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Address to the National Franchising Conference, Surfers Paradise



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Senator the Hon Nick Sherry Minister for Small Business, Minister Assisting the Minister for Tourism, Senator for Tasmania

Senator the Hon Nick Sherry

11 Oct 2010

ADDRESS TO THE NATIONAL FRANCHISING CONFERENCE

Surfers Paradise, QLD [check against delivery]

Good morning.

I’m delighted to be joining you as the Minister for Small Business today.

Thanks to the Franchise Council of Australia, and your Executive Director, Steve Wright, for inviting me here.

I met Steve for the first time in Sydney last week, where we discussed many issues facing your sector in a lengthy and productive meeting.

I consider issues around the franchising code to be one of the most important aspects of my small business portfolio and I am taking a close personal interest.

The topic of this presentation is Australian Franchising and the Government and straight away I want to make it clear the Government is a staunch supporter of small business.

After all, it’s a highly significant element of the Australian economy, with almost 2 million active small businesses representing 96 per cent of all businesses.

And with a total turnover of $130 billion, between franchisors, franchisees and their service providers, the franchise sector is no small part of the small business landscape.

In total, more than 400,000 people are employed in Australia’s 71,000 business franchises.

Franchising has become a well recognised way to create opportunities for many people to realise their ambitions of working for themselves.

Properly thought out, a franchise is a great entry point to a small business as much of the establishment work is already in hand.

There are constant challenges - but the franchise sector continues to perform very well, despite the biggest economic challenge in 75 years. Of course, I’m referring to the global financial crisis.

A PricewaterhouseCoopers’ survey released last month found franchisor revenue grew by 12 per cent and franchisee revenue by six per cent, which is about twice the rate of the consumer price index.

The Australian Government believes that an appropriate regulatory framework is important for your sector.

These arrangements need to allow the sector to operate with confidence and provide certainty, without being unduly intrusive and restrictive.

We continue to support the measures enshrined in the Franchising Code of Conduct under the Trade Practices Act, and the Office of the Franchising Mediation Adviser.

I want to examine some recent changes in a little more detail.

The amendments to the Franchising Code of Conduct that began operating from 1 July will give franchisees more protection, more transparency and greater certainty when they deal with franchisors.

These changes were first proposed in the Government’s responses to the Joint Committee on Corporations and Financial Services report and the Expert Panel report.

They will provide more clarity for both franchisors and franchisees alike.

As you know, the Joint Committee made 11 recommendations relating to specific industry concerns.

The Government felt it was appropriate an Expert Panel examined a number of issues that arose during the Joint Committee inquiry process and the outcomes of the joint Senate Inquiry into unconscionable conduct.

The Expert Panel’s report was most comprehensive; as I’m sure you’ll agree.

The Expert Panel reviewed several industry behaviours that could be considered undesirable: behaviours such as unilateral contract variation

and the imposition of confidentiality clauses on franchisees.

However, the panel did not recommend complete prohibition of any of the behaviours.

The panel concluded some of these behaviours might, in fact, be driven by a legitimate need to respond to market changes or a changed regulatory regime.

It is in this context of no clear black or white, that the most recent changes to the Franchising Code are significant.

In a nutshell, they require greater disclosure and they ensure franchisors and franchisees have greater visibility of the inclusions and risks in any proposed business arrangement.

They make it easier for parties to determine whether a particular agreement is right for them, before they enter into a contract.

Specifically the code requires franchisors to disclose what will happen at the end of a franchise agreement, including sufficient notice of whether they intend to renew or not.

The code now also lists necessary and desirable behaviours enabling a reconciliatory approach to dispute resolution.

These amendments respond to the Joint Committee report.

As a result of the Expert Panel’s considerations, the code deals with some specific disclosures, including:

• the circumstances under which franchise agreements may be changed unilaterally; • disclosure of the requirement for future significant capital expenditure during the life of the franchise and whether this will be

considered at the end of the agreement; • whether a franchisor will attribute costs incurred in dispute resolution to the franchisee; and • any confidentiality requirements for franchisees.

As a part of this drive for more openness, the Government is asking franchisors to voluntarily give prospective franchisees a short, simple plain English document which outlines their rights and responsibilities.

All these changes are comprehensive.

Given this, the Government believes the amendments need sufficient time

in operation to allow their effectiveness to be evaluated.

To do this, and to provide the sector with the stability and confidence it deserves, the Government doesn’t intend to review the code again before 2013.

You would all be aware of the recent announcement by the South Australian Government for its own legislation in this area.

I cannot comment on the substance of the reforms proposed in South Australia at this stage as the draft legislation has not been released.

I will say, however, that franchising requires a national approach and the Australian Government intends continuing on the path of a uniform, national system.

Good faith

I want to briefly cover the issue of good faith.

The Joint Committee recommended a broad and undefined reference to good faith in the code.

While the Government understands the intent of this recommendation, we believe its inclusion would increase uncertainty.

The issues have been well canvassed, so I don’t want to go into great detail.

Suffice to say the law on good faith is still evolving.

There is no single definition or standard set of behaviours that can describe good faith.

Against this background, rather than restrict the development of the common law, the code amendments specifically state that nothing in the code limits any common law requirement of good faith.

To sum up, rather than make general remedies that might have unintended consequences, these changes address specific issues faced by your sector.

They are complemented by new enforcement powers for the ACCC in relation to all industry codes, including the Franchising Code.

These powers include rigorous new information gathering powers and the power to issue public warning notices about rogue operators and to seek

redress for all of those franchisees affected by a breach of the Code.

The new Australian Consumer Law, which will also take effect nationally on 1 January 2011, will give the ACCC and the State Consumer and Business Affairs offices new powers to take action against misleading and deceptive conduct and unconscionable conduct towards small businesses, including franchisees.

Non-regulatory reforms

In tandem with the new regulations, we have renamed the Office of the Mediation Adviser to the Office of the Franchising Mediation Adviser.

The Government will work with industry, academics and the ACCC to gain a better understanding of the stability of the sector and will continue to investigate future opportunities to collect and publish statistics on the franchising sector.

Early intervention

I want to turn now to some of the direct support the Australian Government is providing to your sector.

In the last Budget we provided $2.7 million in funding for an early intervention service for businesses operating under the Franchising Code and the Horticulture Code.

This also will allow the existing dispute resolution services under various industry codes of conduct to continue.

We envisage the early intervention dispute resolution services for these businesses will allow parties to:

• talk through their concerns at an early stage; • receive guidance on what their next steps might be in resolving their dispute; • address issues of concern before they become entrenched in a

dispute; and • maintain ongoing commercial relationships while avoiding the time, expense and stress associated with formal dispute resolution

mechanisms.

In this context, I was interested to learn in speaking with Steve Wright last week that the rate of disputes over franchising arrangements is very low historically and remains low today.

Franchisee education

There has also been progress towards better education, as shown by the excellent collaboration between Griffith University and the ACCC.

They have worked together to develop a pre-entry education program for prospective franchisees.

This was launched on 1 July this year and has already been well received, with more than 700 people registering to take part, so far.

I am confident the changes to the code I have just outlined, with this pre-education program, will lead to a pool of better informed prospective franchisees.

It’s free-of-charge and is available as an online, interactive education program.

In broad terms, the modules of its five e-classes cover:

• the regulatory environment • disclosure • franchisee fees • support services • intellectual property • site and territory selection • retail leasing • marketing and operations manuals

It covers much more and being available online means the course is accessible right around the country.

The training will help ensure franchisees are able to make better decisions before they invest in a franchise system.

In the long term, I hope ensuring franchisees are better informed will also cut down the number of disputes.

This pre entry education goes to the heart of addressing the concerns raised by the Expert Panel that there should be a plain-English document outlining the risks and rewards early on in the franchising selection process.

Survivability research

The Australian Government has funded research into the survival factors for franchisees and independent small businesses during periods of economic uncertainty.

This is a collaboration between the Department of Innovation, Industry, Science and Research, the Franchising Council of Australia and the Griffith University.

It’s been funded through the Australian Research Council Linkages program which supports public interest-based, industry-led initiatives.

The project has adopted an innovative approach to look at how independently-owned small businesses fare against their franchise counterparts both in urban and regional contexts.

I’m expecting that the outcomes of this research will be completed by the end of next year.

Conclusion

The impetus to franchising picked up pace in the 1970s - with Australia racing to become a world leader in this model of setting up and doing business.

Australians have embraced franchising as a way of creating individual opportunity.

I want to reiterate the Australian Government’s support for the franchising model as an important and effective business model for Australians.

The regulatory changes we have made need bedding down. As a Government, we need to give them sufficient time to operate before reviewing them.

The sector deserves this stability.

I wish you all the best for your conference this week and look forward to hearing of the outcomes.