Govt considers licensing to tackle unfair practices in franchise industry

The Australian franchise industry, a $135 billion powerhouse, is facing a potential overhaul. The catalyst for this change?Concerns over a significant power imbalance between franchisors and individual franchisees

Minister for Small Business Julie Collins has disclosed the government’s stance in response to the Independent Review of the Franchising Code of Conduct, chaired by former Australian Competition and Consumer Commission (ACCC) deputy chair Michael Schaper. Schaper’s review has put forward 23 recommendations concerning the Franchising Code of Conduct, which is set to expire in April 2025. While affirming the integrity of the Code, Schaper has pinpointed areas necessitating enhancement.

The ACCC has underscored its limited capability to address every Code violation, primarily focusing on systemic competition concerns. This limitation means the watchdog can only intervene after a breach occurs, hampering its ability to promptly prevent or mitigate harm to franchisees In light of these persistent challenges, the ACCC has proposed a novel licensing scheme coupled with ongoing compliance requirements, alongside mandatory arbitration for non-compliant franchisors, as a potential resolution. Backing this proposal, Schaper has prompted the government to assemble a Treasury taskforce to evaluate its feasibility through a cost-benefit analysis, with input from the franchising sector.

Minister Collins has emphasized the government’s commitment to rectifying power imbalances within the sector, striving for equity to benefit all stakeholders. Beyond the contemplation of a licensing scheme, the government has either fully accepted or accepted in principle all recommendations. This encompasses empowering the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to champion for franchisees, expanding its Tax Concierge service to provide affordable legal counsel, and authorizing the public identification of non-compliant franchisors.

“The concept of a licensing regime is a bold suggestion for a franchise sector that is already more highly regulated here than in other comparable economies and ASBFEO looks forward to contributing to the feasibility work of the proposed taskforce,”  Australian Small Business and Family Enterprise Ombudsman, Bruce Billson said.

“We believe there is scope in franchising for the Government to consider a non-regulatory approach to activating the existing option for parties to agree to arbitration under the Franchising Code of Conduct by urging franchise systems to pre-commit to binding arbitration where disputes cannot be resolved through alternative dispute resolution. Franchisors that make such a positive commitment to binding arbitration should be allowed to have this recognised in the Franchise Disclosure Register.

“But there also needs to be more effective enforcement by regulators, such as the ACCC, of the Code and other legal protections that already exist, particularly around unfair conduct and anti-competitive behaviour. The Government’s response to the Schaper Review further support good and fair commercial relationships in franchising.  In helping with franchising disputes, we are often disappointed when mediation and conciliation does not produce a resolution for both parties. Currently, it is only the well-resourced and patient that can further pursue their interests via existing legal channels, unless the regulator steps up and in. This can distort the bargaining position of the parties and willingness to find an early mediate resolution, and is why we advocate for a responsive, affordable and restorative Court-based mechanism that can ensure all parties can benefit from Code protections and legal provisions intended to support fair and reasonable commercial dealings.

Furthermore, the government intends to escalate financial penalties for severe Code breaches, with maximum fines set at $187,000, and the potential imposition of penalties up to $18,780 for Code violations.

Franchisees will also receive safeguards akin to those enjoyed by new vehicle dealership agreements, guaranteeing fair returns on investments and compensation in the event of early agreement termination.

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