisees are seeking assistance in a contract dispute.”
The committee also recommends making penalties significant and charging the ACCC with investigating standard form contracts and applying penalties where a contract contains an unfair clause. Ms Carnell says this will greatly improve the position of franchisees in their dealings with franchisors.
“Disclosure is paramount, and we welcome the recommendations to provide detailed financial and performance figures, workplace relations commitments and other key data to help make an informed decision to become a franchisee.”
Having recently taken on the function of assisting franchisees with disputes, the Ombudsman also welcomed the dispute resolution clauses being strengthened.
“We support reforms to include arbitration where mediation has proved unsuccessful so that small businesses can continue to access lower cost, timelier dispute resolution services,” she said.
“To ensure the issues raised with my office and the committee are comprehensively addressed, we agree that an inter-agency taskforce of government agencies should be set up to ensure a coordinated and comprehensive response.”