WHAT NEXT FOR THE SECTOR?

The ACCC looks at franchising.

As we reflect on 2018 it’s clear what a huge year it was for all those involved in franchise businesses. From hard-hitting stories in the media; to the parliamentary inquiry, to changing market and lending conditions; last year really shone a light on the good and the bad.

BUSINESSES UNDER THE MICROSCOPE

The franchising industry is an important part of our economy. But recently, the industry has come under scrutiny with the media exposing the financial distress of some franchisee businesses and allegations of misconduct by some big players including widespread underpayment of employees in some franchise networks. This included reporting of underpayments and other non-compliance with Australian workplace laws within the Caltex and 7-Eleven franchise networks.

These events really put the industry on notice. The Franchise Council of Australia boldly said that this behaviour has sparked “probably the biggest crisis in confidence the franchising sector has ever seen”.[1]

So, as we prepare for the year ahead, let us take a moment to consider the key events of 2018 and then turn our mind to what 2019 might hold.

PARLIAMENTARY INQUIRY

Following increased attention on the franchising industry, in March 2018 the Australian Senate referred an inquiry into the Franchising Code of Conduct to the Parliamentary Joint Committee on Corporations and Financial Services.

The Parliamentary Inquiry’s terms of reference include the operation and effectiveness of the Franchising Code of Conduct and the Oil Code of Conduct.

The committee established to conduct the Inquiry welcomed individual stories that may identify widespread issues and recommendations for reform.

The Inquiry held public hearings around the country, and over 200 public submissions were received. It heard of disputes between franchisors and franchisees, including complaints from franchisees about excessive fees and royalties, working too hard for little to no reward, and an overarching lack of transparency.

Some submissions to the Inquiry highlighted an imbalance of power in the relationship between franchisors and franchisees, as well as allegations of non-compliance. Specific issues raised in the submissions include:

• underpayment of wages

• the generally restrictive nature of

franchise agreements

• excessive fees and rebates

• supply arrangements which are consid

ered unfair by franchisees

• franchise business models that are not

financially viable for franchisees

• franchisors misleading prospective fran

chisees as to expected profits

• churning of franchise businesses at the

expense of franchisees

• franchisors not acting in good faith or

unconscionably, and

• dispute resolution not being effective.

ADVOCATING FOR CHANGE

The ACCC is responsible for promoting compliance with the Competition and Consumer Act 2010 (CCA), including:

• the Australian Consumer Law

• the Franchising Code of Conduct, and

• the Oil Code of Conduct.

In our detailed submission to the Inquiry, we made a strong case for changes that would make the relevant codes more effective. Notably, we have called for a substantial increase in penalties for code breaches to at least reflect the much steeper penalties available under the Australian Consumer Law.

The ACCC was successful in 2018 in court cases that imposed penalties for contraventions of the Australian Consumer Law. We saw record penalties handed down by the Federal Court in November, with the sole director of We Buy Houses Pty Ltd,

Rick Otton, personally fined $6 million for making false or misleading representations to consumers, and his company fined $12 million. During 2018 Parliament amended the Australian Consumer Law so that penalties for breaching it in the future could be several times higher than this.

We have also called for more transparency from franchisors, including disclosure of meaningful information to potential franchisees about establishment costs and other expenses.

We would also like to see actions that will create more incentive for prospective franchisees to seek independent advice before investing in a franchise, and changes that make unfair contract terms illegal.

Speaking at the Inquiry, ACCC deputy chair, Mick Keogh, highlighted to the committee that we want to see more effort invested in encouraging prospective franchisees to take meaningful steps to understand what they are investing in.

The party that takes the most risk in entering a franchise relationship is clearly the franchisee, who needs to be able to better understand the risk they are taking, their ability to incur any losses, and what will happen if their significant investment in money, time and hard work does not pay off.

Our work in the franchise industry will remain a key focus for the ACCC. We will continue to provide education and guidance materials; conduct an active Franchise Code compliance program; and keep up our efforts in enforcement. We’re also working on a potential class exemption that would allow franchisees to collectively bargain with their franchisor.

We currently have two proceedings before the Federal Court in relation to franchising: Ultratune and Geowash (a former national franchisor), and we have material investigations underway into several others.

We’ve also had a number of recent successful enforcement actions, including Domino’s Pizza, Husqvarna, West Aust Couriers Pty Ltd trading as Fastway Couriers (Perth), and Pastacup franchisor Morild.

CREATING BETTER PARTNERSHIPS IN 2019

We may well this year see a change in the regulatory landscape that governs franchising and we welcome any reform that results in a more level playing field. Successful partnerships are always a two-way street. They work best when franchisors and franchisees understand their obligations and responsibilities and have a fundamental respect for what each party brings to the table.

So let’s see more of that in 2019: better collaboration, better due diligence, and better business practices.