ACCC Deputy Chair, Mick Keogh, told the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into the Franchising Code of Conduct:
The ACCC welcomes the opportunity to appear before the committee of Inquiry today.
While recognising the benefits associated with franchise business models, we also recognise the vulnerability of franchisees due to the significant personal and financial investment they commonly make, paired with the imbalance of power that can exist between franchisee and franchisor.
This vulnerability is generally acknowledged by policymakers, and the Franchising Code seeks to address it. We also recognise this power imbalance and allocate a priority to franchising matters.
The activities of the ACCC in franchise matters include;
- the provision of comprehensive franchise education and guidance materials,
- an active Franchise Code compliance program, and
- enforcement activities, including the issuing of penalties and court action in cases when breaches of the law are sufficiently serious.
Our education and information activities include a section of our website that is dedicated to franchising, separate manuals for franchisors and franchisees, and a guide to help franchisees and prospective franchisees understand their rights and responsibilities under the Franchising Code. We also support a free online education program for prospective franchisees provided by FranchiseEd.
We also have many thousands of people signed up to our Franchise Information Network. Subscribers receive regular email bulletins about current franchising issues, including changes to the law, information for franchisors about compliance, and information about our enforcement activities aimed to highlight examples of conduct that would be in breach of the code.
We proactively conduct a code compliance program each year, which requires selected franchisors to provide copies of documents relating to requirements under the Franchising Code and other legislation we administer, such as the Business-to-Business (B2B) unfair contract terms law.
Consistent with our Compliance and Enforcement Policy, the ACCC may launch enforcement action when serious breaches of the Franchising Code are identified, either through our code compliance program or following reports made directly to the ACCC.
Our recent franchise enforcement actions have included Domino’s Pizza, West Aust Couriers Pty Ltd, trading as Fastway Couriers (Perth), Pastacup franchisor Morild, and Husqvarna. The ACCC is also currently involved in two proceedings before the Federal Court against Ultratune and Geowash (a former national franchisor) and we have material investigations underway into several others.
As an economy-wide regulator, the ACCC has to prioritise its activities across all sectors through its Compliance and Enforcement Policy. We seek to identify matters that have broad impact in terms of persons harmed, financial detriment, or conduct that highlights broader systemic issues within the industry or economy. We leverage off successful interventions through compliance and education activities, to encourage broader compliance.
The ACCC receives about 400 direct reports each year in relation to franchises out of about 250,000. These reports are a priority for the ACCC, reflected in the resources we dedicate through our Small Business and Industry Codes team and in our enforcement division, and in other areas of the Commission. However, the cost of investigation and litigation imposes limits on how many matters can be pursued.
The reality is we do not have the power to make findings ourselves, so in order to proceed, we need to go to court. Doing so, of course, can cause injury to the brand reputation of the franchise, relationships and to franchisees over time. It is worth noting that while we are able to issue infringement notices without going to court, if those notices are not paid we must proceed to court with the substantive action. Evidence is crucial and it can be hard to gather.
Enforcement challenges exist in all areas of our responsibility, but the franchising industry presents some unique complexities of its own. Obtaining evidence can be challenging in situations where there are often quite different accounts of events and limited documentation. Ultimately, the ACCC is not the final arbiter, and therefore must meet court-established evidentiary standards.
Regrettably, much of our enforcement action occurs after harm has already occurred. Investigations and court action can be a slow and blunt tool for a dynamic and complex industry. When we are working to address systemic issues through enforcement, the redress may not always satisfy the complainant.
The Franchising Code is designed to minimise the need for regulatory and legal intervention. It requires important disclosures to allow informed choices, establishes expectations of transparency and fairness, and facilitates dispute resolution through mediation.
The frontline mechanism for dispute resolution between franchisees and franchisors is through engagement, mediation or private action, supported by the Franchising Code. Other government agencies also play a vital role in these processes, including the Australian Small Business and Family Enterprise Ombudsman, the Office of Franchise Mediation Advisor and the state small business commissioners.
Both the Franchising and Oil Codes (relating to service stations) are not as effective as they could be. Our detailed submission to this Inquiry makes a strong case for changes that would result in a substantial increase in penalties for breaches of the Code and improved and more meaningful disclosure to franchisees. We’d also like to see actions that will create more incentive for prospective franchisees to seek independent advice before investing in a franchise, and changes that make unfair contract terms illegal.
We are aware of systematic conduct within the franchising industry involving underpayment of employees. While we have deep sympathy for the individuals affected by this situation, we need to be clear that we do not have the power to intervene in response to breaches of workplace laws. This power sits with the Fair Work Ombudsman.
We note proposals to address some of the problems heard by this Inquiry by requiring franchise documentation to be registered with the ACCC. We don’t think this will solve the problem. Our concern with this proposal is that it creates the very real risk of a perception that a particular franchise has been ‘accredited’ by the ACCC, and that prospective franchisees therefore do not need to seek advice or conduct a detailed business assessment before agreeing to sign up.
We want to see more effort invested in encouraging prospective franchisees to take meaningful steps to understand what they are investing in. The party that takes the most risk in entering these relationships is clearly the franchisee, who needs to be able to better understand the risk they are taking, their ability to incur any losses, and what will happen if their significant investment in money, time and hard work does not pay off.