26/10/2011 - 10:22

Effective regulation benefits franchise sector

26/10/2011 - 10:22

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All players need to be aware of their rights and responsibilities if the franchising sector is to prosper.

I KNOW a number of people who have been franchisees, so have observed close up how this sector works; its strengths and what some of the many pitfalls can be. In particular, I have observed both the early promise and, in some cases, the unfortunate reality.

I want to make just three points:

• first, while the franchising sector is an important part of our economy, it does have some image issues;

• second, the Australian Competition and Consumer Commission has an important role in relation to franchising, but there is also much that is outside our jurisdiction; and

• third, and most important, the ACCC will be doing more, and earlier, to achieve industry compliance.

Important sector

The franchising sector is an important part of the Australian economy. In 2009, the total sales turnover for the sector was estimated at $128 billion. In 2010 there were more than 1,000 franchisors, with close to 70,000 outlets across Australia.

Unfortunately, however, the sector has at times suffered from a poor image. Indeed, in many ways its strengths are also its weaknesses. Franchising is young, dynamic and offers an opportunity for real entrepreneurship. It therefore can attract people who like the ease of entry and respond well to an environment with few rules.

References to unfair practices in franchising systems were the subject of a review as far back as 1976, with the Swanson Committee.

The sector was again reviewed three years later, then again in 1990, which led to the introduction of a voluntary franchising code of conduct, and yet a fourth time in 1997.

That’s four major reviews of an industry in just over 20 years.

It was this final review that led to the introduction in 1998 of the mandatory Franchising Code of Conduct.

The ACCC’s complaints data supports the proposition that there are problems in the sector.

In the last financial year the ACCC received more than 600 franchise-related complaints.

• 28 per cent of those complaints included allegations of misleading and deceptive conduct; for example, misleading claims about potential earnings.

• 15 per cent included allegations of failure to provide adequate disclosure as required by the code.

• 14 per cent included allegations of unconscionable conduct by the franchisors.

• 11 per cent related to allegations of the unlawful termination by the franchisor of the franchising agreement.

These complaints resulted in a number of ACCC investigations.

We took action against mobile refrigeration business Seal-A-Fridge for unconscionable conduct against its franchisees and breaching the code. 

ACCC action resulted in franchisees of telephone retailer Allphones collectively receiving $3 million in damages. 

And the ACCC secured court-enforceable undertakings against real estate agent Ray White for terminating a franchise without giving reasons to the franchisee or providing them an opportunity to remedy any breaches.

A particular cause of these problems is that franchisors are often large and well-resourced companies that hold substantial power in the franchising relationship. 

On the other side of the equation, franchisees are often couples or individuals, many who enter the franchising relationship without a great deal of business experience but nevertheless invest large sums of money (and sometimes their nest egg) to buy into and be part of a franchise. They often invest the money without doing sufficient due diligence checks.

This can make franchisees vulnerable and this inherent imbalance in power is open to abuse.

The ACCC’s role

Like all businesses, franchisors and franchisees have a range of obligations under the Competition and Consumer Act.

These obligations are wide ranging, such as prohibitions against misleading and deceptive conduct and unconscionable conduct under the Australian Consumer Law, and prohibitions against anti-competitive conduct under Part IV of the Act.

Franchisors and franchisees have an additional layer of regulation imposed upon them by the Franchising Code of Conduct, which the ACCC also enforces.

When we pursue franchisors for breaches of the code, in many cases the problems can be remedied through an administrative resolution, such as an exchange of letters that recognise a problem, or by the franchisor providing section 87B court enforceable undertakings.

This usually means franchisors are given a process whereby they can change their behaviour, without going to court, to ensure they comply with the code in future.

In serious cases, or where franchisors do not cooperate, the ACCC can proceed to court to seek appropriate injunctions and other remedies.

Doing more 

My main point today is that the ACCC would like to help the franchising sector improve its image.

To do this, it is important that we do more to enforce the code of conduct and the Competition and Consumer Act. And it is crucial that we act early and make an assessment to determine what, if any, intervention is required.

One important area where we could do more is in relation to the information provided to franchisees regarding their likely earnings. We can perhaps look more closely to see where franchisees have been misled, and pursue pecuniary penalties and other remedies. Improvements in this area alone would greatly improve the reputation of franchising, and it’s an area where we can be more effective.

In many instances, however, when franchisees make complaints to the ACCC they are withdrawn soon afterwards or no further information is provided. That makes it very difficult for us to assess the conduct being complained about.

Clearly, franchisees fear retaliation by their franchisor, or perhaps other flow-on consequences. Parliament has taken an important step to address this problem by introducing the new audit powers under the Act.

The new audit powers came into effect on January 1 this year. They give the ACCC the ability to call for a range of documents from the franchisor to assess whether they are complying with the code.

It means franchisees can advise us of issues anonymously and we can use these powers to audit the franchisor.

The ACCC will use these new audit powers both proactively and reactively to monitor franchising systems.

At the moment our approach to using the audit powers is to select franchisors based on either a history of complaints against them directly, or a disproportionate number of complaints in the industry in which they operate.

We may, however, conduct purely random audits in the future. Thus far the ACCC has issued audit notices to 13 traders covered by mandatory codes of conducts.

I do understand that there is some nervousness on the part of franchisors about being served with one of these notices. Let me to explain a few things about them that may allay your concerns.

Most important, the fact that you have been issued with a notice doesn’t mean we have already assessed you as having breached a provision of the code. It may just mean a complaint has been made against you or that we are taking a close look at the industry you’re in.

This is why we will be doing more than before; to ensure a more compliant franchising sector, for the overall benefit of the sector.

Earlier and more frequent intervention by us will improve the processes and protections within a franchising system, as the code intended.

Conclusion

If I can leave you with one message it is that effective regulation can bring significant benefits.

If all franchisors are aware of their rights and obligations under the competition and consumer laws and their own code of conduct, and do the right thing by their franchisees and the community, your sector will thrive as a result.

• This is an edited extract from ACCC chairman Rod Sims’ address to the Franchise Council of Australia’s national convention on October 10 2011.


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