Exclusive: Independent review of Franchising Code of Conduct to investigate fairness in $170 billion sector

Australia’s franchising rules will face a new independent review, giving small businesses a chance to share how recent regulatory changes are shaping the $170 billion sector.

Minister for Small Business Julie Collins on Tuesday announced a comprehensive review of the Franchising Code of Conduct, the mandatory regulations covering both small business operators and the major companies that offer their branding and back-end support.

The independent process will be helmed by Dr Michael Schaper, former deputy chair of the Australian Competition and Consumer Commission (ACCC) and small business expert.

The review “is an opportunity to evaluate the effectiveness of the current regulations, and the government is very pleased to have Dr Schaper leading this important work,” Collins said.

It will also wrap up several smaller reviews, like the statutory reviews of the Franchise Disclosure Register, and an investigation into New Car Dealership protections under the code.   

A consultation paper is expected to be released in the coming days, inviting small businesses and franchisors alike to comment on the regulatory landscape.

It will ask contributors to “lend their minds to a range of issues,” Schaper told SmartCompany on Tuesday.

“Is dispute resolution working appropriately at the moment? Is the level of education and engagement working appropriately?” he asked.

“I wouldn’t make any particular observation at this stage to any particular industry that we’ll be looking into, I’m trying to keep an open mind,” he added.

“But also a view as to where the future direction of the sector as a whole is going to, and how do we make sure it’s fit for purpose, as well.”

The review’s terms of reference are now available online.

Franchising stakeholders have already helped to shape the review process, Collins added.

“I am very grateful for the constructive way in which franchising sector representatives have supported the government to plan for this important review,” Minister Collins said.

Schaper will present his findings and recommendations to the federal government when the review is completed.

Two years since last franchising reforms

News of a fresh review comes eight years after the Franchising Code of Conduct introduced an obligation for parties to work in good faith, and two years after its last major update, which leveled eight major changes on the sector.

Those 2021 reforms expanded dispute resolution pathways for small businesses and their franchisor, and applied additional disclosure requirements, giving franchisees greater visibility over the conditions and marketing costs imposed by a franchisor.

The updated Code also bars franchisors from drafting agreements that require a franchisee to cover all of a franchisor’s legal costs.

Maximum fines have also increased in recent years.

Last year, the former Morrison government announced the maximum civil penalty for breaching certain provisions of the Code could result in fines of $10 million.

Those regulatory updates were themselves backdropped by a number of high-profile court cases pitting small businesses and workers against franchisors.

In 2019, the federal court imposed a $2.6 million fine, later reduced on appeal to $2 million, against auto mechanic franchise Ultra Tune for failing to act in good faith with franchisees, and breaching Australian Consumer Law by making false or misleading representations.

The ACCC, which brought the case, successfully argued Ultra Tune misrepresented the price, ongoing rent, and age of a franchise to a prospective franchisee, while also failing to provide marketing fund statements in the necessary timeframe.

Retail Food Group (RFG), the business behind the Michel’s, Gloria Jeans, Crust Pizza and Donut King brands, settled its own legal battle with the ACCC in late 2022.

The ACCC had alleged the business misled would-be franchisees when selling them 42 unprofitable stores.

As part of the settlement, RFG agreed to pay approximately $8 million to franchisees, $5 million to select Michel’s Patisserie franchisees who contributed to a marketing fund and waive $1.8 million in debts.

Perhaps the most high-profile dispute between franchisees and a franchisor came in the legal battle between small 7-Eleven operators and the company’s head office.

A joint 2015 investigation from ABC’s Four Corners and Fairfax uncovered evidence of widespread staff underpayment across the convenience chain’s franchise network.

That investigation also alleged that 7-Eleven head office was aware of those underpayments.

In the aftermath of a class action suit against 7-Eleven by franchisees, who claimed they had been sold businesses that were only viable if staff were underpaid, the parent company agreed to a $98 million payout split between hundreds of franchisees.