Franchising inquiry slammed as golden opportunity missed

"Franchisors can misuse this loophole in the franchising code and the (Trade Practices Act) to steal the assets of small business investors (through a process known as ""churning"", when the franchise is on-sold by the franchisor to someone else)."
December 18, 2008

Franchising inquiry slammed as golden opportunity missed
Chalpat Sonti

Franchisees and a leading academic have slammed a Federal inquiry into the franchising system, saying it fall far short of what was required.

The joint parliamentary committee looking into the franchising code of conduct reported earlier this month. It was formed after several complaints about the existing system, including many from WA.

The committee, which cancelled at late notice a hearing in Perth which was expected to produce fireworks, made several recommendations, including requiring better disclosure from franchisors, looking for a better way to balance the rights of franchisors and franchisees if the former failed, and looking at amending the Trade Practices Act to include monetary penalties for breaches of the code.

However, Perth-based Narelle Walter, a former franchisee who claims that an induced breach of contract left her out of pocket by $5 million, said the committee did not go far enough.

The committee had missed a "golden opportunity" to make sweeping changes to the sector.

"Franchise renewals have not been addressed properly and I am distressed that the apportion of good will has not been determined," she said.

"Franchisors can misuse this loophole in the franchising code and the (Trade Practices Act) to steal the assets of small business investors (through a process known as "churning", when the franchise is on-sold by the franchisor to someone else)."

There was still a big incentive for banks to support the franchisor in the churning process, because they would rewrite loans with an "unsuspecting" franchisee, she said.

Deanne de Leeuw, a former NSW franchisee whose battle with bakery giant Bakers Delight forced an Australian Competition and Consumer Commission inquiry into the franchisor, said she was pleased with many of the recommendations, including the monetary penalty, which was "long overdue".

But she said the committee missed an opportunity to address the "inefficiencies" within the ACCC.

Another of the inquiry's recommendations was that the ACCC be given power to investigate when it receives "credible information" that a party has conducted itself contrary to the code.

"Their poor record of prosecuting franchisors over the past 10 years since the code was introduced is evidence enough that they are not up to the task of monitoring compliance with the code," Ms de Leeuw said.

Bakers Delight was cleared by the ACCC after an 18-month investigation. Ms de Leeuw, Ms Walter and others want the Australian Federal Police to continue the probe.

Their criticisms of the inquiry were reflected by franchising expert Frank Zumbo, an associate professor at the University of NSW's school of business and taxation.

The ACCC recommendation was bizarre, when it already had the power to investigate. The time it took to look into the Baker's Delight allegations was unfair to both sides, Mr Zumbo said.

There needed to be an independent expert appointed to mediate franchising disputes, such as happened in the US. There also needed to be mechanisms to keep franchisees informed when franchisors failed, Mr Zumbo said.

The sector was a major contributor to Australian business, with annual turnover of $128 billion.

"The problem is, they had a chance to do this (inquiry) right, but they rushed it," Mr Zumbo said.

"They could have taken another couple of months, go to a legal expert to go over it, and then report to parliament. Instead they've produced something that doesn't deal with the issues, and will require another inquiry in two or three years. Yet we've also already had recent inquiries in Western Australia and South Australia.

"What will happen is that franchisee groups will get better organised and push for laws in their states, as happened in the US. The problem that is that you end up with legislation that goes further than it should go, and nobody wins."

The Franchise Council of Australia, the major franchise industry body, said the ACCC had been a "very effective" regulator and should be allowed to conduct spot audits.

However, it said any change to include monetary penalties for breaches of the Trade Practices Act needed to be "very carefully considered".

It could lead to people deserting franchising for "unregulated arrangements", it said.

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Risks: Deanne de Leeuw, Churning (serial reselling), Lending is subject to expert fraud because it is a credence good service, Lender's due diligence not done properly, Symbiotic relationships (industry, banks, lawyers), Australian Competition and Consumer Commission, ACCC, Franchisors want the minimum regulation they can get away with, Franchisors push for weak national franchise law, Universities provide unbiased expert knowledge and pursue objective truth, Australia, 20081218 Franchising inquiry

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