Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

I seek leave to continue the introductory remarks I made in the House.

Leave granted.

Firstly, I would like to again thank the secretariat of the Parliamentary Joint Committee on Corporations and Financial Services for their hard work, their diligence and the countless hours that they put into this report. This report was an extensive look at the franchising sector and all of the issues in that sector. I also want to make particular note by name of a number of people. I want to thank the committee members: the deputy chair, Senator the Hon. Brett Mason; Senator Mark Arbib; Senator Sue Boyce; Senator Gavin Marshall; Ms Sharon Grierson; Ms Julie Owens; the Hon. Christopher Pearce; and Mr Stuart Robert. I also thank the other members involved with this inquiry that are no longer with the committee: Senator Grant Chapman, Senator the Hon. Helen Coonan, Senator Linda Kirk, Senator Andrew Murray, Senator Ruth Webber and Mr Michael Keenan. I would also like to thank the secretariat for their hard work: Dr Shona Batge, Mr Andrew Bomm, Ms Veronica Gover, Ms Emina Poskovic and Ms Laurie Cassidy. This was a very extensive inquiry done over a very short time frame and this is, I think, a very good report.

The franchising sector on the whole is a great sector. It is a sector that contributes greatly to employment and to the GDP. On the whole, it tends to operate well, but there are problems and issues within that sector. There are some rogues that would abuse the power imbalance that necessarily exists to ensure that franchising is a flexible, relational type contract arrangement. This report goes some way to dealing with those issues. Franchising has evolved over the past 30 years in Australia. It was once very much an agreement between two parties that was seen at the time to be an agreement for life. Franchisees would come on board and build the business on the franchisor’s behalf across the country. The contracts were merely reviewed after a period of maybe 10 or 20 years rather than there being end-of-contract arrangements. But, as the sector changed, we found ourselves in a situation where franchising contracts would have end dates—they would end after a 10-, 15- or 20-year period. In more recent years, as it has evolved further, we have seen shorter and shorter franchise agreements with very strong end dates, some of which are followed through with. That has certainly been one of the issues within the sector.

At the core of the sector has been the evolution also of the regulatory environment. The sector went from no regulation—there was no specific legislation that dealt with franchising, merely the Corporations Law or the Trade Practices Act or the ACCC as a regulator—to a voluntary code and now to a mandatory code. There have been a number of inquiries, including state and federal inquiries, and reviews over a number of years. Earlier this year, on 1 March, some regulatory changes were made to that code relating to disclosure requirements. This report follows on all of that work over the past 20 or 30 years and forges a very solid middle road of trying to build upon the great improvements that have been made in that sector. We must make sure that there is enough regulation to not only protect franchisees but also to encourage the growth of franchising without it becoming a burden upon franchisors. We must respect the freedom of a contract, the freedom of a bargain, and allow people to get on with the business of being in business while at the same time making sure that there is a good regulatory framework for people involved in the sector.

The reasoning behind that is quite simple. For a franchisee, they will often stake all of their life savings—everything they have—on entering into a franchise. For a franchisor, they often stake their reputation and their core business on the trust they have in their franchisee doing the right thing by them. The focus of the committee inquiry was very much about finding that good middle road to ensure that rights and responsibilities are met for both sides and that everybody plays their part in what is a quite unique contractual arrangement. It is unlike any other business arrangement. From the date you sign a franchise agreement, the exploratory and developmental nature of the relational contract really takes shape. There is so much good faith vested in the behaviour and conduct of the participants in these relational franchise contracts that, over the years, there has needed to be further regulation and codes, and we now have a mandatory code. What we propose in the report is to build upon the structure that currently exists.

I want briefly to run through the recommendations that were made by the committee and expand on a few. The first recommendation is:

… that the Franchising Code of Conduct be amended to require that disclosure documents include a clear statement by franchisors of the liabilities and consequences applying to franchisees in the event of franchisor failure.

We discovered through this process that a number of franchisors, for whatever reason, either fail, go out of business or decide to exit franchising as a sector but that it is often not clear to franchisees what their liabilities or responsibilities may be when that occurs. We felt it was very important that that be more clearly disclosed and not remain an area of silence, so that people in the pre-education environment better understand exactly what they are getting into.

It also came up during the inquiry that we really do not have any good statistics or data. There is no registration, of any nature, of franchising in itself. We were of the view that there needs to be some very simple form of registration—perhaps something as simple as an online form—that requires a franchise system to nominate itself, clearly state the nature of its business and, in doing so, assure franchisees that the franchise system is meeting the requirements of the mandatory code of conduct. We thought that that was important to deal with a range of issues around some sort of registration system. It would be very simple, online, cost effective and efficient.

The third recommendation was:

… that the government review the efficacy of the 1 March 2008 amendments to the disclosure provisions of the Franchising Code of Conduct within two years of them taking effect.

The provisions are only new, and I think it is only fair that after a two-year period we go back and review them. But we need to give it some time. Two years is a good time period after which to go back and review the provisions to see whether they are working and whether they have had some positive impact on the sector.

The fourth recommendation was:

… that the government explore avenues to better balance the rights and liabilities of franchisees and franchisors in the event of franchisor failure.

This relates to the first recommendation in terms of the balance between rights and responsibilities, the liabilities, and what issues are at stake when a franchisor fails. There are contractual arrangements for when a franchisee fails. That is easily dealt with. But there needs to be some clearer paths for how things work when a franchisor fails.

The fifth recommendation was that we amend the code of conduct to ensure that there is disclosure to franchisees before they enter into an agreement. The process will actually be at the end of a contract. We do not want to tell franchisors what it should be but we believe it should be clearly stipulated. The disclosure of end-of-term arrangements needs to be in writing in the contract. Again, it goes back to good faith and pre-education requirements. If people are to better understand what they are entering into, they need to understand what takes place at the end of the arrangement. This is something that many franchisors already do. We are not asking them to do anything different from current industry practice. This would go a long way to resolving many disputes that currently take place.

In the sixth recommendation, on the submission of the ACCC, we agreed with them that the name ‘the Office of the Mediation Adviser’ was not clear enough as to the office’s role and that it should be ‘the Office of Franchising Mediation Adviser’. We believe this is a simple and clear way forward on giving the sector a better understanding of what the role of the office is.

The seventh recommendation was:

… that the government require the Australian Bureau of Statistics to develop mechanisms—

for collecting better data. It became absolutely clear during the inquiry that we do not have any really solid or credible statistics or data. A survey is done every two years but it is too narrow. We need something from the Australian Bureau of Statistics, and I would encourage the government to work with the ABS on mechanisms to provide it.

One of the really big issues, the one that takes up the vast majority of time in franchises and has done for many inquiries, is that of good faith. There are many different views and debates. People try to define it and they try to talk around this issue as much as possible but, at the end of the day, good faith is something that is understood by everyone in some form. There is already a clear indication within the Trade Practices Act as to what good faith is. It is in other bits of legislation to do with fair trading; it is something that is well understood and can be dealt with by courts through litigation.

We have recommended as a committee that the Franchising Code of Conduct be amended to insert a new standard of conduct clause which says:

Franchisors, franchisees and prospective franchisees shall act in good faith in relation to all aspects of the franchise agreement.

It should be the case and it is the case in the industry in most areas that there is a good faith clause in the agreements which actually says that both parties shall act in good faith towards each other and there should be no lesser standard or expectation. I think this is a good middle road in tying together all the issues around disputation back to some clarity in the form of good faith. It is a minimalist approach but one that does give clarity and takes it from just being implied in the Trade Practices Act to actually being codified in the Franchising Code of Conduct.

The ninth and 10th recommendations of the committee are both in the areas of pecuniary penalties in relation to breaches of either the Franchising Code of Conduct or sections 51AC, 52 and 51AD of the Trade Practices Act in relation to other codes and breaches for misleading and deceptive conduct. One of the clear issues that came out of this inquiry was that while there were a number of regulations, laws and codes, there was no stick that could be applied other than going to a court and seeking some remedy. There needs to be clearer pecuniary penalties for people who in particular deliberately breach their responsibilities in terms of the code or the Trade Practices Act. This was a recommendation also by the ACCC. The committee agreed with them and we think it is a good way forward.

The final recommendation of the committee was:

… that the ACCC be given the power to investigate when it receives credible information indicating that a party to a franchising agreement, or agreements, may be engaging in conduct contrary to their obligation under the franchising code of conduct.

While the ACCC does have powers currently to investigate, their view is that unless they have sufficient evidence that would give rise to a successful case in a court they do not pursue that particular information. We are of the view that we should support the ACCC and give them that extra power to be able to do some investigative type work to look at the possibility of the systemic abuse of power in certain franchise systems.

Overall this report builds on the previous good work of other inquiries both at a federal and state level. It is about supporting the sector as a whole—franchisors and franchisees. It is about finding a good, solid middle ground. It is about ensuring the future growth and stability of a very important sector, a sector which this committee and all of its members were very supportive of. I believe this report deals with all of the big issues.

There are two particular issues which, while we have discussed them in the report, we do not have recommendations on. One in particular, and I know it was very popularly discussed through the inquiry, was that of goodwill. We felt as a committee that goodwill in itself was already contained within the aspects of end-of-term arrangements in terms of the market value of the business and the transferability of value. It is really part of recommendation 5 that in determining end-of-term arrangements the process should give due regard to the potential transferability of equity in the value of the business as a going concern. This is something that already exists without trying to define or put a formula to what good will is.

The final point I would like to make is that the committee received a number of bits of evidence that an ombudsman or a tribunal would perhaps help, but on further investigation and on reflection we believe that it would add an extra layer of bureaucracy and confusion and would not provide the sorts of outcomes that people were seeking. The best process to do this is to try to mediate at the franchise level then through the Office of the Mediation Adviser and, if it cannot be resolved, through the courts. I commend this report to the House and I wish the franchising sector all the best in the future.

Sharon Grierson (Newcastle, Australian Labor Party) Share this | Link to this | Hansard source

I also rise to speak as a member of the Parliamentary Joint Committee on Corporations and Financial Services on the committee’s report Opportunity not opportunism: improving conduct in Australian franchising, which was tabled in the House last night. I commend this report to the House. I also commend the work of the committee, particularly its chair, the member for Oxley, who has just spoken on this matter, and the secretariat, who very adequately supported our work.

The report follows a five-month inquiry that held four public hearings and received more than 150 submissions from franchisees, franchisors, representative organisations and academic and legal experts. The committee has made 11 recommendations, all of which are aimed at raising the standard of conduct in Australian franchising. They get the balance right between regulation and encouraging free enterprise.

The franchising relationship is based on a prescribed business model which is offered by the franchisor and carried out under their guidance and oversight by franchise owners. Many franchise agreements have, of course, resulted in highly successful and profitable ongoing business relationships. There is little doubt that the franchising model has become increasingly popular in Australia. At best, franchise agreements for businesses should offer an extra degree of protection for new entrants and particularly some stability and backup for those people going into small business for the first time. To know they are part of an established supply chain under an established brand—a well-marketed brand, in some cases—can offer a degree of comfort to new businesses.

A recent industry survey commissioned by the Franchise Council of Australia suggests that franchise systems enjoyed a 14.6 per cent growth rate between 2006 and mid-2008 and that franchises now represent 3.7 per cent of all small business in Australia, employing an estimated 413,500 people. So they are a significant contributor to our economy and the small business sector. Notwithstanding the rapid growth of franchises in Australia over the last decade, the lack of independent, reliable data has remained a significant issue for this sector, and I think everyone will welcome the committee’s recommendation that the ABS develop mechanisms for collecting and publishing relevant statistics on the franchising sector.

Despite the success of many franchise agreements, evidence presented to the committee also served to highlight the conflicts that currently exist between some franchisors and franchisees. The committee notes that issues arising during the term of the agreements can and do cause tensions and that these issues have the potential to escalate into major disputes. Disputes most frequently arise as a result of differing expectations and understandings about the obligations of each party to the agreement and asymmetric power dynamics within franchise agreements, with the potential to lead to an abuse of power.

Improved collection of franchising statistics, with a focus on disputes and dispute related unit franchise turnover, will help us to develop a better understanding of just how extensive disputation truly is. To have this data publicly available as a source of information for those contemplating entry into a franchise arrangement would allow them to identify any trends or patterns of conflict. A reduction in disputes is nonetheless the most desirable outcome for all, and the committee noted a number of suggestions to improve dispute resolution outcomes, including an increased focus on premediation strategies, the creation of a tribunal to make determinations and the introduction of a franchising ombudsman.

But it is the committee’s view that many of the issues which lead to disputes and the need for mediation or alternative dispute resolution mechanisms would be mitigated by the introduction of an explicit obligation into the code of conduct for all parties to a franchise agreement to act in good faith. Several of our recommendations also are about clarification of disclosure—the sort of information parties to a franchise agreement should be in possession of. That includes clear statements of liabilities and consequences applying to franchisees in the event of failure.

We recommended that government explore avenues to better balance the rights and liabilities of franchisees and franchisors in the event of franchisor failure. We also recommended that the Franchising Code of Conduct be amended to require franchisors to disclose to a franchisee, before a franchising agreement is entered into, what process will apply in determining end-of-term arrangements. That process should give due regard to the potential transferability of equity in the value of the business as a going concern. Our preferred course of action was to emphasise the good-faith angle of both negotiations and entering into any contractual arrangement. The committee believes that acting in good faith at all stages of the franchise relationship provides a deterrent against opportunistic conduct in the franchising sector.

There is no denying that the treatment of some franchisees when their contract ends has been truly appalling. The committee heard disturbing evidence of some franchisors who had exploited and abused their market power and position, had taken advantage of their dominance within the partnership and had shown little regard for the regulatory system or for the outcomes and potential loss to the franchisee. I know that as MPs we have all had cases in our electorates brought to our attention. I have worked with one such case in my electorate for more than three years now; it is still not completely resolved. The trauma experienced by mum-and-dad franchisees who at the end of their contracts have walked away with nothing, and continue to live in fear of losing the roof over their heads, speaks volumes for the need for this inquiry and for the recommendations it has put forward.

In dealing with the cases that I have in my electorate, I want to thank the franchise sector representative groups. They have been very helpful. I also point out that, in these agreements, frequently the franchisor’s bank is the bank that enters into the agreement as financier for the franchisee. I think that is a less than desirable situation, but it is not something that came across sufficiently in our inquiry. But it does seem that, just as in purchasing a home one might use a different bank than the vendor; the franchisee should perhaps have a very separate bank arrangement. I also take this opportunity to point out that there is a high degree of ignorance of people’s rights in the banking sector. There are customer advocates at our major banks, and they are there to be advocates for the customer. In cases of major sums of money, there is also a banking ombudsman. Those sorts of facilities and avenues of redress should be made available, because often the situation is that a franchise business does not return enough to make payments owed to banks for that contract. I think there are issues that we could not deal with in this report but that still exist.

As this report makes clear, though, franchise agreements should clearly stipulate what the end-of-term arrangements and processes are. These arrangements should be fully and transparently disclosed to prospective franchisees. To reduce disputation around end-of-term arrangements, the committee recommended that those disclosure provisions in the code of conduct be amended to increase transparency, before the start of a franchise agreement, about what process will apply at the end. Unfortunately, people go in with a very optimistic viewpoint. They rarely contemplate the worst-case scenario or consider that there will be an element of failure or financial risk. The committee also recommends the introduction of pecuniary penalties and enhancement of the ACCC’s proactive investigative powers in relation to potential breaches of the code. I take this opportunity to congratulate Graeme Samuel. Under the new government, I have seen much greater interest in protecting small business and in representation for small business when they are in a dispute with a major business. I recommend that course of action and I am very pleased to see the ACCC taking up that challenge.

In conclusion, I commend this report to the House. I look forward to working with the government to ensure ongoing improvements in the standard of conduct in the Australian franchising sector. I hope that the relevant ministers will take up our recommendations, put them into effect and be very open to representation by the franchise sector for any further reforms. I think this report builds on a long period of action and responses, but they have not been completely effective. The adding of penalties, the strengthening of legislation and the role of the ACCC and, in particular, changing the code of conduct—basing it on good faith and adding clarity to it—will, if adopted, make sure that this sector is a vibrant and successful one and one where we would certainly like to see a reduction in disputes.

Debate (on motion by Mr Hawke) adjourned.