The Review's comments on licensing
The Review had stated that a comprehensive analysis was needed to understand the nature, extent and implications of a licensing system - but had noted that:
- An ex ante licensing system (requiring franchisors to obtain approval before commencing franchising and to maintain approval as a condition of operating) should be considered
- Approval could be conditional on compliance with a number of licensing requirements
- An example of such a system in Australia was the requirement for licences in the financial services sector, which has its own dispute resolution scheme funded by licensees, with complaints determined by an ombudsman
- Examples of ex ante licensing systems in the franchising sector can be found in other jurisdictions, such as Malaysia, China, Indonesia and South Korea as well as in many US states.
The Exposure Draft of the new Code does not include a licensing model, but the Small Business Division of Treasury, which is responsible for the Code, has just released a Consultation Paper seeking submissions commenting on the reasons for and the benefits and disadvantages of a licensing system. The closing date for submissions is 8 December 2024.
The Consultation Paper
The Consultation Paper does not propose a particular licensing regime. Instead, it is canvassing views, raising the following subject areas, and asking the questions set out below:
The Nature of the Issue
Currently, enforcement action can only occur after a breach of the Code or of other laws. Would a licensing regime assist to overcome some of the perceived shortcomings of the Code?
Questions asked:
- What issues have you identified in the current regulatory framework for franchising? How significant are they?
- Considering the issues you have identified, are they significant enough to require government intervention?
- Have previous attempts to regulate failed, or failed to keep up with new circumstances?
Regulatory Oversight
Regulation of the Code is but one of the many regulatory responsibilities of the Australian Competition and Consumer Commission. Code regulation can be time consuming and resource intensive. An ex ante model would allow the regulator to be proactive in its enforcement approach, and could immediately halt the franchisor's activities if it breaches the terms of its licence.
Questions asked:
- Does the regulator currently have sufficient powers to respond to and limit the impact of persistent issues in the sector? What powers could the regulator have to incentivise better outcomes for all participants in the sector?
- Would an early intervention power more efficiently and effectively address the current issues in the franchising sector?
- What powers could the regulator have to incentivise better outcomes for both franchisees and franchisors? For example, giving the regulator powers to sanction in response to breaches of the Code.
Dispute Resolution
Some voices have raised concerns about the cost and timeliness of litigation and have advocated binding arbitration. A licensing regime could require agreement to participate in arbitration as a term of the licence, as is the case in the Australian financial services sector.
The Review notes there are other ways the industry could encourage the use of binding arbitration in franchise agreements, including using the Franchise Disclosure Register to publicly disclose franchise systems that self-elect binding arbitration as a dispute resolution process.
Questions asked:
- Does the current dispute resolution framework under the Code offer meaningful, timely and cost-effective dispute resolution?
- How do you think the current dispute resolution framework under the Code could be improved or enhanced?
- Are there any barriers to accessing the current dispute resolution options?
- Do you think there is meaningful engagement and communication between franchisors and franchisees where changes under consideration impact the franchise system?
- Are there existing internal change management systems that are effective in reducing future disputes that may be beneficial to the sector? Provide examples where possible.
Disclosure of information
The Government wishes to understand what data prospective franchisees access or need, and acknowledge that more or better data (including comparative data, such as in relation to disputes) could be included in the Franchise Disclosure Register (FDR).
Questions asked:
- Excluding access for reporting purposes, for what purpose would you access data contained in the FDR?
- What changes could occur to the FDR to improve its functionality as a disclosure portal?
- Should data collected through the FDR be used to automatically generate information documents? For example, to generate clearly presented plain language comparison documents.
- Considering all available information, did you have access to sufficient information to make an informed decision before entering into a franchise agreement? If not, what further disclosure would have been beneficial?
- Are there other alternatives for reporting data about the sector that would better achieve the benefits of disclosure and increased transparency?
Business Model preconditions
Preconditions to a licence could set minimum standards for franchising, such as a minimum period to operate before franchising and across two or more locations.
Questions asked:
- Do you think the franchising system you operate in has performed as marketed to you?
- How developed or mature should a business’ operating model be before it can expand through a franchising model?
- How would a potential franchisor demonstrate that their business model has achieved the appropriate level of maturity?
- Does your franchise model offer sufficient support to ensure franchisees are able to perform as expected under the franchise agreement? i.e., do you have access to appropriate training, support and guidance to ensure consistency of product and service delivery.
- Before entering a contract, should franchisors have to provide opportunities to determine whether a potential franchisor-franchisee relationship is suitable for both parties? For example, a requirement for perspective franchisees to work in an existing franchise business as an employee for a specific period before being eligible to enter into a franchise agreement.
Education and Resources
Education and advice sources are currently spread over multiple domains. Industry participants currently need to take the initiate to self-educate. An ex ante model could require pre-entry educational requirements for both franchisees and franchisors.
Questions asked:
- When were you first made aware of the Franchising Code of Conduct? Do you understand your obligations under the Code?
- If you are a franchisor, do you direct potential franchisees to any external information or educational resources prior to entering into or during a franchise agreement?
- If you are a franchisee, have you accessed any external information or educational resources relating to franchising? If so, what resources did you access and what prompted you to seek this information?
- Do you think the current educational resources are sufficient and provide a benefit to prospective franchisees? How could these resources improve to better inform decision making?
Broader Considerations
The Government asks how industry engagement could be increased to raise awareness of tools and requirements such as the Franchise Disclosure Register.
They also ask how a new licensing regime could be funded. For example, the Government could support the regime through ongoing costs met by industry action, enforcement action and fees associated with dispute resolution. In the financial services sector, the dispute resolution process and other activities are funded by membership fees and levies.
Questions asked:
- How can the Government more effectively engage the franchise sector to inform them of changes to regulations, or future consultations that impact the sector?
- What do you think would be the most effective funding model to establish and maintain a licensing regime for the franchising sector?
Next steps
We will be providing a submission to the Consultation Paper. If you have any issues you would like to be raised, or we can assist with your submission, please let us know as soon as possible.
