Legal Insights

Schaper recommends the Franchising Code be remade with sensible amendments

By Greg Hipwell, Shaun Temby, Mira Martin

• 12 February 2024 • 7 min read
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Following wide public consultation with industry stakeholders, Dr Michael Schaper has made 23 recommendations and 34 implementation suggestions to Government following his review of the Franchising Code of Conduct (Code) in his Independent Review of the Franchising Code of Conduct December 2023 (Report). In welcome news for the sector, Dr Schaper recommended that the Code be recreated largely in its current form, but with some notable amendments. This recommendation offers some stability for a sector that has struggled to keep up with significant and persistent regulatory change over the past few years. The sector now awaits the Government’s response.

Dr Schaper was appointed by the Minister for Small Business in 2023 to conduct a review of the Code, which is due to ‘sunset’ on 1 April 2025. His review largely focused on the general fitness for purpose of the Code and whether it should be replaced, the adequacy of the Code in regulating the automotive sector and the effectiveness of the Franchising Disclosure Register (FDR). Despite calls for extreme change, including the submissions by the Australian Competition & Consumer Commission (ACCC) that a licensing regime was required, Dr Schaper has made what appear to be modest and sensible changes for the benefit of all participants in the industry.

Snapshot of key recommendations

The Code should be recreated, largely in its current formatThe Code was found to be largely fit for purpose. In addition to specific recommendations (some of which are summarised below), a number of drafting improvements are recommended which can be found in Appendix A of the Report.
The purpose of the Code should be clarifiedThe current purpose of the Code gives an unrealistic impression of what it can and cannot achieve for franchising participants.
To manage participant expectations the purpose of the Code should be clarified as intended to improve standards of conduct and ensure access to information and dispute resolution.
The Code should be extended to apply to service and repair work conducted by motor vehicle dealershipsService and repair work is an integral part of motor vehicle dealerships and this relationship should have the protections offered by the Code.

It is therefore recommended that the definition of motor vehicle dealership in the Code be clarified to include all sales, service and repair work.

Whether Part 5 of the Code (which current only applies to new vehicle dealership agreements) should apply to other subsectors such as trucks, farm machinery and motorcycles should be considered at the next review of the Code (which is recommended in 5 years from the date it is remade).
The disclosure document and key facts sheet should be merged.An overwhelming amount of disclosure information is provided to franchisees and this can be counterproductive and give the impression that franchising is low risk.
While the content of disclosure documents should remain the same, the role of the key facts sheet should be reconsidered and potentially retired.
All franchise agreements should give franchisees a reasonable opportunity to make a return on investmentThis recommendation follows the introduction of clause 46B of the Code which is currently specific to new vehicle dealership agreements and requires such agreements to provide franchisees with a ‘reasonable opportunity to make a return on investment.’
Franchising is akin to a form of capital raising and extending clause 46B of the Code to apply to all franchise agreements would assist to overcome the relatively short term nature of franchise agreements which do not usually allow franchisees to accumulate a capital return through realisation of goodwill.
All franchise agreements should include provision for compensation in the event of early terminationIf a franchisee’s reasonable opportunity to make a return on investment is cut short, then it follows that they should be compensated by the franchisor.
As such, it is recommended that clause 46A of the Code which is currently applicable to new vehicle dealership agreements be extended to apply to all franchise agreements. This clause currently prohibits a franchisor from entering into a new vehicle dealership agreement unless it contains a compensation mechanism for franchisees in certain circumstances of early termination of an agreement.
Enhanced promotion of the FDR is required. Additional information relating to dispute resolution and adverse actions brought by enforcement agencies should also be included on the FDRThe purpose of the FDR is to assist prospective franchisees to conduct due diligence and compare franchise opportunities, but there is poor awareness of the FDR amongst prospective franchisees.
It is recommended that the FDR in its current form be retained, but that further resources be put into promoting it.
It is also recommended that the FDR be utilised to identify whether franchise systems offer binding voluntarily arbitration and are or have been the subject of certain sanctions or court actions over the past five years.
Further work should be done to limit the use of unreasonable restraints of trade in franchise agreementsThere are concerns that restraints in a franchising context are onerous and unduly limiting franchisee opportunities at the end of a franchise relationship.
It is recommended that the current Australian Government Competition Review examine restraints of trade and other uncompetitive terms in franchise agreements. The ACCC should also publish guidance on when a restraint in a franchise agreement may be unfair.
Government agencies should work together to develop best practice guidance and education and provide a consolidated online resource for the sectorThe ACCC should take responsibility for a consolidated online resource for the sector. Key industry agencies should work together to develop best practice guides, for example, in relation to change management, marketing fund management and supporting franchisees who wish to exit a network. Guidance should also be provided about the impact of the new unfair contract terms laws and any new unfair trading laws relevant to the sector.
The feasibility of a franchisor licensing regime to better regulate the sector should be further examinedThe review heard suggestions for the introduction of an ex ante franchisor licensing regime. Such a system would require government authority to approve (or licence) a franchisor to be able to conduct business. This may assist to overcome short comings under the current regime where enforcement action is only able to be taken after a breach has occurred.
There appears to be some merit in this proposal, but it is recommended that a comprehensive analysis be undertaken to understand the nature, extent and implications of such a system. It is also recommended that existing FDR infrastructure be considered to support any move to a licensing regime.

Licensing regime

Consistent with his measured approach, Dr Schaper urged that the merits of a licensing regime for franchisors be further evaluated before the Government implements such a fundamental shift, noting that the sector is already heavily regulated. This possibility arises following the ACCC’s submission to the Review, in which it suggested that a franchisor licensing framework was required to effectively overhaul and address persistent issues within the sector. The ACCC proposed that such a regime would, among other things, enable it to quickly and cheapy suspend, cancel and impose conditions on a franchisor’s ability to promote and sell franchises. In short, the ACCC would have more options available to it at lesser cost – shifting the risks and costs of commencing Court proceedings to challenge the regulator’s action against the franchisor.

What to expect

We predict that the measured and sensible findings and recommendations in this report will be welcomed by franchisors as they appear to us to strike the correct balance between the interests of various industry participants.

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