Key takeaways

The Review was performed by Dr Michael Schaper, a former Deputy Chair of the Australian Competition and Consumer Commission (ACCC), who had been responsible for the ACCC's enforcement of the Code and dealings with the franchising sector. His practical recommendations and insightful observations demonstrate this experience, and provide a balanced approach. The Review published a consultation paper in August 2023 seeking stakeholder input and received 95 submissions from interested parties.

Substantive recommendations made by the Review which will be welcomed by franchisors include that:

• Pre-contract disclosure to franchisees has become too detailed and repetitive. The disclosure document can be simplified and the obligation to give a separate key facts sheet should be removed.
• Disclosure obligations at the point of renewal could be decreased or removed.
• Disclosure obligations to an existing franchisee entering into additional franchises could be decreased or removed.

Of greater concern is the recommendation that obligations imposed on new vehicle motor dealer franchisors in the Code in 2021 (in response to GM Holden's withdrawal from Australia) should be extended to apply to all franchisors. These obligations require franchisors to:

• Include provisions in their franchise agreements relating to compensation, which would be triggered if the franchisor ends the franchise agreement early in some cases.
• Assess upfront if the franchisee will be provided with a "reasonable opportunity to make a return", as the Code would prohibit the franchisor from entering into the franchise agreement unless it does so.

These obligations introduced for new motor vehicle dealers in 2021 are unprecedented, untested and extremely unclear.

The Review raises the possibility of a licensing regime for franchisors, but it does so with limited enthusiasm, noting that more investigation of the benefits and detriments of a licensing regime would be required in a subsequent review.

The review in detail

The Review's Terms of Reference were broad, asking it to consider the general fitness for purpose of the Code and the effectiveness of changes which were made to the Code between 2020 and 2023.

The key findings and recommendations made by the Review are set out below:

• Structure of the Code: The Code is generally fit for purpose and therefore should be remade largely in its current form, with some amendments. The Code should include a clearer statement of purpose of why it exists, what it seeks to achieve and what it does not cover. Franchisees need to better understand that the Code seeks to raise standards of conduct and reduce risk, but it cannot ensure standards or eliminate risk. Drafting inconsistencies and complexity should be fixed and some drafting modernized. The Code has been amended ten times since 1998, which is too frequent. The sector needs some respite from the constant state of review and more time is required to assess the effectiveness of changes made. All regulations automatically sunset after 10 years: a review every 5 years, being the mid-point of the 10 year term would suffice.
• Scope of its application: Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code, whether or not they also cover the sale of motor vehicles. There should be caution in introducing or expanding sector-specific provisions in the Code. The next review of the Code should consider:
  • Whether the Code provisions regarding new motor vehicle dealerships should also apply to other sub-sectors of the automotive industry, including motorcycle, farm machinery and truck dealerships
  • Whether the Code needs a separate part covering motor vehicle dealerships at all
• Disclosure and cooling off: Disclosure requirements are comprehensive and may be burdensome to both franchisees and franchisors. Disclosure is often repetitive. Pre-entry information should be simplified by merging the disclosure document and the key facts sheet. As disclosure and cooling-off obligations are designed to protect new franchisees, existing franchisees should be able to opt-out of receiving disclosure documents and cooling-off rights if they enter into additional franchise agreements or renew existing franchise agreements.
• Extending motor vehicle obligations to all franchisors: There was no evidence that the motor vehicle specific provisions inserted into Part 5 of the Code on 1 July 2021 have had unintended consequences. Since that date, the Code has prohibited a motor vehicle franchisor entering into a franchise agreement, unless it provides:
  • The franchisee with a reasonable opportunity to make a return during the term of the agreement on any investment the franchisor requires as part of entering into or under the agreement.
  • For the franchisee to be compensated if the franchise agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalizes its networks or changes its distribution models, and specifies how the compensation is to be determined (with specific reference to lost profit from direct and indirect revenue, unamortized capital expenditure requested by the franchisor, loss of opportunity in selling established goodwill and costs of winding up the franchised business).
  • For the franchisor to buy-back or compensate the franchisee for goods, spare parts and tools if any of the above occurs, or if the franchise agreement is not extended or renewed.

The Review recommended that these obligations should be extended to apply to all franchisors and franchise agreements. This recommendation is problematic, as these provisions are largely untested and are very unclear.

• The Franchise Disclosure Register: The Government should actively promote the existence and use of the Franchise Disclosure Register through educational materials, and use it to provide further information relating to dispute resolution and actions by enforcement agencies.
• Good faith: There is no need to further regulate the obligation of good faith. Both relevant case law and the Code appropriately balance the interests of both franchisors and franchisees.
• Marketing Funds: While still a source of dispute between franchisors and franchisees, there was no evidence of widespread problems. As the Code provisions and information provided by the ACCC on the subject appear to adequately address most concerns, no further change to regulation is required.
• Change management: The management of change within franchise systems is a major source of dispute between franchisors and franchisees. However, specific regulation of the franchisor's powers to make change would be inappropriate. Franchisors should be encouraged to consult with franchisees regarding major changes to their franchise business model, through educational support.
• Ending a franchise relationship: The 2021 changes to the Code requiring seven days' notice of termination, in cases where immediate termination was previously allowed, have made it difficult for franchisors to respond to serious breaches. These changes should be revisited to allow immediate termination in appropriate cases and should also be simplified. In addition, guidance should be developed for both franchisees and franchisors in relation to franchisee-initiated exit, as this process is not well understood.
• Restraints of trade: Post term restraints of trade may be onerous and arguably unenforceable. Whether additional regulation of these is required should be considered by the Government's separate review of Australian competition laws, announced in August 2023.
• Regulatory oversight and dispute resolution: The Australian Small Business and Family Enterprise Ombudsman should be provided with adverse publicity powers, enabling it to name franchisors who have not meaningfully participated in alternative dispute resolution. This body could also be used to assist franchisees seeking low-cost legal advice prior to attending formal ADR processes. Franchisees should also be permitted to seek a 'no adverse costs' order when bringing a matter against a franchisor for breach of the Code or the Australian Consumer Law. More Code provisions should be subject to a pecuniary penalty and the ACCC's ability to impose administrative infringement notices for a breach should be increased to the currently allowed maximum of AUD 15,650 per breach.
• Licensing regime: The Government should investigate the feasibility of introducing a licensing regime for franchisors as a prerequisite to operating a franchise system in Australia. This had been recommended by the ACCC, which suggested that a licensing regime could impose prudential requirements on a franchisor both before it commences franchising and as a condition of retaining a licence, could allow the regulator to suspend or cancel a licence or the franchisor's ability to solicit new franchisees and provide a mechanism for accessible binding dispute resolution. However, the Review concluded that a comprehensive analysis would be required to understand the nature, extent and implications of such a fundamental shift in regulatory model and noted that there would be both benefits and drawbacks of a licensing model.
• Measuring the franchising sector: The Australian Government should improve data collection about the sector to assist future reviews.

Next steps

The Government's response to the Review's recommendations is likely by mid-2024, with possible changes to the Code released ahead of their implementation by April 2025.