The Independent Review of the Franchising Code of Conduct has ignited discussions about potential reforms within the franchising industry. Among the recommendations made to the government, Recommendation 23 stands out for proposing a “licensing regime” to regulate franchising. This article explores the implications of a “franchise licence”, weighing the potential benefits against the challenges posed for franchisors and franchisees alike.
What Is the Independent Review of the Franchising Code of Conduct?
On 8 February 2024, the Independent Review of the Franchising Code of Conduct was released. Dr Michael Schaper conducted the Review. It made 23 recommendations to the government on potential changes to the Franchising Code of Conduct (the Code). On 7 May, the government responded by accepting all 23 recommendations.
Recommendation 23, one of the more speculative and heavily debated suggestions, proposed that the Government consider introducing a licensing regime to regulate the franchising industry.
What Is a Licensing Regime?
The Government has yet to conduct a Taskforce inquiry. Therefore, the details of the licensing regime remain unconfirmed.
However, the primary idea is to create an independent body to regulate participation in the franchising industry. This would be separate from the Australian Competition & Consumer Commission (ACCC). The independent body would:
- require franchisors to obtain a “franchise licence” before engaging in franchising;
- receive complaints regarding breaches of the Code; and
- resolve complaints using alternative dispute resolution processes to avoid litigation.
What Are the Pros and Cons of a Licensing Regime?
Like any franchising reform, this proposal has both advantages and disadvantages, which this article explores below.
Cheap Dispute Resolution (…Or Is It?)
The financial disparity between franchisors and franchisees limits many franchisees’ access to justice. This has long been an issue in franchising. A licensing regime would allow franchisees to refer disputes to an independent third party for alternative dispute resolution. This avoids litigation and saves many franchisees significant costs.
However, establishing and operating an independent regulatory body comes with significant costs. So, where will the money come from?
Looking at the Australian Financial Complaints Authority (AFCA) as a model, it is funded by:
- annual member registration fees;
- user charges; and
- complaint fees.
If a business receives a complaint against it, it must pay the AFCA’s complaint fee. Additionally, the longer a complaint remains unresolved, the higher the complaint fee may become. The licensing regime will likely be similar. Therefore, it is inaccurate to view it as providing “free” alternative dispute resolution. This is because franchisors will most likely be expected to cover the costs of this regime.
The Possibility for Fast and Fair Resolution
In similar models, parties are encouraged to resolve disputes through informal methods such as negotiation first. If this approach fails, the dispute will move to formal determination. If the complainant wins, the other party (in this case, the hypothetical franchisor) must comply with the determination. However, if the complainant loses, they can choose to pursue their complaint in court.
While this approach appears to enhance access to justice for franchisees, it is clearly one-sided. It grants a right of “appeal” to complainants but not to licence holders.
Furthermore, while avoiding courts can be a significant time and cost saver for all parties, it also means that the laws of evidence and burdens of proof will not apply. As a result, alternative dispute resolution processes lack the transparency and procedural fairness that courts provide.
This is particularly concerning because many franchising disputes involve high values and complex issues. Typically, these disputes are more problematic than financial services complaints, such as a consumer complaint about a bank overcharging account fees.
Proactive Regulation or Overactive Regulation?
A licensing regime would be more proactive than the current ACCC enforcement method. It would allow more complaints to be heard quickly and efficiently. This would eliminate the cost barriers many franchisees face when deciding whether to pursue a claim against their franchisor. Unlike the ACCC, which typically only pursues enforcement in the most severe Code breaches, this regime would address issues more promptly.
Improving fairness and compliance in the franchising industry is a positive goal. However, the Review acknowledges there is “little firm evidence” supporting many allegations of widespread Code breaches. Additionally, the ACCC states that it already allocates “a disproportionately high level of resources to franchising enforcement and compliance.” This raises the question of whether this is another example of over-regulation affecting the franchising sector.
The ultimate guide to setting up a franchise.
Barriers to Franchising
A vital aspect of a licensing regime is setting entry standards for franchisors. Franchisors must obtain a licence to operate in the industry. Many view this positively, as it removes unqualified operators from the market. Additionally, it requires franchisors to actively engage in the dispute resolution processes set by the relevant regulatory body.
However, the challenge lies in how an independent body can assess whether a franchisor qualifies for a franchise licence. One suggestion is to require franchisors to demonstrate a proven business concept. Additionally, they may be required to show the successful operation of a similar business for a minimum period. However, the government has yet to provide substantive guidance on this matter.
Many argue that this additional requirement highlights over-regulation in the franchising sector. This may potentially:
- stifle the market;
- reduce competition; and
- hinder the growth of new businesses.
What Happens Next?
At this stage, the Government will not make any changes until it conducts a Taskforce inquiry. They will determine if shifting to a licensing regime is feasible in the franchising industry. Once the Government completes this analysis, we will have:
- more information about the proposed changes; and
- how they may affect franchisors and franchisees.
Key Takeaways
Recommendation 23 proposes a “licensing regime” for franchising. While details await clarification pending a Taskforce inquiry, the regime promises streamlined dispute resolution and improved efficiency. However, concerns arise over financial burdens on franchisors and procedural fairness. The regime aims to address Code breaches but also raises questions about over-regulation. Additionally, setting entry standards may professionalise the industry but risks stifling competition.
If you require assistance in understanding the implications of the Independent Review of the Franchising Code of Conduct, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
We appreciate your feedback – your submission has been successfully received.
