'Manifestly failed': Damning report calls for franchise sector overhaul

The parliamentary inquiry into the $170 billion franchising sector has called for a total overhaul of Australia’s franchising system in a damning report released on Thursday.

The bipartisan report calls for new laws, greater enforcement powers and penalties for the regulator and a suite of changes to the franchising code.

Senator John Williams, right: "The work has now been done. It is time for the government to act."Credit: Alex Ellinghausen

It says the current regulatory environment has "manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance".

The report draws parallels between the franchising sector and the behaviour uncovered in the banking royal commission.

"The extent of poor corporate governance in some areas of franchising is comparable to that in the financial services sector," it said. "There are deeply rooted cultural problems that will not be resolved by a franchisor replacing a few senior executives."

Taskforce

The report calls on the government to establish a franchising taskforce to examine and implement its recommendations, made up of representatives from Treasury and the Department of Jobs and Small Business.

Labor is backing the establishment of the taskforce and will act on its recommendations.

Shadow small business minister assisting, Madeline King, said workers were being mistreated and franchisors were not being upfront.

"This taskforce will be integral to ensuring that workers in franchises will not be ripped off in the future," she said.

Small Business Minister Michaelia Cash said the government would carefully analyse the report and consider what improvements needed to be made before proceeding.

"The government is committed to supporting effective and fair reforms to the franchising sector without imposing unnecessary regulation on the sector," she said.

Suite of changes

The report recommends a suite of changes to the franchising code, including the inclusion of civil pecuniary penalties and giving the Australian Competition and Consumer Commission (ACCC) more responsibilities and greater enforcement powers to "root out misconduct and exploitative behaviour" in the franchise sector.

The report wants improvements to disclosure and transparency, including the provision of all financial information when franchises are sold or transferred including Business Activity Statements and greater clarity and accountability around marketing funds.

Senators Deborah O'Neill and Michael Sukkar listen as Tony Alford, former chief executive of Retail Food Group, appears before the inquiry. Credit: Alex Ellinghausen

The report recommends the taskforce examine making unfair contract terms in franchise agreements illegal, investigate options for a public franchise register with franchisors providing updated disclosure documents, and template franchise agreements annually.

It recommends civil penalties if franchisors fail to comply.

The report calls for the ACCC, the Australian Taxation Office and the corporate watchdog, the Australian Securities and Investments Commission, to launch investigations into embattled Retail Food Group, its current and former directors and officers for potential insider trading, tax evasion, quality of audit, directors' duties and continuous disclosure.

A spokesperson for Retail Food Group said the franchisor "supports any changes which will be of benefit to the franchising industry".

Evidence to the inquiry revealed “a substantial amount” of intimidatory behaviour and misconduct by franchisors, leading the inquiry to call for whistleblower protections.

The report said the inquiry took a "holistic approach" to address the systemic problems in the sector and recommended the government "avoid cherry picking, and instead implement all the recommendations in [the] report as soon as possible".

Time to act

Senator John Williams, who was crucial in calling for the inquiry into franchising, said none of the 17 inquiries into the sector over the past 30 years had worked.

"The work has now been done. It is time for the government to act," he said.

Tony Alford, former chief executive of the Retail Food Group, appears before parliament's inquiry into franchising in November. Credit: Alex Ellinghausen

Senator Williams said he was aware the industry had serious problems but was shocked at what the inquiry uncovered.

"It was worse than expected. It was like the royal commission into banking," he said.

Former ACCC head Allan Fels said the franchising code had been "somewhat disappointing" and needed strengthening to be effective.

Franchise Council of Australia chief executive Mary Aldred welcomed the report. Credit: Louie Douvis

"The problems with the code have been longstanding and systemic and, accordingly, strong medicine is required and this report goes a considerable distance in that direction," he said.

The efficacy of the Franchise Council of Australia was questioned in the report, which said the body "does not appear to provide a balanced representation of franchisor and franchisee views". However, FCA chief executive Mary Aldred said the industry body welcomed the inquiry's findings.

"Traditionally we could have done more to incorporate the input of the views of franchisees, I am very alive to that," she said.

The parliamentary inquiry 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.

It was worse than expected. It was like the royal commission into banking.

Senator John Williams

The series exposed crushing business models that pushed franchisees to the wall, leading to a range of issues including financial ruin and marriage breakdowns. To make ends meet, some franchisees engaged in wage fraud.