The competition regulator will get a raft of new responsibilities and powers to protect potential franchisees from being exploited by large companies when they make the life-changing decision to start their own outlet of a chain.

The $170 billion franchise industry, and its peak lobby group The Franchise Council of Australia, came in for heavy criticism in the final report from the parliamentary inquiry into the Franchising Code of Conduct.

The report has called for sweeping changes to the code after calling out systemic exploitation and problems in the sector.

Key recommendations range from civil monetary penalties for all breaches of the code and increased enforcement powers for the Australian Competition and Consumer Commission.

The committee noted in its 369-page report that the poor corporate governance in some areas of franchising was akin to what was seen in the royal commission into the banking sector. And the “deeply rooted cultural problems” in the industry will not be fixed with a franchisor replacing a few senior executives.

The Australian Securities and Investments Commission would also need to “take a much more proactive role in monitoring franchisor corporate governance and taking enforcement action where necessary,” the report said.

The franchise industry has been plagued by scandals and problems for decades. It has been the subject of many parliamentary inquiries since 1976.

The latest inquiry, chaired by Michael Sukkar​, was triggered by Senator John Williams in early 2018 in response to a string of scandals that highlighted numerous flaws in the industry, most notably an abuse of power between the franchisor and franchisee.

The inquiry was sparked by a spate of scandals exposed by The Age and Sydney Morning Herald featuring 7-Eleven, Domino’s Pizza, Caltex and Retail Food Group, which owns Michel’s Patisserie, Brumby’s, Gloria Jeans, Donut King and Crust Pizza brands.

On Thursday, the committee released its final report and recommendations, saying many of the submissions received by the committee outlined “the significant, and often life changing, detriment that many franchisees endured as a direct result of being exploited by franchisors”.

“The existing regulatory framework and Franchising Code of Conduct were developed on the assumption that adequate disclosure would be sufficient to allow franchisees to protect themselves from opportunistic behaviour and power imbalances,” the committee said.

“Disclosure and transparency are still necessary, but are insufficient to protect franchisees operating small businesses against the abuse of contractual power by some franchisors.

“The committee is therefore proposing substantial changes to the Franchising Code of Conduct and to the responsibilities and powers of the ACCC.”

Recommendations by the committee include regulatory changes to address the greater need for transparency, accountability, fairness and protection for franchisees (including whistleblower protections) and better education, franchise registration, supplier rebates, unfair contract terms, and exit rights.

Key recommendations include the creation of an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the recommendations. The taskforce would include representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the ACCC.

The committee heavily criticised the peak industry body, The Franchise Council of Australia, saying that while it claims to represent franchisees, franchisors and suppliers, ” the FCA does not appear to provide a balanced representation of franchisor and franchisee views, and this is likely because of its membership composition”.

“A more balanced representation of views would be of benefit to the entire franchise industry,” it said.

“The committee also considers it important that franchisees develop a strong national association.”

The committee added that disclosure is a vitally important transparency mechanism, both upfront ahead of signing a contract, as well as disclosure during the term of the franchise agreement.

Evidence during the inquiry revealed significant concerns about pre-contractual provisions and the accuracy of earnings information, and the abuse of marketing fees and funds by franchisors.

The committee made significant recommendations around disclosure including a requirement to provide the disclosure document in electronic form and requirements around the provision of earnings and financial information when franchises are sold or transferred to a new owner and greater clarity, consistency and accountability with respect to the use and reporting of marketing funds.

It looked to strike a balance between the legitimate business interests of both franchisors and franchisees, noting that there are many franchisors with profitable franchise systems that treat franchisees fairly.

“The recommendations are designed to lift standards and conduct across the industry and to rebuild confidence in franchising in Australia,” it said.

Extracted from AFR