A FRAMEWORK FOR SUCCESS

Why it’s time for mandatory registration.

Despite having one of the most comprehensive disclosureand conduct-based regulatory regimes in the world, overseen by a regulator with strong investigative and enforcement powers, too many things fall through cracks.

Distilling the various submissions to the Parliamentary Franchising Inquiry in 2018, and objectively reviewing the issues and apparent underlying causes, a few key structural themes emerge:

1. Too many franchise systems are not complying with the existing regulatory framework.

2. Not enough franchisors have elected to register on the voluntary Australian Franchise Registry. In its submission to the franchising inquiry, FRANdata Australia, which administers the registry, indicated that it felt the registration prerequisites to lodge a compliant current disclosure document and franchise agreement were a significant reason why some franchise systems failed to register. The concern for the sector is that the registry’s compliance prerequisites are, in fact, statutory obligations under the Franchising Code. Although the ACCC is able to access the registry, it does not appear that it currently considers the registry when framing enforcement activities.

3. Too many franchisees are not meeting the underpinning expectation that they will use the Franchising Code framework to assist them in conducting proper due diligence. Specifically, too many franchisees are choosing to ignore the code’s strong and explicit recommendations (and the mandatory documents provided by franchisors to

every prospective franchisee) to obtain legal and business advice.

4. Franchisees, the media and the general public expect more assurance around franchisor compliance than is currently provided by the Franchising Code, which is essentially disclosure-based and assumes franchisees will accept their obligations to undertake due diligence.

5. The ACCC’s largely complaintsbased enforcement activities are not sufficient, and no amount of further resourcing will solve that problem. Industry experts would say that it is hard to objectively fault the enforcement activities of the ACCC, but the clear conclusion from numerous submissions to the Franchising Inquiry critical of the ACCC is that the ACCC is simply not positioned to provide the level of comprehensive sector oversight that franchisees appear to expect.

Although some improvements could be made to the Franchising Code, and ACCC enforcement could be enhanced, these changes will not be sufficient to restore confidence in Australian franchising. On the flipside, if the total burden of responsibility for the success of a franchisee’s business is placed on the shoulders of franchisors, this undermines the very essence of the collaborative business model that drives the competitive advantage franchising enjoys over other business structures.

Mandatory registration of franchise systems could provide significant additional protection for franchisees, but not tip the balance too far or remove the important duality of responsibility that should underpin a business joint venture where the franchisee enjoys all net income and capital growth benefits. If it is industry-led, mandatory registration will not impose excessive compliance costs on franchisors or franchisees. It would also be relatively simple to administer.

HOW WOULD REGISTRATION WORK?

The registration system would be relatively simple, and could be incorporated into the Franchising Code of Conduct:

• Franchisors would be required to be registered on an approved public registry to engage in the granting of franchises. Registration would require franchisors to provide a certification in relation to certain matters or corporate details, and to confidentially provide a copy of their current franchise agreement and disclosure document.

• On registration, franchise brands would be given a distinctive registration number.

• The register would be publicly searchable by any person free of charge, with a flexible search mechanism permitting searches by brand.

• If they failed to renew their registration, or had their registration cancelled or suspended, franchisors would be unable to enter into new franchise agreements. (They could continue to operate their businesses and would, of course, still be obliged

to comply with their obligations to franchisees under existing franchise agreements.)

• Failure to register would not of itself trigger any fine or other penalty. However, any franchise agreement entered into by an unregistered franchisor would be voidable at the option of the franchisee, who would be entitled to a full refund of all monies paid.

• Other compliance obligations contained in the code would still apply, and would be enforceable by the ACCC. So failure to register could, and often would, trigger an investigation or audit by the ACCC, and prosecution or other enforcement action would occur if the failure to register related to non-compliance with the code obligation to update disclosure documentation.

Registration of franchise systems is not a new idea. Indeed it occurred prior to the introduction of the Franchising Code of Conduct in 1998, and was recommended by various state and federal franchise inquiries.

The main objections to registration were cost, on the assumption that the registration system was government-operated, and preference for lighter-touch industry regulation. Those objections would remain valid if the registration system was government-operated, but I believe an industry-led but government-backed initiative would receive positive sector support. Whereas a government-funded registry would probably cost more than $20 million per annum to establish and operate, an industry-led initiative would be self-funding at relatively modest cost from franchise system annual registration fees.

Mandatory registration is not a complete panacea, but it does deliver several significant new benefits:

1. It ensures core fundamental compliance obligations are met by all franchise systems, not just those that chose to do so or are audited by the ACCC.

2. It provides additional information for prospective franchisees and their advisers in an easily searchable registry.

3. It provides an early-warning mechanism

that could alert the ACCC to possible breaches of the law.

Unless the government was prepared to provide some form of statutory indemnity registration, it would not include the vetting or audit of submitted documents. However, the ACCC has the statutory indemnity, and these functions are probably best left with the ACCC. Registration augments disclosure, and would sit well alongside additional code changes recommended by the franchise sector, such as mandating that franchisees obtain legal and business advice.

If the franchise sector genuinely wishes to restore confidence in Australian franchising, it must embrace a significant new substantive initiative. Tinkering with the wording of the Franchising Code is not enough. The time has come for the Australian franchise sector to embrace an industry-led initiative for the mandatory registration of Australian franchise systems.

Corporate and commercial lawyer Stephen Giles is the global leader of Norton Rose Fulbright’s International Franchising Business Group.