ACCC flags random audits of franchises, warns sector has “image problem”

The competition regulator has flagged a more aggressive approach to monitoring the franchising sector, including more random audits of franchisors and a more thorough look at earnings forecasts given to potential franchisees, as its chairman Rod Sims describes the $128-billion sector as battling an “image problem”.

In a transcript of a speech delivered to the Franchise Council of Australia national convention, Australian Competition and Consumer Commission chairman Rod Sims drew attention to a potential imbalance between franchisors and franchisees, and urged franchisors to refer disputes to mediation as early as possible.

Sims also flagged the regulator would be “doing more, and earlier, to achieve industry compliance” with both the Competition and Consumer Act and mandatory Franchising Code of Conduct.

In a speech entitled “The franchising sector and the ACCC”, Sims said “while the franchising sector is an important part of our economy, it does have some image issues.”

Describing franchising as “a successful and healthy part of the business community” and a “popular business model”, Sims nonetheless said there was room for improvement.

“The ACCC’s complaints data supports the proposition that there are problems in the sector,” he said, noting the regulator had received more than 600 franchise-related complaints in the last financial year. These complaints related to allegations of misleading and deceptive conduct, concerns over disclosure, allegations of unconscionable conduct by franchisors, and allegations of the unlawful termination by the franchisor of the franchising agreement, Sims said.

“As the chairman of the ACCC, it is difficult for me to ignore these statistics.”

Sims added that franchisors are often large and well-resourced, whereas franchisees might lack business experience or the means to conduct thorough due diligence before investing.

“This can make franchisees vulnerable and this inherent imbalance in power is open to abuse,” Sims said.

Sims said improving disclosure on potential franchisees’ likely earnings would be an important step to improving the sector.

“We can perhaps look more closely to see where franchisees have been misled, and pursue pecuniary penalties and other remedies. Improvements in this area alone would greatly improve the reputation of franchising, and it’s an area where we can be more effective,” Sims told the conference this morning.

Sims told the audience that the ACCC’s approach thus far to its audit powers was to “select franchisors based on either a history of complaints against them directly, or a disproportionate number of complaints in the industry in which they operate.”

“We may, however, conduct purely random audits in the future. Thus far the ACCC has issued audit notices to 13 traders covered by mandatory codes of conducts.”

Speaking to SmartCompany this afternoon, ACCC deputy chairman Michael Schaper declined to give a breakdown on audits undertaken by the ACCC thus far, but said the regulator hoped to put out more information about its areas of focus.  

The Franchise Council of Australia was also contacted for comment this morning regarding the speech.

Jason Gehrke, director of the Franchise Advisory Centre, says random audits are something the sector is prepared to face and should not fear.

“I don’t think any franchisor who runs their business well has anything to fear from a random audit other than the potential inconvenience of providing information,” Gehrke says, adding that the information sought is generally franchise agreements and disclosure documents that well-run franchises tend to have at hand.

Gehrke says while he doesn’t have exact figures on how many companies have been subject to random audits since they started in January this year, he understands it will increase to about 10 a month.

And he adds that given the size of the franchising sector – with around 1,000 franchisors and about 70,000 outlets Australia-wide – 600 complaints to the ACCC over the last financial year is a creditable amount.

“When franchisees make complaints about franchisors, it gives impressions that franchising is bad, but my impression is that the number of complaints to the ACCC is still not a bad number,” Gehrke says.

Gehrke adds that there are many other reasons why franchisee complaints to the ACCC are withdrawn besides the fear of reprisal.