Steve Irons (Swan, Liberal Party) Share this | Hansard source

I am always pleased to follow the member for Herbert and listen to his experience in business. I rise to speak on the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014. This bill will act as a first step in a series of much-needed amendments to Australia's franchising code. I have spoken previously in this place about the need to reform current codes of practice to ensure that the franchise industry is operating both fairly and ethically, particularly with regard to the conduct of franchisors towards franchisees. It has been obvious for a long time that reform is needed, but governments on both sides of the political divide have shied away from implementing the necessary amendments that will hold franchisors and, to a lesser extent, franchisees to account when unconscionable conduct takes place, such as nondisclosure. This is despite eight official reviews of the code taking place in the past eight years at the federal, state and territory levels.

As members in this place would know, franchises are predominantly small businesses. They are owned by families in each of our electorates, and these families quite often put their life savings into these businesses—believing that, by being part of a larger corporation, they will have the support they need to see their business thrive, rather than trying to develop their own business from the ground up. In the majority of cases this concept works well and Australia's franchising code provides the necessary mechanisms to facilitate contract agreements between franchisors and franchisees and sets out the procedures for dispute resolution when those instances arise. The national regulator for the code is the Australian Competition and Consumer Commission, or ACCC.

As I have said before, one reason that people go into a franchise situation is that they do not have the necessary experience that they need to be able to run a business. They have the money—they might want to invest their superannuation or take a loan out against their house—and they rely on the franchisors to give them the experience and the necessary disciplines. But where there is churning or situations where they are in conflict, the franchisors always seem to have it over the franchisees, because they are the ones with the experience and the franchisees have gone to them in the first place. A number of these issues have been identified in the most recent review of the franchising code, by Mr Alan Wein—particularly in regard to the practical applications of the code, as I just said, unnecessary red tape impositions and concerns surrounding levels of disclosure in this unique business relationship.

Many of the issues outlined were not new to me, and I am sure they were not new to many of my Western Australian colleagues who, like me, have supported the plight of constituents in their electorates who were faced with severe financial distress and hardship as a direct result of franchisor conduct. I acknowledge the member for Canning, Don Randall , who has introduced two private member ' s motions to this place calling for amendments to be made to the franchising code in relation to dispute resolution. Like Mr Randall, I have witnessed how the current franchise model and behaviour and the conduct of some franchisors ha ve the ability to send franchisees into bankruptcy.

By way of background, in 2008 three Western Australian franchise owners came to my electorate office in a state of distress, as they were on the verge of financial ruin after purchasing and continuing to run a franchise business from a company called Michel's Patisserie. I then proceeded to find out that this was not an individual case where the ability of the franchisees to run their business could potentially be questioned, but in fact five out of the 16 franchisees in Western Australia were in exactly the same position of distress , along with at least another 10 in Queensland. These middle-class, hardworking Australians placed their homes and financial lives at risk when they signed this franchise agreement based on the flawed business model where return on investment, without sufficient profits, was not forecast in the model provided.

As a result of this flawed model my constituent left the business and was left with a huge debt to the franchisor because the franchisor continued to trade with him when his business was clearly insolvent. When they did come to me they brought the necessary figures that were used to go to the bank in this situation and I looked and them and thought: I would never invest into a business on these figures . T hat is what their bank said as well when they went to the bank : they said , 'We won' t invest on those figures. ' So they went back to the franchisor and said , 'W e can't get any finance, ' and the franchisor said, 'O ur bank will finance it for you. ' That is the model that is actually flawed and this is what I am hoping this bill will help address. The purpose of those franchisors clearly trading with the business while it was insolvent could only have been to drive him back into a position where he would have to sell the franchise back to the franchisor for a 'walk away' sum of money and then they could sell the franchise to another potential client—a concept, as I just mentioned before, known as 'churning'.

I have previously joined my Western Australian colleagues in calling for reforms to the Franchise Code to ensure there is greater accountability for unconscionable conduct, particularly in regard to nondisclosure, and to ensure the franchise industry is operating both fairly and ethically. The coalition government has a strong record of supporting small business and we are progressively rolling out key policy measures such as the $484.2 million Entrepreneurs' Infrastructure Programme to provide practical support for businesses , and $304.1 million over four years from 2014-15 to boost the wage subsidy for mature age job seekers . W e have started the root - and - bra nch review of competition laws and have implemented a dedicated small business support line within Fair Work, to name a few of those new progra m s.

The government has implemented these key measures because we understand small business and the vital contribution this sector makes to our communities and the economy. I know from looking at our side of the House that there are many people with small business experience and other business experience—so the coalition gets it.

Franchises are a significant part of this small business sector, which the coalition government recognised in 1998 when the Howard government introduced the original franchising code. However, as I have previously stated, reform is needed. This view was endorsed by Mr Wein in his review of the code, and by industry following significant stakeholder consultation during the review process and when exposure drafts of the bill were released for public comment by the Minister for Small Business.

I am pleased the government has swiftly acted on Mr Wein's recommendation by introducing the bill before the House today , which will directly respond to my call for greater accountability for unconscionable conduct. The government will achieve this by giving the ACCC greater enforcement tools to appropriately regulate this industry and determine its conduct by allowing it to apply fines to businesses which breach prescribed industry codes.

The ACCC does need more teeth on this particular issue. When I went to them in the first instance with the people who came to my electorate they said, 'We can't really help in franchise situations when they are already in court.' I said, 'I've got five live cases that aren't in court. Let's go for it.' Unfortunately, the ACCC failed to act and these people ended up still in bankruptcy. Hopefully this legislation will improve that situation and allow the ACCC to act on a far quicker and far more efficient basis.

Currently, there are a range of possible consequences for a breach of the franchising code, which includes arbitration in court. The types of orders that a court can make in these instances are, however, limited to providing a remedy. During the review process, stakeholders indicated that these remedies do not suitably deter breaches of the code and that sanctions imposed do not appropriately compensate for the harm that has been suffered. As I noted when assisting my constituents in their plight against a franchisor, some franchisors have been experts in creating a history of evidence that supports their argument that the franchisee was not performing to their model and therefore the franchisee deserves no protection or compensation from the authorities or the legislation in its current format.

The implementation of Mr Wein's recommendation to introduce pecuniary penalties and infringement notices as remedies for contraventions of the franchising code, which this bill will facilitate, will directly respond to this ongoing issue in the franchising sector. This is not a new recommendation in reviews of this code; however, it has never been introduced despite it being a necessary measure to effectively deter ongoing misconduct in the industry. Although statistics relating to the number of disputes and enquiries to the ACCC support the belief that problems in the sector are moderate to low, that does not mean issues do not exist and that appropriate amendments do not need to be made to resolve these issues.

It is clear from the types of complaints and enquiries that have been received that greater enforcement tools are necessary to effectively regulate the franchise industry. In 2013, the ACCC received 595 complaints and 189 enquiries relating to franchising. The Office of the Franchising Mediation Adviser reported 504 enquiries from 1 July 2012 to 30 June 2013. The highest level of complaints and enquiries in these instances related to exit and misrepresentation or deception, followed by other key issues including moneys owed by the franchisor, termination or renewal, and inadequate support. The amendments before the House will provide the legislative framework to allow pecuniary penalties to be imposed by the courts and infringement notices to be issued by the ACCC for breaches of the new code.

The bill sets the upper limit for a pecuniary penalty for a contravention of an industry code at 300 penalty units, which is currently $51,000. The amount of an infringement notice issued by the ACCC for a code breach is 50 penalty units, or $8,500 for a body corporate, and 10 penalty units, or $1,700, in any other case. Infringement notices provide a timely, cost-effective enforcement alternative to commencing court proceedings and give the recipient the option of paying the penalty amount to avoid further action by the ACCC in relation to the alleged contravention.

Seeing these key reform measures implemented is important to me, not just because of the plight of my constituents but because franchises make up a significant part of Australia's small business sector, with the most recent Griffith University survey indicating that franchising contributed more than $130 billion to the national economy in 2012 and employed over 400,000 Australians. In 2012 there were approximately 8,400 franchises operating in my home state of Western Australia alone. Although figures are not available on an electorate level for franchises, as of June 2013 there were 16,153 small businesses in Swan. As a former small business owner myself, and Swan being home to many franchises—particularly in the automotive, retail and manufacturing sectors—I take a very keen interest in ensuring that government policy is aimed at facilitating their future success.

Although the bill before the House today will amend the Competition and Consumer Act 2010 to introduce pecuniary penalties and infringement notices, which will commence on 1 January 2015, a new franchising code will be put to the House at a later date to facilitate the implementation of other key recommendations by Mr Wein.

These changes to the code will result in an estimated compliance saving of $8.6 million annually across the sector by removing red-tape imposts, which is particularly important for the small business sector. As the Productivity Commission noted, small businesses feel the burden of regulation more strongly than any other business due to a lack of staff, time and resources, presenting challenges in understanding and fulfilling compliance obligations, so it is important that an unnecessary regulation is removed. As I previously stated, disclosure is a key concern amongst stakeholders in the franchising industry and reform is needed to improve transparency between franchisors and franchisees.

The new code will respond to this concern by including a requirement for franchisors to remind franchisees of their entitlement to a current disclosure document when notifying them that they intend to renew the franchising agreement. It will also include a short, easy to understand information statement for prospective franchisees to increase due diligence, and it will extend to online trading activities so that franchisees can assess the viability of their business if they also have to compete with franchisors conducting online sales. The new code will also respond to the concerns surrounding dispute resolution to ensure franchisors cannot impose their costs of dispute resolution on franchisees or require them to resolve disputes in a state other than the state in which the franchisee's business is based. An overarching obligation for franchisors and franchisees to act in good faith will also be introduced. It will remove confusion in the industry about whether the concept of good faith, as applied in common law, also applies to all aspects of a franchise contract by including this obligation in the legislation.

Greater transparency with regard to marketing funds will also be introduced to ensure franchisees receive meaningful information about expenditure of marketing and other co-operative funds. There will also be a specification in the code that marketing funds can only be used for expenses such as legitimate marketing or advertising expenses. The new code will also address concerns regarding onerous contract terms, including a franchisor's ability to impose unforeseen capital expenses such as refurbishments to retail premises, and concerns relating to trade clauses in instances where a franchisor chooses not to offer a franchisee a renewal of their agreement.

I look forward to the government's new Franchising Code being introduced in this place to improve the ACCC's ability to regulate the industry. I commend the bill to the House.

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