Draft Franchising Code unveiled for consultation

The Federal Government has drafted a new-look Franchising Code of Conduct, set to come into effect on 1 April 2025. There is a short public consultation period which ends on 29 October.

Jay Westbury, CEO of the Franchise Council of Australia, told Franchise Executives, “The FCA welcomes the exposure draft of the Franchising Code of Conduct and will be providing constructive and informed input to the final stage of consultation with Treasury. 

“We acknowledge that the draft has embraced the government’s response to the Shaper review and will be providing a supplementary submission by the closing date with constructive feedback to Treasury as the final draft is completed.”

So what’s new in the Code?

The government has outlined the proposed changes in an accompanying Explanatory Statement. 

The changes stem from recommendations made in the 2023 Schaper Review. However, the revised Code does not include all 23 recommendations. One contentious point, the question of a franchise licensing system, is not featured.

Also missing from the new Code is the Key Facts Sheet. By removing this document and consolidating all the relevant information into the disclosure document, the government aims to improve clarity for franchise buyers.

However, the Code draft does include another point that raised concerns following Dr Schaper’s review, the question of franchisees’ ROI.

Franchisee ROI

Lawyer Nick Rimington, a partner at Norton Rose Fulbright, told Franchise Executives, “The requirement that a franchise agreement must provide a reasonable opportunity to make a return was expected, however, we had hoped for more context and colour in the drafting. A franchisee’s total return needs to be viewed holistically.

“Buying a franchise is by its nature an entrepreneurial investment and should not be regulated like a risk-free financial product. Given that the ‘super penalties’ would apply to a breach of this section, we would like to see more substance in the drafting,” Rimington said.

Under the revised Code, franchisees must have a reasonable opportunity to recoup any capital investment required by the franchisor upon entering into or under the agreement. Failure to include this in an agreement could result in a civil penalty.

“The end of term compensation and ROI changes emerged from existing provisions in the Code which apply only to automotive franchisors,” he explained.

“It was never a good idea to try to translate obligations which currently apply in very limited circumstances to the automotive sector to the broader franchise sector. ‘Market exit’ makes sense where all automotive franchisors are ultimately foreign corporations but makes no sense in the context of the broader franchising community,” he said.   

Other changes to the Code

The Explanatory Statement points to the new structure of the Code and highlights changes. Some of these include:

The disclosure document

There are a number of changes around the disclosure document, including enabling franchisees to sign electronic versions, and to opt out of disclosure if renewing or purchasing a further franchise and the new agreement mirrors or is similar to the existing franchise agreement.

However, Rimington said the ability for certain franchisees to opt out of receiving a disclosure document applies only to a narrow cohort of franchisees.

“This exemption would be very rarely used, so it won’t deliver a genuine reduction in compliance costs for most franchisors,” he said.

The marketing fund

A new, more inclusive term, specific purpose fund, replaces the marketing fund, enabling franchisors to collect franchisee payments for a particular purpose such as marketing or a tech project.

Termination

The new Code proposes a streamlined approach to franchisee termination with seven days written notice on grounds for which the franchisee cannot dispute. Grounds for this termination include bankruptcy, ASIC deregistration, a serious Fair Work contravention, wage theft and conviction of a serious offence.

Civil penalties

A number of clauses now have civil penalties attached. For example, failure to give a franchisee notice of termination and the reasons for the decision; failure to provide a disclosure document as required by the Code; and requiring a franchisee to pay costs incurred by the franchisor when settling a dispute.

Mediation

The Code also gives the Australian Small Business and Family Enteprises Ombudsman the right to reval the names of franchisors who either refuse or engage in, or withdraw from the ADR mediation process.

Code review

The new Code stipulates a review within five years to assess the Code’s impact and operation; and suggests a further assessment post-2030 to coincide with the Code’s sunsetting process.

Draft Franchising Code consultation

You can read the new Franchising Code in full online, and use the accompanying Explanatory Statement as a guide to the new format and changes. You can make a submission here; the deadline for submissions is 29 October 2024.

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