SA inquiry recommends tighter disclosure rules for franchisors

A South Australian parliamentary inquiry into the franchising sector has recommended tightening of disclosure requirements in the industry, including forcing all franchisors to register all disclosure documents with the Australian Competition and Consumer Commission.

The inquiry, headed by MPs Tom Koutsantonis and Tony Piccolo, received more than 50 separate submissions and heard repeated claims from franchisees about bullying and intimidation by franchisors. Piccolo says there is no doubt the industry needs to make changes. “It’s an important industry and it’s a sound industry, but because it’s grown so quickly there is certainly a rogue element in the industry that is using unethical practices to do-over unsuspecting franchisees.”

The inquiry’s recommendations included:

• Compulsory federal registration with the Australian Competition and Consumer Commission (ACCC) of all disclosure documents.
• Full disclosure of franchisor financial reports with no exceptions.
• Full disclosure to potential franchisees of the risks of failure.
• Publication of the names of those who persistently breach the franchising code.
• Penalties for insufficient disclosure.
• Amending the code to include a duty to act in good faith.
• Amending the code to require parties to a franchise contract to consider goodwill or other exit payments.
• A range of alternative dispute resolution processes, including a body such as a Franchising Ombudsman or franchising tribunal.
• Recognising franchisees’ interests on the leases between franchisors and landlords.
• Enhanced education campaigns at state and federal level.

But the Franchising Council of Australia’s first impressions of the report are not positive. Executive director Steve Wright says: “On first reading, the recommendation represents a major upheaval of the sector, suggesting a rewrite of law on unconscionable conduct, good faith and fair dealings and upending the current court approach to goodwill. We are not sure the committee has thought through the consequences of the changes it has proposed.”

While Wright is pleased with the committee’s recommendations on education and dispute resolution, he is unhappy with the increased disclosure burden. “The committee says disclosure documents should be simplified, yet what it is proposing would significantly add to the cost of legal compliance and the volume of disclosure documents, without any evidence of economic benefit.”

Piccolo scoffs at those claims and argues that given franchisors are preparing disclosure documents anyway, it shouldn’t add much extra work to forward them to the ACCC. “The ACCC won’t look at whether it’s a good business or not, just whether it complies. With electronic documents, it’s very simple to do.”

Associate professor Frank Zumbo from the University of New South Wales, who appeared before the inquiry, describes the report as a “comprehensive treatment of the key problems facing the Australian franchising sector today”. He supports the disclosure changes and is particularly pleased with a recommendation that would broaden the interpretation of unconscionable conduct laws via legislation.

“Unconscionable conduct laws like section 51AC of the Trade Practices Act have been too narrowly interpreted by the courts, and the committee’s recommendations in this regard will provide greater transparency and certainty as to what constitutes unacceptable behaviour by franchisors. This will assist franchising participants to understand this vital area of the law and will allow unethical conduct to be effectively targeted by the ACCC.”

Wright disagrees and says the committee has stepped a long way out of its territory. “The SA committee’s suggested changes would create new trade practices law which applied only to the franchise community, not the broader business community. This is a legal minefield potentially reaching beyond the franchise sector.”

This is the second state-based inquiry into franchising to report in the last few weeks. On 28 April, a West Australian parliamentary review recommended increased disclosure by franchisors, the imposition of penalties for breaches of the franchising code, and the establishment of a dedicated franchise enforcement unit within the Australian Competition and Consumer Commission.

Many of the recommendations from the Victorian and South Australian parliamentary committees would need to be enshrined in federal legislation.