New watchdog, bigger fines floated for $182b franchise sector

The $182 billion franchise industry faces the prospect of bigger fines, a specific new ombudsman and the creation of an independent disputes body as the government moves to fix the scandal-plagued sector.

The government has been under pressure after a report from a parliamentary inquiry in March made 71 recommendations to overhaul franchising laws amid a regulatory environment it said had "manifestly failed".

A paper due to be released on Friday, reveals the government is considering beefing up the sector through increased fines, more enforcement power, more-effective dispute resolution and an industry-wide ombudsman.

The current maximum civil penalty for breaching the nation's franchising code is $63,000 per breach.

The issues paper, put together by the government's franchising taskforce, canvasses the creation of a single body to manage franchising disputes through mediation or mandatory arbitration which could be funded through a levy paid by the franchisors.

The parliamentary inquiry into franchising was triggered by a series of media investigations by The Age and Sydney Morning Herald into 7-Eleven, Domino’s Pizza, Pizza Hut, Caltex and Retail Food Group where franchisees described franchising as "indentured servitude" or slavery.

A healthy franchising model should generate value for both franchisors and franchisees.

Michael Sukkar

Small Business Minister Michaelia Cash on Friday said the government wanted to make the sector fair.

“The Franchising Taskforce is carefully considering changes to the regulation of franchising
to make it fair and effective for both franchisors and franchisees, while avoiding unnecessary
regulatory burden,” Ms Cash said.

The paper also floats tighter rules for supplier rebates which are financial incentives provided by suppliers to retailers to use their products.

Rebates have been an ongoing source of pain for franchisees with industry sources estimating franchises such as the Retail Food Group generate tens of millions of dollars a year in rebates from suppliers.

The issues paper noted these rebates "could give rise to a conflict of interest" and asked if the benefits offered by rebates could be achieved in other ways.

The difficulty franchisees face in exiting a franchise is another area of concern for the taskforce which will look at issues of goodwill, restraint of trade clauses and widening the range of trigger events for 'no fault' exits from franchising agreements.

The issues paper also asks for feedback on giving the Australian Competition and Consumer Commission the power to prevent franchise sales.

It will look at expanding the current requirement for a disclosure document to a register of franchises or a franchising website to improve transparency.

Assistant Treasurer Michael Sukkar chaired the parliamentary inquiry. Credit: Dominic Lorrimer

Other potential changes to franchising regulation include changes to cooling-off periods including the extension of cooling off periods to franchisors.

The government has already said it will not consider the parliamentary inquiry's recommendations on unfair contract term protections, ACCC regulation of competition and consumer law, whistleblower protection and franchising in the automotive sector which it said were issues directed to independent agencies or related to other government processes.

Assistant Treasurer Michael Sukkar, who chaired the joint parliamentary inquiry, said the taskforce was consulting with the sector to inform the government's response to the inquiry.

“While the majority of franchise relations are positive and generate mutual benefit for franchisors and franchisees, the parliamentary committee heard evidence of franchising relationships which were neither," he said. "A healthy franchising model should generate value for both franchisors and franchisees."

The government will undertake a four-week period of consultation on the issues paper which will be followed by the release of a regulation impact statement in October and a further six-week period of consultation.

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