ACCC Deputy Chair Dr Michael Schaper provides an update on recent and upcoming franchising activities. Dr Schaper discusses trends in complaints and enquiries, use of the industry audit power and the online pre-entry franchise program.
Check against delivery
It has been a big year for the franchising sector in Australia. As always, the ACCC welcomes the opportunity to update you on our thoughts and activities.
It is important that we communicate what we are doing. The ACCC plays a fundamental role in our market economy. The profit motive very often works for the good of society, but it only does so if it works within boundaries which are largely set by the ACCC within the framework of the law. It is important to explain where those boundaries are, to act as a form of deterrence but also so that people can have faith that our market economy works for them.
The ACCC has several roles. We regulate infrastructure services and we monitor markets where there is limited competition. We enforce and encourage compliance with competition laws. The ACCC is also the national body responsible for consumer protection and product safety.
We also have a role in enforcing and encouraging compliance with mandatory industry codes which are prescribed under the Competition and Consumer Act 2010. Today, of course, the Franchising Code of Conduct will be my main focus. I will give you an update on our activities over the past year; then I’ll talk about some of our planned activities for the year ahead; and then finally I’ll just briefly touch on the review of the Franchising Code.
The past year
Complaints and enquiries
Last financial year, the ACCC received 740 complaints and 114 enquiries about or from people involved in franchising.
The issues raised were consistent with previous periods. The most common topic related to disclosure under the Franchising Code. Franchisees frequently allege that they didn’t receive a disclosure document, or that the disclosure document they received wasn’t up-to-date or didn’t include important information.
We also recorded more than 100 complaints alleging misleading conduct and false representations, and this continues to primarily relate to claims made by franchisors about potential earnings.
Franchisors must have a reasonable basis for any income projections they give to potential franchisees. There can be severe financial penalties for franchisors found to be misrepresenting potential franchise earnings. We urge franchisors to think twice before making a claim to a prospective franchisee or master franchisee that they can’t justify.
The next most common allegation by franchisees is unconscionable conduct, followed by unfair termination.
You can find these statistics and other relevant information in our half-yearly report on small business, franchising and industry codes – Small Business in Focus.
Compliance & Enforcement
The ACCC has actively enforced the Franchising Code of Conduct since its introduction in 1998 – some 15 years ago.
During this time we have taken successful court action against more than 20 franchisors and have also obtained court enforceable undertakings from more than 10 franchisors.
These cases cover unconscionable conduct, misleading and deceptive conduct and contraventions of the Franchising Code.
While it varies from year to year, as an illustration, in total across the board the ACCC:
- start with more than 160,000 complaints and queries
- commence about 550 investigations
- progress around 140 of these to in-depth investigations
- institute court action in more than 30 cases, with another 30 enforcement outcomes such as court enforceable undertakings and the payment of infringement notices.
A similar funnel or triage approach applies to investigating franchise related contacts, as a rough guide we:
- start with 800 plus contacts a year
- of these about 600 are complaints
- around 100 progress to assessment
- leading to between 5-15 investigations.
Our approach to enforcement is set out in our Compliance and Enforcement Policy. The policy sets out our areas of focus and explains the factors we take into account when deciding whether or not to pursue particular cases.
There are a few franchising related cases currently before the Federal Court.
Our case against Sensaslim is awaiting judgment. In 2011, we instituted proceedings alleging Sensaslim and several of its officers engaged in misleading and deceptive conduct and made false representations about the identity of Sensaslim officers, the Sensaslim Spray and the business opportunities offered by Sensaslim.
The alleged conduct includes falsely representing that Sensaslim franchisees were already participating in, and profiting from, the Sensaslim franchise, that a Sensaslim franchise had a certain earning potential and that there was a ‘money back buy back guarantee’.
In June this year, the ACCC took court action against a tax franchise for alleged misleading representations. The case, which is still before the Federal Court, alleges Taxsmart engaged in false, misleading or deceptive conduct. The ACCC has also joined Taxsmart’s sole director and its Business Development Manager to the proceedings.
The case relates to job advertisements for graduate accountant positions to attain a tax agent licence and subsequently operate a Taxsmart franchise. We allege some graduates were induced to pay significant upfront sums, on the unfulfilled promise they would receive experience to obtain registration and operate a Taxsmart franchise. At the time of taking the case we made it clear that employers need to ensure they have a reasonable basis when making representations about future expectations. Currently awaiting a hearing date.
In July this year, after the Court determined that each matter was unrelated and should be heard separately the ACCC re-instituted legal proceedings against nine Harvey Norman franchisees for allegedly misrepresenting consumer rights.
Online education programs
In the past year we have reached some important milestones in delivering online education programs.
In 2010, the government funded research into the causes of franchisor-franchisee conflict. There are no prizes for guessing that a lack of communication was identified as a major cause of friction. Disturbingly, the study revealed that around half of the franchisees surveyed relied heavily on their gut feeling when deciding to invest in a franchise. Further, around 40 per cent of franchisees said they faced surprises after buying their franchise.
The findings paved the way for the development of a pre-entry franchise program. Since 2010, the ACCC has funded a free online pre-entry education program run by Griffith University. The course goes beyond the Franchising Code and provides practical advice on running a business. It is designed to assist prospective franchisees make informed investment decisions and help them understand the demands of franchising and where to turn if things go sour.
Three years on and more than 5,000 people have enrolled in the program.
The ACCC has also released free online competition and consumer law program tailored to small businesses including franchisees. To date the program has had 7,500 unique visitors.
The program includes ten short modules covering topics such as pricing, advertising, consumer rights, selling safe products, cartels and scams.
We are also targeting our future business leaders. We are developing a training program for tertiary students designed to increase their knowledge of the Act and how it operates in the real world. The tertiary program will be released later this year.
Recently the government funded research into whether the program is delivering benefits for franchisees. Griffith University conducted interviews and a survey comparing the experiences and decision-making processes of those who have completed the pre-entry program with those who haven’t.
The research report concluded that the prospective franchisees who completed the pre-entry franchise program were more confident and made more informed decisions.
The key finding was that participants in the program had more realistic expectations of franchising performance which led to higher levels of satisfaction.
The report found that the franchisees who completed the training had a broader appreciation of the influencing factors (both internal and external) on their franchise.
The majority of participants indicated that completing the program had either reinforced their decision to invest in a franchise system or gave them a greater level of confidence and awareness about investing.
Many of you will be familiar with the industry code audit power (section 51ADD of the Act).
The power, which came into play on 1 January 2011, enables the ACCC to compel a trader to provide any information or documents it is required to keep, generate or publish under a relevant prescribed code. For franchisors, this includes disclosure documents, marketing fund statements and franchise agreements.
The audits enable the ACCC to quickly determine whether franchisors are complying with particular aspects of the Franchising Code.
We have now conducted 63 audits, including 49 franchisors, and most of them have come up clean.
In the past, we have been focusing primarily on traders of concern. For example, traders that we have had previous dealings with.
We are now targeting industries that are generating a disproportionate number of complaints.
In the ACCC’s next round of audits we will be looking at franchises from the take-away food and health and fitness industries, however our audits will not be restricted to these two sectors.
The ACCC has a Franchising Consultative Committee which has now been running for more than ten years. Members, who include franchisees, franchisors, professional advisors and franchising researchers, meet at least twice per year to discuss issues affecting the franchising sector, particularly those relating to the ACCC’s role. The FCA is a member.
Later this year, we will be refreshing the membership of the Committee. We will be calling for expressions of interest (around November) via our Franchising Information Network, our free email subscription service. So if you are interested in joining our FCC, please visit www.accc.gov.au/franchisingcode and sign-up to the network.
Supply arrangements guidance
Supply arrangements are common in franchising. For example, where a franchisor requires a franchisee to buy goods or services from particular suppliers.
Supply arrangements often cause concern for franchisees who are required to purchase a product from an approved supplier when they can buy the same product cheaper elsewhere, particularly where they know that the franchisor is receiving a rebate or other benefit from that supplier.
The ACCC is about to publish guidance on franchise supply arrangements,particularly third line forcing and the process by which franchisors may lodge a ‘notification’ with the ACCC which provides protection from legal action under the Act.
The guide also outlines the matters the ACCC considers in its assessment of these arrangements, including the receipt of rebates.
Separately, we are also looking to revise our existing franchising publications in the next 12 months.
We will work with relevant stakeholders, including the FCA and our Consultative Committee members, to ensure that our material answers common questions and is more useful for franchisors and their legal advisers.
As I mentioned earlier, claims about potential earnings continue to be an issue for us and we are in the process of drafting some guidance material on this issue for franchisors, franchisees and master franchisees.
The ACCC is working to develop closer ties with other franchise regulators globally.
Liaison is especially important in franchising, where international expansion is common and the master franchisor can be based in a different jurisdiction.
To help ensure franchisors understand the need to comply with Australia's franchising laws, we see benefits in the areas of sharing of information, updates on activities, disclosure regimes and enforcement activity.
Cross-border co-ordination is already well established in many other ACCC roles. For example the ACCC is an active participant in forums such as the International Competition Network and the International Consumer Protection Enforcement Network.
While there are approximately 30 regulatory bodies globally, the ACCC has a special interest in the Asia-Pacific region.
The Franchising Code Review
Of course, the big talking point in domestic franchising circles is the Code review. As the agency responsible for enforcement and promoting compliance with the Code, the ACCC has put its views forward.
What we said
In our submissions we said there is a need for greater deterrence of Code breaches via penalties and infringement notices.
We also suggested that the scope of the audit power be extended to enable us to more accurately assess a franchisor’s level of compliance with the Code.
We recommended that franchisors be required to provide prospective franchisees with a short summary document or risk statement that accompanies the disclosure document.
In this day and age we also think there is merit in franchisors being required to disclose their ability to operate online in competition with their franchisees.
We also recommended that franchisors be required to disclose the existence of any infringement notices they have paid. And finally, we suggested that the Code be amended to ensure that a written request from a franchisee that its details not be disclosed in future disclosure documents has in fact been initiated by the franchisee.
What the reviewer recommended
Mr Wein supported most of our recommendations.
The review report was published in May and made 18 recommendations, including that the Code be amended to:
- allow for civil pecuniary penalties and infringement notices for Code breaches
- include an express obligation to act in good faith
- require franchisors to disclose the rights of the franchisor and franchisee to conduct and benefit from online sales.
The election came while the previous Government was consulting on these recommendations. And it is too early to tell what the new Government will do, however, the ACCC will work closely with government to implement any changes and educate the sector about them.
The symposium always provides us with a good opportunity to update you on our activities.
Complaints and enquiries from the franchising sector remain steady in terms of the topics raised and the volume received. We continue to take action and assess franchising complaints against the factors set out in our Compliance and Enforcement Policy.
The ACCC is using its audit power to target franchising industries which generate a disproportionate number of complaints. On the other hand we are committed to stopping franchising conflict and problems before they surface by funding the online pre-entry education program run by Griffith University.
We recognise that liaison with industry is important. We look forward to further discussion at our consultative committee. We have also set our sights on improving some of our franchising guidance material and providing new advice on supply arrangements and earnings claims. I am also pleased to report that we also have a role to play in sharing our regulatory experiences with other agencies in the wider Asian Pacific region.
With the franchising code review and consultations there are interesting times ahead. I look forward to hearing your views in the next session. Thank you.