Franchising Code of Conduct – exposure draft

29 October 2024

Small and Family Business Division
Treasury
Langton Crescent
Parkes ACT 2600 via email: smallbusinessfranchising@treasury.gov.au

Dear Sir/Madam,

Consultation on Exposure Draft, Competition and Consumer (Industry Code – Franchising) Regulations
2024

The Federal Chamber of Automotive Industries (FCAI) is pleased to respond to the consultation on the exposure draft of the Competition and Consumer (Industry Code – Franchising) Regulations 2024.

The FCAI is the peak industry body for the Australian importers and distributors of passenger motor vehicles, sports utility vehicles, light commercial vehicles, motorcycles and off highway vehicles. FCAI members supply the majority of the more than 1.2 million new vehicles sold into the Australian market each year.

INTRODUCTION

The FCAI was pleased to participate in the Independent Review of the Franchising Code of Conduct conducted by
Dr Michael Schaper in 2023.

The FCAI is generally supportive of the recommendations made by Dr Schaper and acknowledges the Federal
Government’s response to the Review (May 2024) in which it agreed or agreed in principle with all 23 of
Dr Schaper’s recommendations.

In particular, the FCAI agrees with Dr Schaper’s findings that:

• the Code is generally fit for purpose;
• Part 5 of the Code (new vehicle dealership agreements) is operating as intended and not producing any
unintended consequences; and
• the sector requires some respite from a constant process of review.

The FCAI particularly notes Dr Schaper’s observation that no sector recommended that Part 5 be removed from the Code and that it now appeared to be part of the regulatory framework. The FCAI supports the retention of Part
5 of the Code (Part 6 in the remade Code) and reiterates its opposition to the formulation of a separate code for the automotive sector.

The FCAI notes that all parties have expressed a desire to reduce complexity, improve clarity and remove unnecessary compliance obligations to improve the effectiveness of the Code. While the FCAI supports much of the exposure draft on this basis, it is concerned that aspects of the remade Code run counter to these objectives.

The FCAI has listed below its views on the exposure draft, outlining areas of support as well as nominating specific sections that would benefit from further drafting amendment.

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FCAI COMMENTARY ON EXPOSURE DRAFT

Schaper recommendation 4: Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code.

The FCAI notes Dr Schaper’s recommendation that the definition of motor vehicle dealership in the Code be amended to clarify that it includes service and repair work. In doing so, Dr Schaper referred to the discussion of
Beach J in AHG WA (2015) Pty Ltd T/A Mercedes-Benz Perth and Westpoint Star Mercedes-Benz & Ors v
Mercedes-Benz Australia/Pacific Pty Ltd (2023) FCA at 590 [3349].

In response, the exposure draft amendment to the definition of motor vehicle dealership in section 6 clarifies that service and repair work conducted by such dealerships will be encompassed by the new Part 6 of the remade
Code. Equally, the Government has clearly indicated that service and repair operations not associated with a motor vehicle dealership should not be covered by Part 6 of the remade Code.1

The FCAI concurs with this view. In doing so however, the FCAI notes that a range of service and repair arrangements currently exist, and it is important that (consistent with the Schaper recommendation and the
Government’s response), the drafting within the remade Code ensures the following service and repair operational variants remain outside Part 6:

• standalone Original Equipment Manufacturer (OEM) service and repair operations that are separate and not
associated with any motor vehicle dealership; and
• OEM service and repair operations that are located at a motor vehicle dealership that does not engage in
buying, selling, exchanging or leasing the motor vehicles provided by the OEM, but who may buy, sell or
exchange new vehicles on behalf of a different OEM.

The FCAI recommends that the drafting of the new section 6 definition of motor vehicle dealership be amended in subsection (a)(ii) and (b)(ii) with the addition of the word those as follows:

(ii) any servicing or repairing of those motor vehicles by that business.

Section 42 (Franchising agreement must provide for compensation for early termination)

The FCAI notes that the exposure draft expands the scope of the previous clause 46A (Franchise agreement must provide for compensation for early termination) which applied only to new vehicle dealership agreements. In transferring the provision to Part 4 (Franchise agreements) and applying its provisions to all franchise agreements, the provision has become most unclear in its application.

In the existing Code, an OEM franchisor must not enter into a franchise agreement unless the agreement contains provision for the OEM to buy back or compensate the franchisee for new road vehicles, spare parts and special tools in specified circumstances.2

In transferring the provision to Part 4 in the remade Code so as to apply to franchise agreements generally, the previous section 46A has been amended as follows:

• section 42 specifies that a franchisor must not enter into a franchise agreement unless the agreement
contains a provision to buy back or compensate the franchisee for:

1 Franchising Code of Conduct Exposure Draft (Information Paper), Department of Treasury, page 3.
2 Specified circumstances include where the franchise agreement is not renewed and a new agreement is not entered into, or the agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalises its networks or changes its distribution models (see clause 46A(2)).

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(a) all the outstanding stock of the franchise purchased by the franchisee that was specified by the franchisor
and required in order to operate the franchise in accordance with the franchise agreement or any
operations manual (however described);
(b) all the essential specialty equipment, branded product or merchandise purchased or maintained by the
franchisee that could not be repurposed for a similar business;
(c) any other thing that the franchisee was required by the franchisor to purchase or maintain for the
purposes of the franchise, in order to operate the franchise in accordance with the franchise agreement
or any operations manual (however described);
(d) if the agreement is a new vehicle dealership agreement—new road vehicles, spare parts and special
tools.

The FCAI believes that this drafting is unworkable for the following reasons:

• its is not clear whether OEM franchisors would have to comply with each of (a) – (d) inclusive, or simply (d)
(as is currently the case). The FCAI contends that the application of each of (a) through to (d) would involve
the payment of overlapping compensating elements;

• the wording of the individual subsection (a) - (c) elements is overly broad and most unclear.

For example, reference in subsection (b) to branded product or merchandise may have unintended
consequences where a franchisee purchases branded merchandise to give to its customers, but these
purchases are not made from the franchisor nor made at the request, or any requirement of the franchisor.
The FCAI recommends that the drafting of subsection (b) be amended to only apply where the branded
product or merchandise was specified to be purchased or maintained by the franchisee that could not be
repurposed for a similar business.

Similarly, what does the term any other thing in subsection (c) mean? The FCAI recommends that any other
thing should be confined to items specifically related to the unique operation of the franchise and which
cannot be utilised or repurposed for other activities within the business or otherwise outside the operation of
the franchise.

The FCAI recommends that section 42(3) be amended to clarify that the compensation or buy back obligations for early termination of new vehicle dealership agreements does not require that each of subsections 42(a) - (d) be considered, but that compensation/buyback activities for new vehicle dealership agreements only need to consider section 42(3)(d).

The FCAI further recommends that section 42(2) of the remade Code clarify that the compensatory elements outlined in section 42(3) apply where the agreement is not renewed due to a decision taken by the franchisor
(rather than by the franchisee, and in particular, where initiated by the franchisee at short notice).

Section 42 (Franchise agreement must provide for compensation for early termination) and section 43
(Franchise agreement must provide reasonable opportunity for return on franchisee’s investment)

The FCAI notes the provision for payment by the franchisor of compensation and/or the requirement that the term length of an agreement is sufficient to provide the franchisee a reasonable opportunity to make a return set out in sections 42 and 43 of the remade Code. Such compensation/buyback options should not apply in instances of termination by the franchisor for breach by the franchisee.

The FCAI believes that the exposure draft should be amended to make it clear that the provisions of sections 42 and 43 do not apply where there has been an early termination for breach of the agreement by the franchisee
(refer sections 52, 54 and 55).

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Requirement for transitional provisions

The FCAI notes that the exposure draft introduces a number of significant changes to the Code, including a revised structure, altered section (previously clause) references, and changed disclosure requirements. It is of relevance therefore that the Code as currently drafted will apply to all franchising agreements – both existing and those subject to renewal or extension – on and from 1 April 2025.

The FCAI believes that it is important that the remade Code does not have retrospective operation. Imposing a hard commencement date fails to take into account the amendments to existing agreements and disclosure documentation that will be required. The FCAI notes that some OEMs operate on calendar years (not financial years). These OEMs would have limited time to adjust to the 30 April deadline for the required disclosure documentation updates. Similarly, the provisions set out in section 30 of the remade Code in relation to specific purposes funds (as opposed to marketing funds in clause 15 of the Code) will require amendment to existing franchise agreements and changed administrative and reporting requirements on the part of franchisors. The
FCAI queries the rationale for the change from marketing to specific purpose funds given the increased administrative and compliance costs the change will impose on franchisors.

The FCAI strongly recommends that the Government include appropriate transitional provisions in the remade
Code to ensure that its provisions apply prospectively to franchise agreements entered into on or after the Code commencement date of 1 April 2025.

Penalties

Consistent with its previous submissions, the FCAI reiterates its view that many of the penalties in the Code are disproportionately harsh. This aspect has not been addressed in the remade Code, and in fact in some instances has been further exacerbated.

The impact of the earlier 2022 reforms which increased certain penalties available under the Code to the greater of $10 million, three times the benefit obtained, or 10 per cent of annual turnover is not justified. Motor vehicles are high value items and consequently some FCAI members have high turnovers (in excess of $1 billion), but with high expenses resulting generally in lower profit ratios compared to other sectors. With an annual turnover of $1 billion, the maximum penalty facing a company when calculated on 10 per cent of annual turnover would be $100 million. The FCAI was and continues to be of the view that the penalties contained within the Code (an in turn the remade Code) are excessive.

General Comments

Proposed amendment FCAI commentary
Recommendation 2 The FCAI agrees with this recommendation.
The Code should be remade, largely in its However, given the recommendation that the Code be
current form. remade, largely in its current form, the FCAI queries the utility
of reformulating the Code as a chapter, renumbering and with
sections rather than clauses.
Recommendation 3 (section 14) The FCAI does not support the amended purpose of the Code
A clear statement of purpose should be set out in the exposure draft.
inserted into the Code. The FCAI believes that the reference to addressing the power
imbalance between franchisors and franchisees in subsection
(a) is overly simplistic and in the case of automotive
franchises, is factually incorrect.
The vast majority of vehicle dealerships are far from the simple
small businesses often associated with the franchising sector.
Dealership ownership is becoming more concentrated and

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increasingly dominated by sophisticated investors, whether
they be family-owned conglomerates or listed companies.
Recent research, conducted on behalf of the FCAI by Deloitte,
indicates the current make-up of the industry, as follows:
• there are fewer and fewer single site dealers as the big
groups buy them and consolidate the market;
• there is an overall trend to corporatisation, and this trend
is accelerating;
• the average turnover of an urban dealer is over $97
million per annum.
Recommendation 5 (section 11) The FCAI believes the intent and drafting of section 11 is
Reviews of the Code should be conducted acceptable.
in five yearly cycles in the future.
Recommendation 6 The FCAI notes the simplification of pre-entry documentation
Simplify and consolidate the pre-entry (for example, the merger of the key facts sheet and the
information given to prospective disclosure document).
franchisees. The FCAI recommends that this changed arrangement be
introduced with an appropriate transitional period to enable the
parties to adapt the required documentation in an orderly
manner.
Recommendation 7 The FCAI has no specific comment on this recommendation.
Franchisor obligations under the Code in
relation to existing franchisees should be
simplified.
Recommendation 13 The FCAI has no specific comment on this recommendation.
Provisions relating to termination for
serious breaches should be simplified.
Changes made in 2021 relating to
termination under clause 29 of the Code
should be revisited.
Recommendation 8 Refer discussion above.
The existing requirement that new vehicle
dealership agreements must provide a
reasonable opportunity to make a return on
investment should be extended to all
franchise agreements
Recommendation 9 Refer discussion above.
The existing requirement that new vehicle
dealership agreements must include
provisions for compensation for
franchisees in the event of early
termination should be extended to all
franchise agreements
Recommendation 18 The FCAI notes that the remade Code will permit the ASBFEO
The Australian Small Business and Family to publicise the names of franchisors who refuse to engage in,
Enterprise Ombudsman (ASBFEO) should or withdraw from, an ADR process for a dispute (refer
be given additional powers to name subsection 15(e) and section 75).
franchisors who have not participated

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meaningfully in alternative dispute The FCAI queries why the additional ASBFEO powers would
resolution. apply only to franchisors, and recommends that the provision
apply equally to both franchisors and franchisees.
The FCAI recommends that further clarity is provided to
ensure that the provision is used only when a party is acting
unreasonably. The FCAI contends that it would not be
unreasonable for a party to withdraw from an ADR process in
some circumstances (including where the other party is acting
unreasonably). Similarly, it may be more appropriate to apply
the provision in instances of systemic unreasonable behaviour
rather than a party being named following one subjective
instance.
Recommendation 2 Refer discussion above.
The scope of penalties under the Code and
associated investigation powers and
infringement notice regime in Part IVB of
the Competition and Consumer Act 2010
(CCA) should be increased.

SUMMARY

In summary, the FCAI generally supports the remaking of the Code. However, while the FCAI supports many of the provisions of the proposed remade Code, the FCAI believes that a number of provisions require some amendment as follows:

• amendment to the definition of motor vehicle dealership (section 6) to make clear that Part 6 of the remade
Code will not apply to service and repair operations that are not connected to a motor vehicle dealership;

• amendment to section 42(3) to clarify that the compensation or buy back obligations for early termination of
new vehicle dealership agreements does not require that each of subsections 42(a) - (d) be considered, but
that compensation/buyback activities for new vehicle dealership agreements only need to consider section
42(3)(d).

The FCAI further notes that the drafting of subsections 42(a) - (c) are extremely broad and invite confusion.
For example, the FCAI queries the term any other thing in subsection 42(3)(c);

• amendment to sections 42 and 43 to clarify that these sections would not apply in instances of the early
termination of franchising agreements or new vehicle dealership agreements for breach under sections 52, 54
and 55;

• reconsideration of the change from marketing funds to specific purpose funds given the increased (and
unnecessary) costs franchisors will incur as a result;

• reconsideration of the disproportionately harsh penalties imposed throughout the Code and the remade Code;
and

• insertion of appropriate transitional provisions into the remade Code to ensure the provisions have
prospective (and not retrospective) application.

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The FCAI remains committed to working with the department and the Federal Government to ensure that the remade Code operates effectively. The FCAI would be happy to provide any further information to relation to any of the commentary noted above.

Yours sincerely,

Tony Weber
Chief Executive

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