The competition watchdog has called for more robust disclosure requirements between franchisors and franchisees and harsher penalties for breaching the Franchising Code of Conduct.
In a 44-page submission to the senate inquiry into the franchising sector the Australian Competition and Consumer Commission (ACCC) – the body responsible for overseeing the Franchising Code of Conduct – said that the lack of consequences for breaches to the code has undermined its ability to ensure compliance.
“The lack of consequences for breaching parts of the Franchising Code and all Oil Code breaches undermines our ability to ensure compliance with the Codes,” the watchdog said.
The ACCC is pushing to increase the maximum civil penalty provision in the industry code from $63,000 to at least reflect penalties under Australian Consumer Law, which maximise at $1.1 million for companies.
The ACCC has litigated 33 alleged breaches of the franchising code over the last two decades and 16 court enforceable undertakings. This includes an $18,000 settlement with Domino’s in 2017 for an alleged failure to provide some franchisees with marketing fund statements and auditors reports.
Expanding disclosure requirements
The watchdog has also recommended that disclosure requirements in the code be amended to force franchisors to disclose better information about establishment costs and expenses to prospective franchisees.
In separate submissions to the senate inquiry more than half a dozen current or former franchisees have complained that they were misled about the potential of a prospective franchise opportunity before buying in.
The ACCC said some franchisors are providing wide ranging estimates of costs for expenses like store construction, initial inventory, insurance and working capital, which constitute “almost meaningless” information.
In one example provided an estimate range for construction, remodelling, leasehold improvements and decorating costs ranged from a lower limit of $5,000 to an upper limit of $350,000.
“Disclosure of the facts and assumptions underlying franchisors claims and estimates based on other franchisee’s experiences would provide more meaningful information to prospective franchisees. This would enable prospective franchisees to more accurately estimate the total costs of the business,” the ACCC said.
In a separate submission Gloria Jeans owner Retail Food Group, which has been the subject of a string of media allegations regarding unscrupulous business practices, dismissed suggestions that disclosure requirements needed to be expanded.
The ACCC also recommended that the franchising code be amended to prohibit franchisors for passing on information about costs associated with preparing, negotiating and executing their agreements, fearing that prospective franchisees are becoming worried about seeking their own advice due to cost concerns.
Codes “no obstacle” to termination
In submissions to the inquiry and in other public commentary franchisors like 7-Eleven have expressed concern that it has been too difficult to terminate franchisees who have underpaid staff or committed other breaches of the code.
But the ACCC said in its submission that the code is not an obstacle to terminating franchisees without prior notice or opportunity to remedy.
“Some Franchisors have claimed that the Codes prevent them from terminating Franchisees who are purposely not complying with their workplace obligations,” it said.
“This is incorrect. Provided that the franchise agreement contemplates termination for non-compliance with workplace laws and the Franchisor complies with the termination procedures in the Codes, then the Codes are no obstacle.”