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Franchise sector to face more compliance checks

Franchise sector to face more compliance checks

Australian Competition and Consumer Commission

Franchisors are to be subject to a new wave of compliance checks under the Franchising Code of Conduct, just weeks after a multimillion-dollar penalty was given to one franchise network for disclosure failures.

Competition watchdog the ACCC has unveiled plans to scrutinise franchise networks in the food services industry as part of ongoing compliance checks, which will include take-away operators as well as café and restaurant chains.

Deputy ACCC chair Mick Keogh said that the action was in response to the sheer volume of complaints received by franchisees about food services franchises in particular.

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“The ACCC receives more franchising code-related reports from café, restaurant and take-away food franchisees than any other sector, and for this reason, franchisors operating in this sector will be the target of our next round of checks,” he said.

Mr Keogh noted that franchisors are subject to strict disclosure rules when negotiating with prospective franchisees, including as to set-up and operating costs, supply agreements and restrictions, and any applicable site history information.

“This information is vital as it allows them to make better informed decisions, and a lack of disclosure may result in substantial harm to the franchisee,” he said.

“In the last six months, almost a quarter of reports we received about the Franchising Code related to inadequate disclosure. This highlights the need for improved disclosure to prospective franchisees,” Mr Keogh said.

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The ACCC’s six-monthly Small business in focus report revealed a rise in franchise-related complaints in the second half of calendar year 2018, with complaints about inadequate disclosure soaring from 31 to 51, and accusations of not acting in good faith increasing from 84 to 107, compared with the first six months of the year.

Last month, a court handed auto services chain Ultra Tune a $2.6 million fine for disclosure failures to a franchisee, and then subsequently attempting to mislead the court of its dealings with the franchisee, in legal proceedings instigated by the ACCC.

It has also intervened in other franchise networks’ disclosure processes, including obtaining a court-enforceable undertaking with Husqvarna Australia and a voluntary undertaking with Luxottica Franchising Australia.

The regulator has previously called for stronger penalties on franchisors that fail to meet their obligations to franchisees.

Of particular interest to the ACCC during these compliance checks will be:

  • Disclosure of certain costs of establishing and operating a franchise business
  • Disclosure of limitations on where franchisees can buy goods and services
  • Disclosure of whether a franchisor receives rebates or benefits when franchisees purchase from certain suppliers
  • Disclosure of site or territory history
  • Disclosure of cooling-off costs
  • Disclosure of current and former franchisee contact details

Broader unfair contract laws have also become a federal election issue, with Labor promising to beef up existing rules and introduce stiff penalties against businesses found to be relying on contracts or clauses that place an unfair burden on small businesses.

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