The Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) (the Franchising Code)  is subject to a current review, no doubt in light of the impending expiration of the Franchising Code in April 2025. We wrote about it here. In its September 2023 submission to the review (the submission), the Australian Competition and Consumer Commission (ACCC) set out its somewhat radical recommendation that the Franchising Code be replaced altogether with a licensing regime. But what would such a regime entail? Why was it recommended? What could this mean for the franchise sector? Importantly, what does Magnolia Legal think about all this? This article unpacks these issues. 

What would a licensing regime entail?

Based on the ACCC’s submission, it seems such a regime would broadly entail: 

1. the imposition of certain requirements on franchisors at the commencement of their franchise and during its life (presumably, to obtain and maintain the necessary licence required to grant franchises). Those requirements could include, as set out in the submission, imposing obligations on franchisors to ensure its franchisees have the knowledge, skills and experience to successfully operate a franchise before selling them a franchise; 
2. providing the ACCC or another relevant regulator with a greater suite of tools to quickly address and prevent “localised” harms and future harm to prospective franchisees, including the suspension of licences enabling the grant of franchises, and imposition of conditions on the relevant franchisor to get the licence back; and
3. an accessible binding dispute resolution process.  

Why was a franchise licence regime recommended? 

Ultimately, it seems the ACCC recommended the adoption of a licensing model to remedy the issue that, currently, their powers are mostly reactive (that is, they can only take action after a breach or suspected breach), whereas a licensing regime would proactively promote compliance with the law and address the inherent power imbalance in most franchise systems. 

The ACCC identified in their submission that “As the sole regulator of the Code, the ACCC must necessarily direct its attention and resources to the most serious harms in the sector.” and “The ACCC is not a complaints resolution agency and rarely becomes involved in individual disputes”. It can be deduced from that statement that, as a result, a lot of smaller claims/ issues/ breaches of the Franchising Code are not being investigated by the ACCC and leaving franchisees vulnerable. 

The ACCC also identified numerous persistent issues in franchising which, it submitted, could be improved by adopting a licensing model, including: 

1. that many franchisees do not understand their limited rights or the significant risks of the franchise; 
2. the limited transparency of franchisor operations; 
3. the ability of franchisors to terminate franchise agreements before the end of the term; and
4. where franchisors continually fail to comply with their Code or Australian Consumer Law (ACL) obligations, the ACCC currently has no ability to prevent or limit the franchisor from continuing to promote their system to unsuspecting prospective franchisees. 

What could  franchise licencing regime mean for the franchise sector? 

If such a regime is introduced, this will mean all franchisors will need to: 

1. obtain the licences, whatever they look like and whatever that entails; 
2. put in place processes and systems to maintain those licenses; 
3. update their Disclosure Documentation (noting a licensing regime will no doubt necessitate changes to the Disclosure Document and Key Facts Sheet); and
4. no doubt, yet again update their franchise agreements. 

What is the view of Magnolia Legal? 

We consider a licensing regime could be of benefit, but a trial program should occur first (where the licensing procedure is implemented across a smaller subset of franchisors initially, to ensure it works and so feedback can be obtained). The simple fact is that enforcing something against a sector as large as franchising, and then quickly changing it, is confusing and burdensome for all involved. 

We also consider some other measures could be implemented to remedy the current issues facing the sector, including: 

1. Requirement to obtain legal advice – advice is recommended, but not required per the current Franchising Code. We believe obtaining advice should be mandated for franchisees, so there can be no doubt they understand the risks and nature of the transaction. A statutory provision could be introduced whereby a franchise agreement is not valid and enforceable until a certificate is signed by an independent legal advisor, who certifies they have advised the franchisee parties of certain things, and the franchisee parties appear to understand the advice so given. A similar approach exists in the context of Binding Financial Agreements (BFAs) and a relevant provision in the Family Law Act, and helps promote parties’ understanding of the legal agreements they are signing, and that they are advised of any inherently unfair or unusual agreements or terms. 
2. Requirement that any ability to terminate be mutual – most franchise agreements have a clause entitling the franchisor to terminate in the event the franchisee fails to remedy a breach, but no reciprocal clause in favour of the franchisee. While there is scope to argue such clauses are in breach of the Unfair Contract Terms (UCT) laws (see our article here for further information on this topic), the government has the opportunity to remedy this power imbalance by ensuring franchisees have the right as a matter of law to terminate a franchise agreement in an expanded set of circumstances; and
3. Greater investigation and audit by the ACCC – in its submission, the ACCC acknowledged it did not investigate or take action as a consequence of all  or even most complaints, only those of a high value, widespread or serious misconduct, or where there was a public interest. Giving the ACCC more investigative audit powers, and even a published ‘name and shame’ register to publish the results (similar to food safety audits, for example) could help promote compliance and transparency on the part of franchisors.  

Importantly, we at Magnolia Legal wholeheartedly support the more accessible and binding dispute resolution recommendations. So many times we have learned of genuine disputes that have caused significant harm to franchisees, who just don’t have the resources to litigate them. Even worse, there have been some cases where franchisees have spent their life savings litigating a complaint, won the case (after several years embroiled in the court system), and then been left with a worthless decision when the franchisor went into liquidation. Having a quicker and much cheaper dispute resolution process that was binding would ensure such claims could be pursued, and wrongs remedied. 

What should those in the franchising sector do? 

The most important thing for those in the franchising sector is to stay informed, and keep an ear to the ground. It’s not entirely clear what will happen once the Code expires in early 2025 at this stage, but no doubt laws will be introduced and reports published during 2024 which will enable franchisors and franchisees alike to prepare for the changes, whatever they may look like. A great way to keep informed is to follow clever franchising experts like Magnolia Legal, who are dedicated to keeping abreast of the issue and reporting back! If you would like to discuss your franchise, please contact us!