The Hon Fran Bailey MP, Minister for Small Business and Tourism recently announced the completion of the review of the effectiveness of disclosure provisions of the Franchising Code of Conduct (the Code).
The review was specifically focused on the following issues:
- Reviewing the current operation of part 2 – Disclosure of the Code.
- Identifying possible amendments that could improve the disclosure provisions of the Code.
The Franchising Code Review Committee provided its report on the Review of the Disclosure Provisions of the Franchising Code of Conduct late in 2006 after consultations with interested stakeholders. The Committee received 75 submissions.
The Government largely agreed with the recommendations of the Committee. It is anticipated that amendments to the Code which were agreed will be drafted shortly.
A summary of the approved recommendations by the Government are outlined in this update.
Initial disclosure
The key changes to franchisors as a result of the review are:
- The franchise agreement and all related documents, such as leases, hire-purchase agreements, guarantees and confidentiality agreements must be provided at the same time as the disclosure document.
- A copy of the Code must be provided with the disclosure document.
- The amounts (or method of calculation) of rebates or other benefits they or associates will receive must be disclosed.
- Financial information of any consolidated entity to which the franchisor belongs must be provided.
- Disclose in the disclosure document the names, locations and contact details relating to franchises transferred, ceasing to operate, terminated by the franchisor or franchisee, not renewed on expiry, bought back by the franchisor and terminated and the franchise business being acquired by the franchisor.
- Provide the details and the history of the franchise site or territory with the disclosure document.
- In addition to these key changes, the following points apply to directors and franchisors:
- Directors of a franchisor will be required to disclose certain proceedings, judgments or awards.
- Franchisors will be prohibited from preventing prospective franchisees associating with franchisees.
Continuing disclosure
In terms of continuing disclosure, franchisors are now required to disclose details of undertakings under section 87B of the Trade Practices Act no more than 14 days after being given.
Application of the Code
Exemptions from the Code will be removed under the following circumstances:
- For franchise agreements where the franchisor is outside Australia and grants only 1 franchise or master franchise for operation in Australia.
- For franchisees where the franchise business turnover is less than 20% of the business’ total turnover (after consultation with industry groups).
Other matters
The Government also agreed with the recommendations that franchisors are also required to audit marketing and other co-operative funds and that managers of a franchise are required to disclose their business experience.
Key recommendations the Government didn’t agree with
They key recommendations that the Government did not agree with are:
- Implementation of a mandatory process of franchisor registration and annual lodgement of disclosure documents and other prescribed information. It was proposed that the process be administered by the ACCC.
- Franchisors be required to provide a statement setting out known significant risks that could have a material impact on the franchise.
Conclusion
Although the amendments to the Code are still to be drafted and no timeframe for their actual implementation has been released, it is clear that franchisors will be required to review their current disclosure practices and disclosure documents to ensure compliance.
Our Franchising team will circulate a further update when the Government makes the draft amendments to the Code available.
In the meantime, we hope you can join us at one of our upcoming interactive workshops where we will take a close look at the changes and provide insights into the practical impact on your business.
Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.
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