Jane Prentice (Ryan, Liberal Party) Share this | Hansard source

I rise today to speak on the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 which implements the coalition government's policy of strengthening effectiveness and improving compliance with the Franchising Code of Conduct. The object of the Competition and Consumer Act is to promote competition and fair trading and to provide for consumer protection. The code aims to strike a balance between mandating best practice in relation to disclosure and not unduly constraining the operation of the market. The franchising relationship is rarely balanced. The franchisor generally has greater power because they are better resourced; they own or control the intellectual property, including trademarks, relating to the franchise business; they prepare the franchise agreement, which may be offered to a potential franchisee on a take-it-or-leave-it basis; they have broad and detailed knowledge of the business and its prospects; and they may control the supply of materials and other inputs to the franchisee.

Despite the popularity of franchising in Australia, there have been significant and often very public complaints about the operation of the franchising sector. In particular there has been widespread criticism about the lack of enforceability of the code. My electorate of Ryan has a strong small business population—upwards of 1,200—and a number of constituents who are franchisees have met with me to discuss the problems they have with their franchisor. It is this ongoing level of complaint within an apparently popular business model that has given rise to a number of high-level reviews. Between 2006 and 2008, there were five inquiries at the Commonwealth and state levels into franchising which sought to address allegations of misuse of power by franchisors. The most significant of these inquiries was carried out by the Parliamentary Joint Committee on Corporations and Financial Services. The report, entitled Opportunity not opportunism: improving conduct in Australian franchising, called for significant legislative amendments.

Amendments were made to the code in 2007 and 2010, following which the previous Labor government stated that it did not intend to conduct any further reviews before 2013.

In January 2013 the government appointed Mr Alan Wein to review the code with particular focus on the efficacy of the recommendations that had been made to the code in 2007 and 2010, and other matters such as good faith in franchising, the rights of franchisees at the end of the term of their franchise agreements—including recognition for any contribution they had made to the building of the franchise—and the operation of the provisions of the act as they relate to enforcement of the code.

Currently, it is the problem of information between franchisors and franchisees that is the basis of the concerns about disclosure. The importance of accurate and up-to-date disclosure cannot be overstated. Its purpose is to give to a prospective franchisee or an existing franchisee, who is proposing to enter into a new franchise agreement or renew or extend the scope of their franchise agreement, information from the franchisor that will allow that person to make a reasonable and informed decision, not the franchise. In addition, it concedes the fact that there are often difficulties for franchisees attempting to carry out due diligence before entering into a franchising agreement as would occur, say, with the purchase of an existing business.

As Jenny Buchan of the Australian School of Business explains:

If the franchise is owned by a public company, there will be very little information that is specific to the wholly owned franchisor subsidiary in the published annual returns of the public company.

While it is not difficult to conduct a search of proprietary company, franchisors often operate different aspects of their businesses through more than one legal entity.

The more entities there are, the more expensive and difficult it becomes to conduct a robust due diligence.

If any of those entities, including the franchisor, is in a trust, it is not possible to objectively verify the identity of the beneficiaries from the public records.

The franchisee, faced with the high cost or the impossibility of conducting a thorough due diligence for itself, will decide to trust the franchisor information more or less on face value. Or walk away.

The code is designed to ensure that franchisees are given information that is material to the running of the franchise business and provide access to a fast and relatively inexpensive way to resolve any disputes. Broadly, it achieves this by requiring the franchisors to disclose specific facts to franchisees and to follow set procedures in their dealings with franchisees. However, pecuniary penalties are not currently available for breaches of the code, nor is the ACCC currently empowered to issue infringement notices for a likely breach of the code. These are issues that this bill will remedy.

The Law Council of Australia summarise the cautious arguments in favour of imposing civil pecuniary penalties for a breach of the code as follows:

Penalties would operate as an effective deterrent to breaching the code … Due to the cost of justice, franchisees do not possess the resources to pursue franchisors, ie the sector is characterised by an imbalance of power and therefore the state should intervene.

It is inconsistent that penalties do not exist for a breach of the code, given that penalties exist for other breaches of the Competition and Consumer Act, including the Australian Consumer Law. The introduction of penalties would increase the confidence of investors and parties to a franchise agreement.

According to the Wein report, the ACCC as the industry regulator has argued that it should be able to issue infringement notices in addition to being able to seek pecuniary penalties for a breach of the code. This would be an appropriate penalty in circumstances where a franchisee has received an inaccurate or incomplete disclosure document from a franchisor. In particular, the payment of infringement notices in such circumstances would make the matter public and act as a deterrent to other franchisors. The Franchisee's Association of Australia has urged the parliament to pass laws which result in both civil and criminal sanctions for a breach of the code.

The franchise industry has been the subject of a number of inquiries at the state and Commonwealth level since 2006. This has led to amendments to the code in order to overcome many problems which have been reported by franchisees. In addition, there have been, since 2006, significant steps to update the Competition and Consumer Act, including the codification of the prohibition against unconscionable conduct.

The Wein review canvassed many of the same issues that were the subject of those earlier inquiries. The move to impose civil penalties for a breach of the code has long been resisted. What cannot be forgotten is that all breaches of the code will be liable for such a penalty—that is, a penalty can be applied equally to a non-compliant franchisee as a franchisor.

The challenge for this coalition government was to consider the Wein review recommendations afresh and to apply an even-handed response which does not unduly tip the balance of the franchise relationship too far in favour of the franchisees to the detriment of franchising generally. The coalition government, in particular, supported Mr Wein's recommendation to make enhanced and more flexible enforcement options available to the ACCC.

The minister for small business, the Hon. Bruce Billson, described Mr Wein's report as 'a terrific road map about areas of important reform in franchising'. I believe that this bill has risen to the challenge and met the delicate balance between the franchisor and the franchisee to ensure that the franchise sector is improved overall, and I commend this bill to the house.

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