Franchising Code of Conduct – exposure draft

29 October 2024

The Hon. Minister for
Small and Family Business Division
Treasury
Langton Cres
Parkes ACT 2600

Re: Response to Proposed Amendments to the Competition and Consumer
(Industry Code – Franchising) Regulations 2024

Dear Minister,

On behalf of the Australian Association of Franchisees (AAF), I am writing to provide feedback on the Government’s proposed amendments to the Franchising Code of
Conduct (the Code) under the Competition and Consumer (Industry Code –
Franchising) Regulations 2024.

AAF in our submission to the Schaper review consistent with the ACCC, took the view that the Franchising code was not fit for purpose, insofar as it did not recognise franchisees as investors and did not apportion them rights accordingly. We maintain that view and see the Schaper review therefore as a failure, and as an opportunity lost.
Because of that, we will be campaigning for a different approach by any incoming government.

Having said that, AAF acknowledges that the proposed amendments do take positive steps towards addressing the imbalance of power and enhancing protections for franchisees. However, while these changes are welcomed, several areas fall short of the comprehensive protections the AAF advocates as essential to establish a balanced and sustainable franchising sector. The following is our response to the key elements of the proposed amendments:

1. Good Faith Obligations
While the AAF acknowledges the inclusion of a good faith obligation, this provision alone
does not adequately address the potential for franchisors to exploit franchisees. Good faith,
although an important principle, remains subject to interpretation and does not impose a
sufficiently enforceable standard of conduct. The AAF reiterates that a more explicit fiduciary
obligation should be established, mirroring corporate governance standards under the
Corporations Act, to require that franchisors act in the best interests of both parties to the
franchise agreement.
2. Capital Expenditure and Return on Investment
The AAF supports the provisions requiring franchisors to justify capital expenditure and
ensure franchisees have a reasonable opportunity to recoup investments. However, the
amendments lack specific guidelines on how a “reasonable opportunity” is to be assessed
and enforced. The AAF strongly recommends establishing a minimum term for franchise
agreements proportional to the level of required capital investment to provide franchisees
with greater security and predictability regarding their financial commitments.
3. Dispute Resolution and the Role of ASBFEO
The enhanced role of the Australian Small Business and Family Enterprise Ombudsman
(ASBFEO) in publishing the names of non-compliant franchisors represents a meaningful step
towards transparency. However, the AAF urges the Government to implement a compulsory
arbitration mechanism as part of the Code’s dispute resolution framework, especially for
cases where mediation fails. Additionally, AAF continues to advocate for the establishment of
an independent franchising regulator to oversee compliance, facilitate dispute resolution,
and enforce standards across the sector more comprehensively.
4. End of Term Arrangements and Termination Provisions
The AAF welcomes the introduction of mandatory compensation for early termination and
greater clarity on termination grounds. Nevertheless, the issue of tenure remains
inadequately addressed. Many franchisees invest their life savings and rely on the stability of
their franchise agreements to secure their livelihoods. The AAF urges the Government to
require franchisors to offer reasonable renewal options, ensuring franchisees can benefit
from their established business goodwill and investment over the long term.
5. Transparency in Financial Reporting and Specific Purpose Funds
The AAF appreciates the increased requirements for transparency in financial reporting,
particularly regarding marketing funds and other specific-purpose funds. To build on this, the
AAF recommends that franchisees have meaningful input on fund expenditures through a
franchisee-led committee. This will ensure franchisees’ contributions are allocated
appropriately and transparently.
6. Restraint of Trade Clauses and Fair Exit Options
We support the inclusion of provisions limiting the enforceability of restraint of trade clauses
if the franchise agreement is not extended. However, without clear protections for
franchisees in cases where franchisors unreasonably withhold renewals, these provisions
may not sufficiently mitigate risks to franchisees who have invested heavily in their
businesses. The AAF recommends implementing fair exit options where a franchisee’s
interests are not aligned with the franchisor’s revised business model or ownership.
7. Financial Penalties and Enforcement Mechanisms
The introduction of higher financial penalties for non-compliance is a welcome
improvement. Nevertheless, the AAF remains concerned that the enforcement of these
penalties will rely on franchisees taking action, which is often financially prohibitive. AAF
recommends the appointment of an independent franchising ombudsman with powers to
proactively investigate and enforce compliance within the sector.

Conclusion
The AAF believes that while the proposed changes mark a significant improvement, they do not yet establish the robust regulatory framework necessary to correct the power imbalance inherent in the franchisor-franchisee relationship. For the franchising model to realise its full potential in Australia, franchisees must be afforded comprehensive
protections, particularly concerning tenure, transparent fund administration, and enforceable fiduciary obligations. We hope the Government will consider these additional recommendations to provide franchisees with the level of security, respect, and support they deserve.

The AAF remains committed to working constructively with the Government and other stakeholders to ensure the creation of a fair and balanced franchising sector that will benefit franchisees, franchisors, and the Australian economy. We thank you for the opportunity to provide feedback on these vital amendments, and we look forward to further engagement in the reform process.

Yours sincerely,

On behalf of AAF.

Vincent Caruso Chairman

Mike Sullivan CEO