Franchise sector to get own ombud

Draft code of conduct lays groundwork for new body

PLANS are afoot to set up an ombud to handle complaints between franchisers and franchisees‚ following the release in January of the draft Franchise Industry Code of Conduct by the National Consumer Protector.

At present only members of the Franchise Association of SA (Fasa) are governed by a code of conduct.

With the new code‚ the National Consumer Protector plans to widen this to include all franchise systems through the appointment of an industry ombud for a five-year term.

To fund the ombud’s office‚ a levy on franchisees and franchisers has been proposed. Aggrieved parties will be able to seek legal redress should they feel the need to.

Eugene Honey, of law firm Adams and Adams‚ describes the code as “very much a work in progress” and says minor amendments to it were made following the comments period.

He says an updated version of the code has been lodged with the National Consumer Commission.

Should the commission give the green light‚ it will then be sent to Trade and Industry Minister Rob Davies for approval.

Honey says Fasa has been calling for an alternative dispute mechanism for the sector for years.

This has now become possible as the National Consumer Act‚ which came into effect in 2011‚ allows for industry-specific codes.

If the code is approved‚ the sector will join the automotive and consumer goods and services sectors‚ which have own their ombuds.

Following the gazetting of the code‚ franchisers expressed concern that it could encourage franchisees to lay trivial complaints with the ombud. But Honey says the code will benefit both franchisers and franchisees as it will offer them an alternative dispute mechanism‚ which could save both parties from costly litigation.

Eric Parker‚ a senior associate of Franchising Plus‚ says Fasa currently lacks teeth to tackle problems in the franchising sector.

If Fasa members fall foul of the code‚ he says‚ the association is faced with either cancelling their membership – which might result in their continuing to operate unethically outside the association – or keeping them in by trying to resolve the matter internally.

Fasa executive director Vera Valasis says the association receives very few requests for dispute resolution from its members‚ and none have been lodged so far this year.

“In the past‚ where the association had an issue with a member‚ it did not renew the company’s membership for the immediate follow-up period.”

The association offers a complaints link on its website and follows a specified procedure to address and manage legitimate complaints. Valasis says most relate to non members‚ which the association cannot act upon.

The Consumer Protection Act tightened criteria for all franchisers – whether Fasa members or not – by‚ among other things‚ making it obligatory for them to disclose certain minimum requirements in a franchise agreement.

Valasis says Fasa has not noted any change in the number of complaints or dispute solution service requests since the act came into effect.

SA Franchising Warehouse chief executive Kobus Oosthuizen says a large number of the disagreements between franchisees and franchisers are over the common franchisers’ practice of levying a depo- sit on franchisees that commit to buying a franchise.

The deposit is used to secure a franchisee’s commitment to the purchase and to cover certain upfront costs such as training or when a franchiser negotiates a lease on behalf of a franchisee.

Oosthuizen says the size of a deposit usually varies between R30 000 and R150 000.

But Honey says there is nothing in the Consumer Protection Act that specifically states franchisers must refund any upfront deposit to a franchisee or that does not allow for franchisers to insert a provision in the franchise agreement that allows for non-refundable deposits.

However‚ he stresses that the spirit of the law indicates that deposits should be refunded‚ as the act states that all deposits must be paid into a separate trust account.

Fasa released a practice note earlier this year on the handling of deposits.

It recommends that both the franchise agreement and any preliminary ancillary agreements are drafted so as to set out clearly for what purposes any deposits or initial fees are to be used.

Timm is a freelance journalist and founder of the blog Small Business Insight

Where the association had an issue ... it did not renew the membership