Published: 16 December 2014
Summary: An ACCC hosted webinar to help franchisors, franchisees and their professional advisers learn more about the new Franchising Code of Conduct, which will take effect from 1 January 2015.
RICHARD WEKSLER: Good afternoon everyone and welcome to today's webinar on the new Franchising Code of Conduct. My name is Richard Weksler. I'm the Director of the ACCC's Small Business and Industry Code section.
Just a couple of housekeeping matters before we get started. First, if you've got any questions, submit them by clicking on the 'Ask the Question' button on your screen and we'll leave some time at the end to answer as many of those as we can. If you have any technical difficulties throughout the webinar, please contact the Redback Support Line which is 1800 733 416, and just a reminder that there will be a feedback survey at the end of the webinar.
I'll now throw to our Deputy Chair, Dr Michael Schaper, who will take you through today's presentation.
MICHAEL SCHAPER: Thank you, Richard, and good afternoon everyone. As Richard said, this is a session to provide you with information about the Franchising Code of Conduct, its new provisions, and how they're likely to affect you. Now this session is geared towards all participants in the franchising sector, whether you're a would-be franchisee looking at entering into a franchise agreement for the first time, an existing franchisee for an established system, or indeed the operator of a franchise system, or a franchisor, as they're known.
Today what we're going to cover is a number of different provisions. First of all, we're going to give you a little bit of background, especially for those of you who are not familiar with it, with the Code and its general purposes. Then we're going to talk about what the new Code is and how the key changes come into effect and how they're likely, indeed, to affect you.
Now one of the areas that always draws a great deal of attention is the issue about disputes between franchisees and franchisors, so we'll talk a little bit about how disputes are resolved under the new Code framework, and then we'll also talk finally about how the ACCC, as a Federal government agency responsible for educating and enforcing the mandatory Code, will look at issues such as breaches of any of the new provisions and indeed how will we use its new powers, its new infringement powers and its capacity to go to Court and seek so-called pecuniary penalties.
So we'll go through that, and as Richard said, at the end of it hopefully we'll have time to take some of your questions. Those that we can't deal with today, we will be more than happy to collate and give generalised answers on our FAQ section online.
So, first, let's take a little bit of a step back and just make sure that we're familiar with what franchising is and the common framework that's been applied to it. A franchise isn't a licensing arrangement, it isn't a distributing arrangement, it's a very popular form of business model where essentially one party, typically someone who has developed a product or a service and an intellectual property that goes with it, licenses another party, known as a franchisee, to sell those goods or services, and it's usually for a fixed period of time. In Australia the Franchising Code of Conduct actually goes to the point of defining what a franchising code is and contains a number of the elements that you can see up there on the screen with you at the moment. So it's a business operating process, it's either in the goods or services area, and it also contains an element of intellectual property as well.
The Franchising Code of Conduct is actually part of a broader piece of law called the Competition and Consumer Act. The CCA, or as it was once known, the Trade Practices Act, has been around in one form or another since 1974 and the Franchising Code of Conduct, in turn, has been part of that since 1998. All operators in the franchising sector are bound into both the broader Competition and Consumer Act, as well as the specific franchising related requirements of the mandatory code.
Today there are almost 1,200 franchise systems operating in the country and almost 80,000 individual franchisee units, so these provisions apply obviously to a very wide range of players in the sector. Now, it's important to bear in mind today's discussion is about the Franchising Code, but you also need to take some time to familiarise yourself with the broader provisions of the Competition and Consumer Act and, indeed, if you go to our online page you can find more about that.
So the new Code, let's just have a look at what - before we go to what's in the new Code, let's just take a step back and also look at what the Code has traditionally provided and, indeed, the same framework that might apply going forward. It's easy to think of the franchising code as essentially having three components.
First of all, what are the obligations of franchisees and franchisors before entering into and when negotiating about a franchise contract? Then what are the requirements the Code spells out about the life of the franchise agreement? As I said before, a franchise arrangement is usually a contract for a given, a set period of time, so the mandatory Code has some stipulations about how you've got to treat each other during the life of the franchise agreement and then finally it also comes down and spells out some provisions about what happens when the franchise agreement comes to an end.
So for example, at the early stage, at the commencement phase, it's about issues such as disclosure, information that is to be given to people, cooling off periods, a requirement, for example, that would-be franchisees seek professional advice. During the life of the franchise agreement, the mandatory Code has stipulations about material changes to circumstances, the use of marketing funds and how to deal with disputes when and as they arise.
And finally, in terms of the end of the franchise agreement, it spells out the conditions upon which a franchise agreement may or may not be renewed and some of the information that you need to seek and provide depending on whether you're a franchisee or a franchisor, either if you're existing, you want to renew it or, indeed, if you want to on-sell or transfer it to another party.
So the new Code basically has four key principle elements and two very important annexures or attachments to it. If you go on our web page, you'll actually see a link to this and you can actually go and read physically a copy of the Code itself, but if you don't want to, here are the key elements that you need to know about.
Part 1 of the new Code covers the general issues by way of an introduction. An important one here is the notion of good faith, which I'm going to come back to in a minute.
Part 2 looks at the disclosure requirements in terms of entry into the franchise agreement, whereas Part 3 looks at the actual contract, or as we're going to call it today and as the Code refers to it, a franchise agreement and that's the contract, the very heart of the arrangement between the franchisor, the owner of the franchise system and all its associates rights and intellectual property, and the franchisee, the person who operates the system.
Part 4 of the mandatory Code provides mechanisms for resolving disputes and gives a number of different options on what they can do. Now, the new Code also has two important annexures. First of all, there are the specific elements of a disclosure document that each and every franchise system needs to provide to a would-be franchisee, and there's also a requirement in so-called Annexure 2 about a generic information statement that spells out some of the generalised observations you need to know about franchising, for example, that it can fail from time to time, it's not necessarily a guarantee of success, that you need to do your due diligence if you're a franchisee and so forth.
Now, the key changes to the franchising Code fall into the following six areas. It's important to bear in mind that whilst today we're talking a lot about changes, bear in mind that many, many elements of the 1998 Code still remain and it's important to bear in mind that while there are substantial alterations, many aspects still are as they were before and the six key elements that fall here, as you can see, are as following.
First of all, good faith, which will be the subject of our next slide. There's a question about marketing and advertising fees and greater transparency and disclosure and, indeed, franchisee involvement about decisions relating to marketing and franchising. What happens if you're at the end of a franchise agreement? Well, today there are some new constraints and some new abilities on both franchisees and franchisors about how they might carry on business if, for example, the business ends, the franchisee isn't able to renew but continues to want to operate essentially a very similar type of business going forward, so that's called restraint of trade.
An important fourth element is the capacity of the competition regulator, that's the ACCC, to now either impose so-called infringement notices for relatively minor breaches of certain elements of the Code, or in the more serious cases, to go to the Federal Court and seek Court imposed penalties, what's often referred to as pecuniary penalties, and they're financial penalties which at its maximum can go up to $51,000 for breaches of certain elements of the Code, not each and every individual item of the Code, but some major parts of it.
In regards to money, not only is there greater transparency about marketing and advertising, but there are now also some new rules about when and how a franchisor can require his or her franchisees to outlay large amounts of money on major new changes, or what's referred to on the slide in front of you as a significant capital expenditure, and then finally also the disclosure document itself and the attachments that go with it have also been revised. So they're the big six in terms of today's changes.
First of all, let's look at this issue about good faith. Now, good faith is an interesting concept and in some respects it's actually easier to define it by what it's not, rather than to give you a one line sentence about what you think it might be. Good faith is a term that's been around for a while and essentially it means the capacity or the situation where if two parties are doing business to each other, how do they treat each other? Are they honest with each other, if they're in a contractual relationship do they seek to help each other fulfil the elements that each of them are required to do, do they act arbitrarily or do they work together to try and ensure that the contract can make a success? These are the sorts of elements of so-called good faith.
Now good faith isn't defined, as I said before, with a one word definition or a one sentence definition, rather, but rather part of the common law. That's not written statutory law that you might find spelt out neatly in a sentence or a paragraph in a particular Act of Parliament, but it's rather the decisions that are made and the observations that are made by Courts over time. That's common law, the so-called unwritten law.
Key elements, though, for the purposes of the Franchising Code are issues such as is a party acting honestly towards each other, are they acting cooperatively, are they helping each other to fulfil their mutual obligations under the requirements of the contract? So they are some of the key elements.
Now, it's important to bear in mind that many people would think of that in regards to franchisor, i.e. has a franchisor done what he or she is responsible to do? But think about this, it also applies to franchisees and, indeed, it actually also applies to would-be franchisees as well, and it also extends to not just the ins and outs of the day to day relationship once you've signed up for a franchise agreement, a franchise contract, but can also apply to situations where at the start you're negotiating a new franchise contract or where there's a dispute or even in some respects after the franchise agreement ends. So it also applies to franchisees and even would-be franchisees. So for example, if a franchisee and a franchisor are in a dispute about something there may be situations where, for example, one party says, "Well, the franchisor is being very unfair, being very arbitrary, hasn't actually done everything that they're required to do in the spirit in which they're required to do it under the franchise contract," that potentially might be something that might be looked at as lacking in good faith.
Similarly, you might also find arrangements where franchisees become annoyed with the franchisors and start to talk down the system, start to make large public criticisms of it and do so with the intention of actually driving down the image, the reputation and, indeed, possibly the value of the franchise system, arguably they're things that could also be looked at under this broad, catchall of good faith as well.
Now, being honest, being cooperative and refraining from being arbitrary doesn't mean that you have to surrender your own legitimate commercial interests. For example, if a franchisor decides for perfectly sound commercial reasons that they don't want a franchisee to renew the franchise agreement or doesn't want to give them the option to do so, then that's not necessarily a breach of good faith. So both sides are still entitled to look after their own interests, that's not in and of itself a breach of good faith.
Now here's a couple of tips about avoiding issues falling into so-called bad faith, and the good faith provision, bear in mind, is one of the key areas where the new penalty regimes apply, so it is really important to take this into account. First off, honesty is a really important one, and in many respects there is a common sense approach to many aspects about good faith. Am I being honest with someone, am I being upfront, am I helping them as much as I expect them to help me? These are the sorts of things that each member of the franchise arrangement, whether you're a franchisee or a franchisor, should be thinking about in your interactions. Am I being honest with them, if a decision needs to be made am I doing it promptly, quickly so that the other side can also fulfil their side of the obligation or they're not left hanging, waiting for an answer.
Sometimes it's worthwhile putting yourself in the shoes of the other side of the contract. Would I want to be treated in the same way that I'm treating them at the moment? Am I talking to them, am I letting them know if I propose to make a change to the franchise system, what it is, why I'm doing it, am I consulting with them, and if there are disputes am I trying to deal with them proactively? If there are discontents, if there is rumblings, if there's someone who is unhappy about something, ultimately I may not be able to make them happy about it, but along the way am I actually stepping out to try and see what those problems are and, if I can, to try and help deal with them as they emerge. So that's one of our big six changes.
The second one that I mentioned is this issue about transparency, about marketing and advertising fees. In many franchise systems, franchisees are required to pay money into a centralised marketing and advertising fund which is meant to be used for the purposes of promoting the brand, the chain and so forth. Now, under the new Code, franchisor - in some cases franchise systems consist of a mix of franchisor owned stores and franchisee operated stores. Going forward, both types of stores will be required to contribute equally to the fund which is to say that if a franchisor has 50 franchisees and 10 store owned firms, those 10 store owned firms are going to have to give, proportionately, their contribution into the marketing fund pretty much on the same basis as each of the individual franchisees.
The marketing fund also needs to be kept in a separate bank account, so some franchisors who in the past have kept those moneys as part of a bigger pool are going to have to take some steps by 1 January to ensure that the money is being kept in a separate bank account and it needs to be audited each year. Now previously audits could take place once every three years, but going forward they're going to have to take place every year and whilst that's a requirement, if more than three-quarters or more than three-quarters of all the voting franchisees and franchisor stores agree to do so, then you can waive that, but then again you have to come back for the next year and put that to a vote each and every year.
So generally speaking there's going to be a requirement to get an audit done of it. On the other hand, if three-quarters of all of the stores that are contributing to the fund choose not to, then you can waive that right for that particular year. There's an interesting one there because franchisor stores also get the opportunity to vote in there, but regardless you still need three-quarters of all of the stores that are eligible to vote in it.
Another issue that's important in terms of money is the issue, as I said before, about large outlays that can emerge from time to time. Every now and then franchisors will make a decision, usually from a very sound commercial basis about either issues such as a refurbishment, new equipment, new production processes, new ways of doing things or new equipment. It may even be an upgrade to some of the fitting and layout of a store, for example, if you're in a physical location.
All of those, generally speaking, fall into this phrase of significant capital expenditure and many franchisees in the past have expressed some concern about whether or not that's fair to be asked to contribute to that. So the new Code says, basically, a franchisor can't ask the franchisee to contribute to that significant capital expenditure unless one of the following five conditions applies. So the general rule is, they can't ask a franchisee to contribute to it, but there are five major provisions in which it can actually still take effect.
The first one is if it's disclosed to the franchisee upfront. So, for example, if your disclosure document signed when you entered into the franchise agreement actually said very clearly that the franchisor did have and may have and in fact probably will ask for significant capital expenditure during the life of your franchise agreement, then that's acceptable. Secondly a franchisor may approach an individual franchisee and ask for their permission, their consent to do it, and if the franchisee gives that then, again, that's an acceptable way of saying we need you to outlay this money, this major capital expenditure.
A third way, especially if there's a majority of all the franchisees are affected by the franchisor's decision, might be to get the approval of a majority of those franchisees. So if a majority of them give their consent, then they're all bound by it.
Fourthly, of course, the law may change, either occupational health and safety issues, there may be some other requirement that at the time originally wasn't foreseen and so the law may actually require the franchise to insist on those upgrades, those major expenditures. In that case, clearly everyone has to comply with the law, and so that's your fourth exemption from that general prohibition.
And finally, there may also be times where a franchisor thinks that there is a major reason for doing it and it's got a good rationale for doing it and provides the franchisees with a written statement saying this is why I need you to do it. Now, if you look in some of the material that's been circulating around it gives cases of this, examples of this. For example, someone who decides that a sports store needs a major new upgrade, needs a new rebranding, needs a refreshing of its layout and so the owner there, the franchisor, then has a number of options about what they do.
So, for example, if they provide all the franchisees with a written statement about why they're doing it, what it's going to cost, what the risks and benefits, then that would be acceptable. That's one case in point. Other ones are also contained in some of the other explanatory materials and some of the guidance materials that the Commission is also putting out at the moment.
Restraint of trade is an interesting issue, and this is the fourth issue that the major change of the new Code brings into play. A restraint of trade is a phrase many of you may be familiar with and it's basically a restriction on the ability of someone after they've finished their time as a franchisee to continue operating in the same industry. Now, traditionally, this has always been an area of concern.
On the one hand, franchisors might, at the end of a franchise agreement, say to an individual franchisee, "Well, thank you very much. Your services are no longer required, we don't want to renew or give you an option on this individual franchise agreement," and the franchisor's concern might be there, "We want to impose a restraint of trade because we don't want you setting up a competing business with us." On the other hand, franchisees have quite a different view of it and can sometimes see this as being a situation where “I've invested a lot of goodwill, my reputation, my profile has gone a long way to helping to raise the profile of this business and the sales of these products here so if I want to continue working in this industry, why shouldn't I?” Now, the new provisions do provide a narrow frame in which franchisees who aren't continuing on after the end of a franchise agreement can continue to trade. So a restraint of trade clause will be limited if four conditions are met, for example, if the franchisee, first all, approaches a franchisor and says, "I would like to extend my agreement," but the franchisor declines to do it. Alongside that though, the franchisee has to have a clean track record, for example, not be in breach of the franchise agreement and they must not have infringed the franchisor's intellectual property, their confidentiality agreements and so forth. And finally, a key issue to ask yourself is whether or not the franchisee has already received some compensation, some genuine compensation for the fact that they're not allowed to continue on.
If each of those four terms is met, for example, if the franchisee asks to have the franchise agreement extended but is denied, the franchisee secondly has not breached their agreement, thirdly the franchisee hasn't infringed IP or confidentiality issues and fourthly hasn't received genuine compensation, then they have an ability to continue trading on in essentially the same business. That's obviously not to say the same brand name, that's not at all the condition there, but they can continue operating in the same industry.
Now, the disclosure document. Disclosure was one of the other issues we mentioned as part of the big six. The 1998 Code, the original Franchising Code had as one of its lynchpins the idea that franchisors had to provide a set body of information to franchisees as and when they signed up and this was referred to, and still is, as the disclosure document and it really lies at the heart of the sort of information that franchisees need to know when they're doing their due diligence, before they enter into an agreement and that's why the Franchising Code has always said that you need to receive this at least two weeks before you sign up and you get a cooling off period as well.
And the disclosure document covers a wide variety of areas. The key ones for most would-be franchisees, what's the territory that I'm going to get, what are the fees that I'm going to pay, who is the franchisor, what's their financial interests in any of the products or services that I'm required to sell, has the franchisor been involved in any Court actions regarding this or other franchise systems, what happens at the end of the franchise agreement, what are the marketing fund arrangements? These, and many other areas, are all covered under the so-called disclosure document, and as you can see from the slide there at the moment, the new Franchising Code breaks this down into 23 key item areas and, really, it's an essential part of the due diligence you need to do when you're entering into it and it's one of those areas that franchisors need to make sure is maintained and kept up-to-date because it really is the document that franchisees rely on when they're either entering a franchise agreement for the first time or they're seeking to either extend or renew the franchise agreement when the original term comes to an end.
So it's an essential part of the Code, but it has undergone some changes. First of all the old Code used to actually have two disclosure documents. It used to have a so-called short form and a standard form disclosure document. That's gone now. There is one disclosure document. As I said before, it's got 23 items in there, but it contains some new items that weren't previously in the 1998 Code. For example, the franchisor now has to disclose the arrangements that apply for online sales and they also touch on the issue of franchisor's associates.
Now, this is an interesting area. Who are the other parties that may not necessarily be directly the franchisor themselves, but who are substantially involved in marketing, selling the franchise system, operating the franchise system, dealing with its intellectual property, so the associates, those other parties that are also involved with the franchise system now also have to be disclosed as well. In order to reduce the regulatory burden on firms, as I mentioned before, the short form disclosure document has been gotten rid of and there's also, in terms of reducing the amount of paperwork, master franchisors are no longer required to give disclosure documents to sub-franchisees. So it really is intended here for the arrangement where the franchisee is receiving the information directly from the franchisor that they're dealing with and we want to remove those other extraneous layers.
There are some exemptions, also, about how frequently it has to be updated and on the next few slides I'm going to run through the timeframe about when and how the disclosure document needs to be updated. The disclosure document is the key one. Interestingly enough, I referred to Annexure 1 which is the disclosure document in the new Code. I also mentioned Annexure 2. Annexure 2 is a generic information statement. We're not going to spend a lot of time talking about that today, but there is a generalised statement, as I mentioned before, about the risks and benefits of franchising which has to be provided.
Now, the disclosure document. Disclosure document is a major piece of information gathering and compilation for franchisors and it's a fair bit of work, so we have to be mindful not only about making sure the franchisees are given all the information they need, but also that franchisors aren't burdened unnecessarily. So in order to strike that balance, there's a few new provisions here that you need to be aware of. So I'll come back to that one in a minute. Sorry, I'm going to come back to that in a sec.
The final element here is also about penalties and infringement notices. Up to $51,000 in Court imposed fines can be found by Courts, the Federal Court, if the ACCC takes a matter to Court for a serious breach of the Franchising Code. These are called civil pecuniary penalties and they're intended for more serious breaches of the Code and amounts of up to - penalties of $1,700 for infringement notices, or $8,500 for bodies corporate for very quick responses of relatively minor arrangements, minor breaches of the Code.
There are 24 elements within the Franchising Code as it stands from 1 January that will attract these penalty provisions and you can see some of them here. Key of them are the ability of - has a party acted in good faith, have they provided a complete and fulsome disclosure document, have they complied with all the reporting obligations about marketing funds, in regards to termination have they given all the information that's required and also in terms of mediation, are they actively participating in the medication process? Each of these can attract either, as I said before, the Court imposed penalties or the infringement notices.
Let's have a look at resolving disputes. Resolving disputes are an important issue here. Essentially franchisors can make one of two choices. They can either follow the generalised dispute resolution mechanism set out in the Code itself, or they can create their own system so long as it broadly complies with the Code. If they create their own system it's got to be set out in the franchise agreement itself, and bear in mind, that general observation about good faith applies directly here, those issues about are you working cooperatively, are you participating, are you genuinely trying to solve the problem?
Now in the past some franchise agreements have had interesting stipulations such as the fact, for example, that it wasn't necessary if there was a dispute that it be dealt with in the franchisee's State or territory where they were actually operating in. It could have been done, for example, where the corporate headquarters of the franchisor was located, even if that was on the other side of the country. There was also in some arrangements situations where franchisees would be required to meet the franchisor's dispute costs. Now those, by and large, can no longer apply under the new Code.
Essentially, when you're trying to resolve a dispute, there are three key steps that apply. First of all, the party that feels they've got some sort of grievance needs to let the other side know that there is a dispute, so you need to inform them, and you need to do so in writing. You need to try and solve it within three weeks and then if you can't then you need to refer it to mediation. Mediation is the process outside of the Court system of having an impartial third party sit down with both of the two conflicting sides, hear their sides of the story and try and see whether or not there is some relatively simple, inexpensive, mutually acceptable way in which the problem at hand can be dealt with so you can get on back to the business of the day-to-day franchising arrangement, making sure that it works for both of you.
So in order for that to work, of course, parties need to participate, they need to attend, and mediation can be provided from a number of sources. It can be provided through the franchisor itself in terms of a mediator provided through that mechanism, it can be provided through the Office of the Franchising Mediation Advisor and it can be provided from a number of other services such as the Small Business Commissioners that exist in some States and territories.
Now, I mentioned before that, first of all, the Franchising Code has been in place since 1998, but there have been a number of small changes to the Code over the years up until now, although this is clearly very much the biggest set of changes. In some cases, some franchising agreements in the past have had, for example, provisions that say a franchisee must meet a franchisor's dispute settlement costs, or that if there is a dispute that it must be settled in the home State of the franchisor, not the franchisee. Now, those elements going forward will not apply in any new franchise agreement that takes effect from 1 January, or from any existing franchise agreement already in place that's altered, varied, extended, renewed, amended at any point on or after 1 January.
In the meantime, though, it is important to note that if you have a franchise agreement that was entered into between the dates shown on this screen here, then some of those clauses won't apply. These so-called carve outs or exemptions mean that in a practical sense some franchisees may find, for the time being, that they are still caught by those provisions about interstate dispute settlement, costs of the franchisors, a dispute resolution and, indeed, one or two other elements as well.
Once the franchise agreement is altered in any way, then the new provisions take into effect, but until they do, then you may find that your existing contract, your existing franchise arrangement has those carved out and that's basically dealing with a constitutional issue there about the Commonwealth's ability to extend back over to contracts that have already been struck.
So, that's a quick snapshot about some of the key elements. What do you need to do now? Where do you need to go to from here? We've got three groups of people participating in this webinar today. People thinking about entering into a franchise agreement, franchisees who are already signed up and trading and franchisors who are operating the systems. What do each of you have to do? Well, we've got detailed guidance in our new franchisee and franchisor manuals, which I'll come to in a minute and which we're launching here today, but here is a quick snapshot about what you need to do.
First of all, if you're a prospective franchisee, if this is the first time that you're entering into a franchise agreement, then you may not necessarily notice much because you may not have participated in these before, but you will still have some issues you need to deal with. You will still be required when you get the documentation to observe the requirements that are in there. One of the requirements in the Code is that perspective franchisees, for example, get independent advice from a reputable third source, such as an accountant, a lawyer, a business advisor before they sign onto the franchise agreement. You will still need to do that.
You need to remember also that good faith covers pre-contractual negotiations as well, so you need to bear in mind that those good faith provisions can apply to you as well, and of course you need to be mindful about that issue about significant capital expenditure that I referred to previously.
If you're an existing franchisee, well, your existing franchise agreement continues on. It's not like they're all being ripped and thrown in the shredder and you're going to necessarily get a new franchise agreement tomorrow. So your existing franchise agreement, by and large, continues on, but bear in mind that you're going to be required now to act in good faith, so if you're having a dispute or there is an issue there where you're just as much required as a franchisor to do something, then you are bound to do that, to do it honestly, to do it cooperatively and as I used the phrase before, not to act arbitrarily.
On the other hand, check the marketing fund statements that you're going to be getting. You should expect that going forward they're going to provide more information, it's going to be more meaningful and perhaps more detailed as well. You shouldn't be required to undertake significant capital expenditure, although as I pointed out before, there are five exclusions there and bear in mind that I just talked about some of the carve outs that won't apply to you unless and until your franchise agreement is varied in some way, shape or form.
It's to franchisors where most of the new changes come into effect. Franchisors, like the other two parties, of course, have got to act in good faith, but of course they've also got to give an information statement to prospective franchisees, they've now got to ensure that marketing funds are put into a separate bank account, as I mentioned before, and they've got to contribute on an equal basis now for all the corporate stores, for all the franchisor’s stores, not just the franchisee stores contributing to that self-same marketing account.
Another important requirement is that franchisors now have a greater requirement to keep either electronically or in writing the paperwork that supports their decisions. The ACCC's powers to audit and collect information for compliance with the Code has been extended and although we haven't talked about that a great deal so far today, bear that in mind. So not only are the key documents required to be kept, but any of the paperwork that in turn supports that, so for example your disclosure document clearly needs to be kept, the written confirmation from franchisees or prospective franchisees about taking independent legal advice needs to be kept, the marketing fund information that you provide your franchisees, all this and much more needs to be kept as well.
And of course there are some restrictions and some prohibitions on what franchisors can do. We've talked now in some detail about significant capital expenditure. We pointed out there are some exemptions, and how if you don't fall into those exemptions then you can't require franchisees to undertake some of those major requirements. And of course going forward, you can't write new franchise agreements that require franchisees to pay your costs to settle a dispute, nor to travel interstate to settle a dispute.
If you've got a disclosure document, and I mentioned how important those were before, you're meant to comply with them from 1 January going forward, however in order to reduce the paperwork and the regulatory burden, the government has made a policy decision very clearly that under the Code, you don't necessarily have to immediately update your existing disclosure document. In fact, you can use the existing disclosure document up until the end of October next year and then going forward you'll simply be required to update it within four months of the end of each financial year.
So, in effect, that means that up until the end of October you can use your existing disclosure document until then, however bear in mind that you will be required from 1 January to disclose materially relevant facts, to act in good faith and that the Competition and Consumer Act has always had a general prohibition against misleading and deceptive conduct. So whilst you can use the same disclosure document, if anything changes that is material or anything that is significant to the chain, to the finances, to the information that the franchisee or would-be franchisee needs to know, then you do need to update that.
Now, as I mentioned, you have the opportunity to keep it until the end of October and for subsequent financial years, update it within four months. Now that actually has an interesting effect because it depends on the financial year, it's not the Australian tax system financial year that we're referring to here, but rather your own system's financial year. Most businesses, of course, have a financial year that goes from 1 July to 30 June, so in that case you'll be required, as Example A shows here, to first of all, to upgrade your disclosure documents by 31 October, but for the next financial year, which will run from 1 July 2015 to 30 June 2016, you won't need to upgrade that one until the end of October 2016, that is, four months after the end of your next financial year.
And of course, if you operate on a calendar year, then what you'll find is that you need to update yours by the end of April 2016, and if you use other systems like, for example, Example C which actually uses a very different accounting year, but one which is actually found in some parts of South East Asia and in some jurisdictions overseas you may find that, again, that you don't need to renew yours until July 2016. So it's four months after the end of your relevant, your company's, your franchise system's financial year, not necessarily the standard Australian one. Most businesses, of course, will follow the standard, but not all of them.
I mentioned before the issue about penalties and infringement notices. This is an important issue. The ACCC is the principal agency for enforcing the Act and the Code. We get about 160,000 contacts, queries and complaints each year, not all in the franchising space, many of them fall into many other areas, but even in franchising alone we get several hundred a year, and out of all of those, we sift through them and as you can see here from this slide, we end up taking a relatively small number of matters to Court, we get some undertakings and we also issue about 30 infringement notices a year because other parts of the Competition and Consumer Act already allow us to issue infringement notices, for example, under the Australian Consumer Law breaches, some of the Consumer Law provisions allow us to issue infringement notices.
So how are we going to deal with this new system? For the very first time, franchising and the Franchising Code attracts penalties and how is the ACCC going to come to that? Well, the very first thing we're going to look at when we deal with them, like I said 160,000 contacts, queries, complaints right across the Australian continent, right across all industries, how do we sift those? Well, first of all, we ask ourselves questions like how important is this? Is it something that's affecting, in the case of franchising, a large number of franchisees or is it very limited? Is it major, or is it minor, is it something that's likely to spread right across the sector if it's not stamped out, or is it an isolated incident? Are we dealing with a business that's repeatedly broken the law or flouted the law in the past or is this an innocent mistake? All of these and a number of other factors are the sort of factors that we start taking into account.
And when we do look at the issue though, we go through a number of steps. The ACCC doesn't issue infringement notices or decide to take matters to Court in an arbitrary manner, we go through a very considered process. We take all of those contacts, queries, we sort through them, and as you can see from the flow chart here every week our senior staff sit down and look at what comes in and we make an initial decision is something here, does it have on the surface of it look like it's something that might be a serious breach of the Act or something that we need to deal with?
If we think it warrants further attention, we then undertake an initial investigation where we collect information, we talk to franchisees and franchisors because we need to know both sides of the story, and then once we've done that if we think that there is still potentially some substance to the accusation, then we'll usually go and start looking at what we call an in depth investigation. Now the ACCC has seven Commissioners appointed by government sitting at the top of it and the seven Commissioners or a subset of them meet each week in the so-called Enforcement Committee and they will review those in depth investigations and make a decision about whether they think something warrants further dealing with, whether it should be discontinued, whether it should be looked at for an infringement notice or whether it should be dealt with in terms of possibly being taken to Court.
And if we do get to the point of deciding that something should be either given an infringement notice or become Court-based litigation then ultimately all seven Commissioners at one of their weekly meetings will get the opportunity to collectively vote and make a decision on whether or not the investigation gets to that end point.
Court imposed penalties, up to $51,000. This is an amount - the actual amount is to be set by the Court. Twenty-four items in the new Franchising Code where these apply. It’s important to bear in mind here two things. First of all the ACCC doesn't give private advice to people so we can't make a ruling about your particular situation, and the second one is that ultimately this is an amount not imposed by the ACCC, but rather by the Federal Court. So we have to mount a Court case, we have to be convinced that it's likely, or it's got a reasonable grounds of success and that we've got sufficient evidence and information and also that it's justified in terms of the seriousness of the matter. The ACCC doesn't take things to Court on the drop of a hat, we think about it very seriously before we get to that final point.
On the other hand, infringement notices are specifically designed for matters where there should be some financial penalty because it appears that the Code, in this case, has been broken, but they're not so serious that they should attract those really heavy penalties that a Court can impose. So an infringement notice can be $8,500 for a corporation or $1,700 for a sole trader or an individual or a partnership. In some respects an infringement notice is a bit like paying a speeding fine. If the matter - if the ACCC issues an infringement notice and the other - the party we issue it to pays the infringement notice then that's the end of the matter in terms of where we go to with that. The ACCC, indeed, can't take it to Court beyond that matter, and interestingly, it's not also taken as an admission of liability, it rather ends the matter at that point there.
When do we take one as opposed to the other? If we think a matter is small scale, a one-off, it warrants some sort of dealing with, then we're likely to give an infringement notice. On the other hand, if it's serious, repeated, has a major effect on a large number of franchisees or a franchise system or, indeed, the whole franchising sector, then we're much more likely to take it to Court. In the last year alone, for example, under the Consumer Law provision, we've issued 23 infringement notices, so that gives you a sense of just how many we issue in one sector going forward. And as I mentioned before, bear in mind, as a franchisor, that we also require franchisors to keep information. We have the power to collect information, to collect and so-called audit.
This is not a financial audit, it's an information and compliance audit. Are you complying with all the provisions of the Code in terms of the documents that you've got to keep? Interestingly enough, in the last three years and in the time that we've done that, more than 60 franchise systems, and most of them have been compliant. Those that haven't been compliant have usually been quite relatively small scale issues. It's quite uncommon for us to find serious breaches to date, which I think is a very good reflection on the sector and the work of franchisors to date.
Some people have asked us whether or not, given that we've got audits, we’ve now got infringement notices, we've now got the ability to go to Court, will there be an easing-in period; will there be a time, for example, for the first six months where we might have a moratorium on Court action and the answer to that is very simply no. We think it's important that once the law takes effect that people comply with it, and if they fail to comply with it, that they face sanctions for it. We do focus, and we will be focussing our attention on what we think are the key elements of the new provisions of the Code, the new focus on non-disclosure, the new focus on termination provisions, good faith and mediation, so it's important to bear in mind that as such there will be no moratorium.
Now, Richard, we're coming up close to the end of our time so I think it's probably at this point just a good chance, first of all, just to conclude with two comments I might make at this point. First of all, remember, bear in mind, that we have a franchising information network. Any and all of you are welcome to sign up to that. It's simply a means for us to keep you up-to-date about new information we've got coming, new decisions we make, Court actions that we undertake and, of course, we've also got not only our website, but also if you're thinking about entering a franchise system, we've updated all our pre-entry information.
And we've also updated our new guidance for franchisees and franchisors. This is shorter, more easier to read, much more user friendly than our old publications, I think. The franchisee manual gets right down to what do you need to know, what do you need to ask, what information have you got to collect and what have you got to do before you sign up to a franchise agreement, and the franchisor compliance manual is a much more plain language document that now gives you a lot more guidance about what you need to do, the nuts and bolts if you're operating a franchise system.
It also gives you some of the documentation that can help you make the transition to the new Code, for example, a deed that will allow you to seamlessly move your disclosure documents over from the provisions of the old Code to the new one, and they're all available and downloadable at our website under the subset accc.gov.au/franchisingcode. So with that, Richard, I'll throw back to you.
RICHARD WEKSLER: Thanks, Michael. There's a lot of questions here, so let's just try to speed through as many as we can. The first question here is from Tim and you mentioned that the obligation of good faith works both ways, so it applies to both franchisors and franchisees, will the ACCC actually take action against a franchisee if they breach the duty of good faith?
MICHAEL SCHAPER: I think it's likely that we will take action against a franchisee that engages in a serious breach of good faith. I mentioned before in the session, the example, the hypothetical example, of a franchisee in a dispute with a franchisor who might actually actively wage a campaign not only in social media but elsewhere to deliberately drive down the value of a franchise chain, or similar sort of actions. That might well be the sort of behaviour. If it's on the books and it very clearly is on the books that good faith provisions apply to franchisees and potential franchisees as well as franchisors, then you can expect the Commission to make sure that all three parties will be looked at.
RICHARD WEKSLER: The next question is from Joe. Joe asks if a franchisor doesn't provide a disclosure document to say 10 franchisees, so you've got 10 breaches of the Code; could the ACCC issue 10 infringement notices?
MICHAEL SCHAPER: Could we issue 10 infringements notices if there are 10 breaches of the Code? Hypothetically, yes. In practice, with the consumer law which is probably a good parallel here, what you tend to find is that where something starts to become really serious that we prefer to take it to Court. Infringement notices are not meant to be a substitute for Court action, they're meant to be for relatively minor breaches, so we could, but I think that what you would tend to find if it's affecting a whole franchise chain, then in that case we may well take it to Court where the penalties are much more serious.
RICHARD WEKSLER: Okay. The next question is from Amanda. The Code says that marketing or advertising fees can be used to meet legitimate marketing or advertising expenses, what does that mean?
MICHAEL SCHAPER: Okay, now what are legitimate advertising and marketing expenses? Well, sometimes of course that's up for a bit of a contention and of course that's why the new Code also makes provisions for much more consultation between franchisees and franchisors, but let's use some common sense applications here. There are very clearly situations that fall into the domain of being marketing and advertising related. Print, social media, signage, rebranding they may well fall into those areas. On the other hand, a franchisor who finds that they really need a new Lamborghini and they're just going to put a little decal on the side of it with a logo on it, that probably wouldn't fall into the domain so there's an element of common sense here. Some of these provisions aren't strictly defined and that's as it should be because different systems are going to have different marketing needs and it's designed to give that flexibility, not be overly prescriptive.
RICHARD WEKSLER: I've got a question here from Anne. If I've complained to the ACCC and they've decided not to take my matter on; what can I do?
MICHAEL SCHAPER: As I mentioned before, the ACCC does have priority lists in terms of these are the issues - not lists, but rather factors, these are the issues that we look at in terms of franchising breaches and whether we're going to deal with them or not, and of course there are times when we do go back to franchisees and say that we're not going to take this any further, we'll go back to you usually in writing as well, I think you should also bear that in mind, but when that is the case you do have the right of so-called private action which means that you, either by yourself, or if you want to with other franchisees can initiate your own Court-based action as well, and that has already been the case under the existing, the old 1998 Code, and will continue to be with the 2015 Code.
RICHARD WEKSLER: A question here from Tom. I'm thinking of buying a franchise, should I wait until after 1 January 2015?
MICHAEL SCHAPER: The session today has obviously outlined a number of changes that are going to take effect from 1 January. If you, at this point now, where we're some three weeks before it starts, for those of you who are considering entering into a franchise and signing it now, really do face an interesting choice there about it and I think you need to weigh up for yourself whether or not the protections under the new Code are worth waiting for or whether you want to go ahead with it right now. Bear in mind that if you sign now before 1 January, as I've mentioned in the discussion about carve outs and some of the other elements there, and the fact that agreements that are entered into up until the very last day, December 2014, will work on the old system until the time that they're varied and are altered. You do, of course - many of the generalised provisions - sorry, the carve outs won't apply until such time as they're varied. The other provisions will apply, but you will work in that area where effectively you may be dealing with, essentially, elements of two Codes, the old one and the new one.
RICHARD WEKSLER: A question from Stuart. Does the disclosure document have to contain earnings information?
MICHAEL SCHAPER: The disclosure document has a requirement about a number of pieces of information in there. Many franchise systems put earnings information in there, and there is also - bear in mind that it has been one of the areas of the years the ACCC has taken some action on because we have had a number of cases where information - earnings information either hasn't been complete or hasn't been accurate as well. Bear in mind also that if you're a prospective franchisee, not only is it about what's formally required in the disclosure document, but what you also ask your franchisor to put in because in some senses the disclosure document is a template. If you want more information and your franchisor is prepared to give it to you over and above that, then you're both at liberty to do that.
RICHARD WEKSLER: A question here from an anonymous viewer. Can a franchisor contract out of the new Code or any parts of the new Code?
MICHAEL SCHAPER: The short answer to that one, can you contract out of the Code, no. It's a very simple answer. It's a mandatory industry code. Interestingly enough, from time to time there are also systems that say we're not a franchise system, we're a licensing system, we're a distribution system, well the Franchising Code, both in the old version and the new version actually has a fairly clear definition of what franchising is and it doesn't matter what you call yourself, if you operate like a franchise under the terms of the Code then you are a franchise and you are obliged to comply with it. So, no, you can't contract out of it.
RICHARD WEKSLER: A question here from Jim. Can a franchisor update its disclosure document before 31 October 2015?
MICHAEL SCHAPER: Absolutely. You can update your disclosure document any time you want to do so. The information that we put in today's session where we talked about the dates and the grace period, effectively, where you can up until the end of October 2015 continue on with your existing disclosure document, is for those franchise systems who don't want to, or think that it might be quite a heavy regulatory or paperwork burden to do that straight away. Of course, if you want to update yours now or you're indeed effective from 1 January, then I think for many people they will be looking at that going, "Well, that's quite a common sense answer," or it's just cleaner and neater. Bear in mind also, just aside out of that question which throws up a really good point, Richard, and that is that for some people you may sign up to a franchise agreement on or after 1 January, but because of that grace period, your franchisor may actually be using the old disclosure document, rather than the new one. So just bear that in mind as well. Interestingly enough, if the franchisor is using the old document under that grace period, that doesn't mean that they are excluded from disclosing any materially relevant facts, any information that really is crucial to you, such as financial information. If something new comes up, they have to provide that information to you if it's the sort of information that would affect whether or not you're going to sign up to the system.
RICHARD WEKSLER: Next question, also from anonymous. I'm a franchisee in Australia, but my franchisor is based overseas. Do they still need to comply with the new Code?
MICHEAL SCHAPER: Good question. Does the Code apply only to Australian franchise systems? If you're doing business in Australia, as a franchise, then the Franchising Code applies to you, so obviously that includes home grown systems, but it also includes a large number of chains operating from outside of Australia as well.
RICHARD WEKSLER: A question here from Trudy. Will we need to send a new disclosure document to incoming franchisees after 1 January?
MICHAEL SCHAPER: If you've got - for incoming franchisees, I take it that means new franchisees?
RICHARD WEKSLER: I guess so.
MICHAEL SCHAPER: Yes, as I mentioned before, you've got that grace period where you can use the existing one, but you do need to make sure that if you're using that one up until the end of October that any financial or major information that changes that you do bring that up to them, you do make that aware to them as well.
RICHARD WEKSLER: A question from Carolyn. How many days does a franchisor have to provide an existing franchisee with a current disclosure document if requested?
MICHAEL SCHAPER: Would you repeat that one question for me one more time just to make sure I've got that right.
RICHARD WEKSLER: Yes. Sorry, if you've got an existing franchisee who says can I get a copy of the disclosure document; how many days do you have to provide that?
MICHEAL SCHAPER: The existing franchisees will sometimes ask for a disclosure document. A classic case will be where they're coming up to and they're making a decision about whether they want to renew or extend a franchise agreement, it's coming up to the end of their existing term, now they do have the right to ask the franchisee for a document, but in order to reduce the regulatory workload on that franchisors do have a longer time to deal with that, and Richard I'm going to have to confess that the figure has slipped out of my head right now, so I'm going - I think we'll post that one up on the FAQs.
RICHARD WEKSLER: Yes, we cover that in our guidance anyway.
MICHAEL SCHAPER: We do.
RICHARD WEKSLER: We'll bring today's session to a close now. Thanks everyone for attending and I hope you got something out of it. Unfortunately we didn't get through all the questions, but we will be going through the questions later to see if there's any common questions or issues that we can address in FAQs on our website and just a reminder that there's a feedback survey so, yes, we'd really appreciate if you filled out that survey. Thanks very much.
MICHEAL SCHAPER: Thank you everyone.