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Industry responds to franchise inquiry report

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Industry responds to franchise inquiry report

Retail Food Group

With the game-changing report on the franchising industry finally released, recommending a significant shake-up of the current state of play, here is how the industry and stakeholders reacted.

As previously reported, the Parliamentary Joint Committee on Corporations and Financial Services released its final report late on Thursday (14 March). The findings and key recommendations from that report can be found here.

Various stakeholders, including those singled out by the committee such as the Franchise Council and Retail Food Group, were quick to issue an initial response to the report, while they digested its full contents and implications:

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Franchise Council of Australia

The Council, commonly known as the FCA, welcomed the report and said that it was “pleased that a number of our recommendations have been embraced by the inquiry”.

“The FCA followed the inquiry closely in 2018 and listened carefully to the testimony and issues raised. We are already addressing some of the concerns raised through the inquiry process,” it said in a statement.

“Two key initiatives that the FCA is supporting is the establishment of a registry of all franchises in Australia, and the mandatory requirement to obtain legal and financial advice prior to entering a franchise agreement.”

It also addressed the committee’s finding that its current structure and membership base creates a strong bias towards franchisors.

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“The FCA has also taken action to more directly engage franchisees through a new FCA Franchise Advisory Committee and is encouraged by the response it has received from franchisees,” it said.

“We look forward to constructively contributing to the Taskforce and working to effectively implement both the changes we have underway and other recommendations of the inquiry. The FCA emphasised to the inquiry that there was a need for more rigorous compliance oversight and enforcement and we have been actively engaging with the ACCC.

“We are pleased that recent enforcement actions have successfully brought some unscrupulous operators to account with significant penalties. The ACCC has also advised that it is focusing its compliance investigations in 2019 on the most problematic subset in small business: the food services and takeaway food sector.”

The FCA concluded by saying that it “has made it clear that we will not tolerate breaches of the franchising code or consumer law by either franchisors or franchisees, whether or not they are FCA members”.

“Any breach of the law by a franchise business reflects on the reputation of the majority in franchising who do the right thing. Franchising works best when there’s open collaboration between franchisors and franchisees and the FCA is committed to ensuring their mutual success.”

Retail Food Group

In a statement to the ASX issued on Friday morning (15 March), the listed company said that it was “still studying the committee’s full report”, but that it “supports any changes which will be of benefit to the franchising industry”.

“Importantly, RFG notes that the success of its franchise network is its major focus and, in line with this, has already conducted its own extensive reviews and improvements of its own policies and practices to better support its franchisees,” it said.

“RFG has implemented a board renewal strategy and has significantly changed and strengthened its senior leadership team.

“Since November, the company is under new executive management led by turnaround expert executive chairman Peter George who is driving a range of initiatives to better support, connect and benefit RFG’s franchisees and improve services to customers.”

The company’s executive chairman, Peter George, added: “The current management team and board completely understand that RFG’s future success is directly linked to the profitability of its franchisees. We have instituted a comprehensive program of investment and improvement to materially help existing and new franchisees grow and prosper.”

RFG also briefly referenced the specific recommendation that it — and its current and former directors and managers — be investigated by the ACCC, ASIC and the ATO.

That recommendation by the committee was for regulators to dig into “matters including, but not limited to, the Australian Consumer Law, the Franchising Code of Conduct, insider trading, short selling, market disclosure obligations (including related party obligations), compliance with directors’ duties, audit quality, valuation of assets (including goodwill) and tax avoidance”.

“Regarding recommendation 4.2 of the report, RFG has an established history of cooperation with regulators and takes its compliance with all of its legal obligations extremely seriously,” it said.

Other franchise brands

While many other franchise brands remained quiet on the report, at least for the moment while they digest its contents, at least one other was willing to comment, with real estate group Ray White issuing a statement noting that “not all groups are the same”.

Ray White claims to be the largest real estate franchise in Australia, with over 700 business owners and 13,000 members.

“The stories and commentary that have emerged from the recent federal parliamentary inquiry into the operation and effectiveness of the Franchising Code of Conduct have been surprising to me,” said Dan White, the fourth-generation head of the family-owned business.

“While we are still digesting the report which calls for greater enforcement powers, we want to make it clear that not all franchised groups operate under the same paradigm.”

According to Mr White, his business, particularly as a family-owned enterprise, is “a world away from the general perception of a franchise model”.

“My family is the custodian of what has been and will be created. No one really owns it, except in the most literal of senses,” he said.

“We see our role as a partnership model with our franchisees. While most franchised models impose a joining fee, we don’t. There is simply no fee to open a Ray White business.

“In fact, we often contribute to the start-up costs to get our new business owners off on the right foot.

“On average, we invest more money and time in the first two years of a new franchise agreement than we receive in revenue, and feel very comfortable taking a long-term view on shared success and profitability.”

Mr White added: “Nothing irks us more than people suggesting that we are in the business of selling franchises. Not so — we are in the business of providing leadership to our members, enabling them to chase their potential and build the best possible business to provide for themselves and their families.

“Trying to put each business owner in a straightjacket conflicts with the inherent purpose of the franchise concept, and serves the business owner poorly.”

ASBFEO

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), said the recommendations align with addressing the concerns her office has received from franchisees as business owners.

“Franchisors continue to breach the ‘good faith’ obligation of the Franchising Code of Conduct and include unfair contract terms in franchising agreements without penalty, further entrenching the power imbalance between the franchisee and franchisor,” she said.

“At the moment, if a franchisor breaches the code, franchisees take no action for fear of repercussions, such as losing their franchise agreement. If they do go to mediation, the franchisor brings a legal team, while the franchisee is often unrepresented and suffers because of this.

“We agree all franchise agreements must comply with unfair contract term legislation; the majority of calls my office receives from franchisees are seeking assistance in a contract dispute. The committee’s recommendations to make penalties significant and charging the ACCC with investigating standard form contracts and applying penalties where a contract contains an unfair clause will greatly improve the position of franchisees in their dealings with franchisors.”

Ms Carnell also welcomed the proposals aimed at improving disclosure provisions and transparency, which she said were “paramount” for current and future franchisees to make informed business decisions.

“Having recently taken on the function of assisting franchisees with disputes, we welcome the dispute resolution clauses being strengthened,” she added.

“We support reforms to include arbitration where mediation has proved unsuccessful so that small businesses can continue to access lower-cost, timelier dispute resolution services.

“Of particular note are the committee’s recommendations to address issues raised by new car dealers. These will guide the consultation currently being conducted by the government to mitigate the power imbalance between manufacturers and dealers.”

The Business Council of Australia, the Australian Association of Franchisees and the International Franchise Association have also been asked to comment on the report, its recommendations and how they may impact the sector if implemented in full.

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