On 20 March 2018, the Senate voted in favour of establishing an inquiry into the franchising sector. This latest inquiry follows significant media coverage of allegations of franchisee exploitation against high profile franchisors, including Domino’s and Retail Food Group, who operate brands including Gloria Jeans, Brumby’s, Donut King and Michel’s Patisserie.
The inquiry will be held by the Parliamentary Joint Committee on Corporations and Financial Services and the report is due by 30 September 2018. The inquiry will cover the operation and effectiveness of the Franchising Code of Conduct (the Code), including the adequacy of dispute resolution and termination provisions, as well as the imposition of trading restraints on former franchisees. It will also evaluate how well the Code ensures full disclosure to franchisees amid transparency criticisms of the sector.
Given this announcement, we thought it was timely to summarise the number of inquiries into the franchising sector over the last few years and their findings, as this may provide some insight into what we can expect from this latest inquiry.
Mr Graeme Matthews led the review of the operation of the disclosure provisions of the Code in 2006. The Matthews review was the subject of criticism because its terms of reference were confined only to the disclosure provisions of the Code.
Following the 2006 inquiry, a range of changes to the disclosure requirements under the Code were implemented in 2008, including:
- a requirement on franchisors to include the following information in disclosure documents;
- who provides rebates and financial benefits to the franchisor
- details of the expenses of marketing and other operative funds
- the last known particulars of name(s) and contact details of each ex-franchisee will be disclosed, unless the ex-franchisee requests that it be withheld
- the business experience of all ‘officers’ of the franchisor
- prohibition on franchisors inhibiting prospective franchisees from communicating with each other or existing franchisees
- general waivers (i.e. broad disclaimers), regarding prior written or verbal representations, were prohibited in franchise agreements
- the details and history of the territory or site to be franchised must be provided together with the disclosure document
- certain disclosure timeframes were reduced from 60 days to 14 days.
In 2008, the Parliamentary Joint Committee on Corporations and Financial Services conducted an inquiry into the Code and related matters with the aim of raising the standard of conduct in franchising.
In response to this inquiry, the Government amended the Code again in 2010. These changes included:
- a requirement to include warnings in disclosure documents
- a requirement to include additional information in disclosure documents, such as details of: recurring or isolated payments; whether a franchisor has unilaterally changed a franchise agreement; and what happens at the end of the franchise term
- obligations on franchisors to notify franchisees whether or not they intend to renew the franchise agreement or enter into a new franchise agreement
- expansion of clauses dealing with the conduct of parties during mediation.
Alain Wein report
In 2013, Alan Wein commenced an independent review of the Code. The review looked at the 2008 and 2010 amendments to the Code and resulted in the development of the new 2015 Franchising Code of Conduct.
Some of the more significant changes made to the Code in 2015 following the Alan Wein report, included:
- amendments to the franchisor’s disclosure requirements (e.g. obligation to provide information statement)
- the introduction of an obligation of good faith
- changes to provisions regarding marketing and advertisement fees
- restrictions on enforceability of restraint of trade clauses
- amendments to penalties and infringement notices
- restrictions on franchisor’s requesting significant capital expenditure
In addition to the above inquiries, there have also been state based inquiries in the franchising sector in South Australia and Western Australia.
So what can we expect now?
Given the current environment, we expect that a significant focus of the inquiry’s recommendations will be around improving disclosure to franchisees. We may see recommendations from previous inquiries, which were rejected by the government, put forward again, such as mandatory registration of franchisors and lodgement of disclosure documents. We expect that the inquiry will be focused on a few key issues contributing to current franchisee complaints, including the level of supplier rebates, whether franchisors should take greater responsibility for the success of franchisees, the provision of clear, current financial information for franchise operations and end of term arrangements. We will have to wait and see whether this inquiry continues the approach of adopting smaller, incremental changes to the Code or if it will recommend a significant overhaul of the regulation of the sector.