The federal government will consider a new licensing scheme for the $135 billion franchise sector, after the competition watchdog argued the existing system contributes to power imbalances between franchisors and their small business franchisees.
Minister for Small Business Julie Collins on Tuesday released the government’s response to the Independent Review of the Franchising Code of Conduct, which was helmed by former Australian Competition and Consumer Commission (ACCC) deputy chair Michael Schaper.
That inquiry levelled 23 recommendations related to the Franchising Code of Conduct, which is due to ‘sunset’ in April 2025.
The Code of Conduct is generally sound and should be remade, Schaper found, while recommending key areas for improvement.
A major recommendation came from the ACCC, which said its focus on systemic competition issues means it is unable to police every breach of the Code.
And because it can only undertake enforcement action after a breach has taken place, the competition watchdog “cannot rapidly prevent or limit harm” to franchisees when a potential problem is identified, the ACCC added.
“After over 25 years of a mandatory industry code of conduct, the ACCC considers that even an amended Code cannot address or prevent the persistent harms that arise in franchising,” it told the Schaper inquiry.
A new licensing scheme that makes ongoing approval to run a franchise network reliant on continued compliance, and exposes dodgy franchisors to compulsory arbitration, would “address many of these persistent issues,” the ACCC continued.
In his review, Schaper recommended the federal government investigate how such a scheme might operate.
The government took that recommendation on board and will establish a Treasury taskforce to conduct a cost-benefit analysis of shifting from the Code to a new licensing scheme.
The taskforce will consult widely with the franchising sector and present its findings to the government.
“I have heard the challenges in the franchising sector, particularly in relation to imbalances of power between franchisors and franchisees, which is why our response is targeted at improving partnerships in the sector,” Minister Collins said in a statement.
“We want a fair playing field for the sector, which is better for everyone, and this is what our response delivers.”
Beyond the investigation of a potential licensing scheme, the federal government agreed, or agreed in-principle, to every recommendation.
As such, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will gain new powers to advocate for franchisees.
Its Tax Concierge service will expand, enabling the ASBFEO to offer low-cost legal advice to franchisees pursuing an alternative dispute resolution process.
In addition, it will be given legislative approval to name and shame franchisors that baulk at those dispute resolution processes, and will lead the development of best practice guidelines for franchising participants.
Potential financial penalties for severe breaches of the Code will also ramp up, with the federal government committing to maximum penalties of 600 penalty units, or $187,000.
The government will consider applying penalties of 60 penalty units, or $18,780, for Code breach infringement notices.
In another new protection for franchisees, protections relating to new vehicle dealership agreements will roll out across the franchise sector.
Those dealership rules ensure agreements must provide franchisees a reasonable opportunity to make a return on investment, and provisions for compensation if a franchisor ends their agreement early.
The full government response can be found here.
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Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
