Time for federal govt to penalise rogue franchisors

The Franchising Code is a law that sets out standards of conduct for franchisors. The requirements of the Franchising Code are intended to represent industry best practice. As such, the Franchising Code needs to be fully complied with by all franchisors.

The problem is that there are currently no financial penalties for breaches of the Franchising Code. That absence of financial penalties is out of step with our competition and consumer laws. So if you break the competition and consumer laws you could be up for significant financial penalties. In contrast, if you don’t fully comply with the Franchising Code you might only get a slap on the wrist. That’s, of course, if the ACCC decides to take action. Unfortunately, the ACCC these days is known for its big talk and little real action.

With no financial penalties for breaches of the Franchising Code, it’s very tempting for rogue franchisors to think that compliance with the Code is optional. At best, rogue franchisors will start to cut corners and decide that it doesn’t really matter if they don’t fully comply with the Franchising Code. This cutting of corners is explained away by the rogues as representing only “technical” breaches of the Code. At worse, there will be blatant and recurring breaches of the Code by the rogues.

With growing evidence that rogue franchisors are not fully complying with the Franchising Code, you would think that Nick Sherry would stand up for franchisees and not tolerate any failure of franchisors to comply with the Code. You would think that the Federal Small Business Minister would quickly act to stamp out the rogue franchisors. But no, Nick Sherry has repeatedly stated that he will not take any further action in the franchising sector until 2013.

Here we have rogue franchisors giving the sector a bad name and jeopardising the success of an important and expanding part of the economy and Nick Sherry says he will not consider acting until 2013. Try explaining that to franchisees who have lost everything at the hands of rogue franchisors. Franchisees are on the receiving end of rogue franchisors right now and Nick Sherry says he will not consider acting until 2013.

Sadly, Nick Sherry’s failure to immediately act against rogue franchisees is a bit like saying that while there’s a fire gaining momentum we won’t send the fire brigade until later. A “wait and let’s see what happens” approach by Nick Sherry will only make matters worse. The damage by rogue franchisors is being done now and waiting until 2013 only means that considerably more damage will be done before then. Like putting out a fire, immediate action is needed to deal with rogue franchisors.

That’s why it’s noteworthy that the South Australian Labor Government has announced that it’s moving to impose financial penalties on those breaching the Franchising Code in relation to South Australian franchise agreements.

Through the efforts of Tony Piccolo in South Australia and the mounting evidence as documented by three recent franchising inquiries of the damage that rogue franchisors can do, it’s clear that the South Australian Labor Government is to be congratulated for showing the policy leadership on franchising matters that’s so lacking federally.

Also, to be congratulated is Peter Abetz, the liberal backbencher who has introduced a Private Member’s Bill into the Western Australian Parliament modelled on the South Australian Franchising Bill. Of particular note is that the Western Australian Labor Opposition supports the Abetz’s Bill. So while we have a State Labor Government and a State Labor Opposition that support dealing with rogue franchisors we have a Federal Labor Minister that’s determined to do nothing until 2013.

You would think that Nick Sherry would have an open mind on the issue. After all, having recently been given portfolio responsibility for small business there was a perfect opportunity for Sherry to have a new look at the issue. Instead, Sherry has simply parroted the recalcitrant approach taken by his predecessor, Craig Emerson, on the matter. As previous Federal Small Business Minister Emerson had become Dr No, more likely to oppose than to implement real and meaningful reforms such as imposing financial penalties for breaches of the Franchising Code.

Whatever the reason for Sherry’s and Emerson’s failure to act, how can it stack up against the misery and financial loss suffered by franchisees at the hands of rogue franchisors? The simple fact is that Sherry can do something about the rogue franchisors but chooses not to do so until 2013, if ever.

Now, there is no doubt that rogue franchisors give the sector a bad name and threaten the investment of both franchisors and franchisees. These rogues know that they can get away with breaching the Franchising Code as the ACCC is slow to take action and Sherry has given them a green light to do what they do until 2013.

As anyone involved in franchising knows, the franchisor has extensive power under the franchise agreement which effectively allows the franchisor to dictate everything the franchisee does. Therein, lies the essence of franchising and, that is, the franchisee is not truly an independent business person. In fact, the franchisee can be very much like an employee. The franchisor tells the franchisee what to do and if the franchisor abuses that power the franchisee can do precious little about it.

In reality, the franchisee can actually be in a much poorer position than an employee as the franchisee has actually invested money in the franchised business and if a rogue franchisor abuses its power and drives the franchisee out of business then the franchisee loses everything. In these cases a rogue can engage in a pattern of conduct designed to undermine and ultimately remove the franchisee for the purpose of reselling the franchised business to the next victim. This can include verbal abuse and intimidating behaviour from the franchisor; the franchisor offering the franchisee a site that the franchisor knows from past experience to be dud; or the franchisor forcing the franchisee to buy much more stock from the franchisor or related business than the franchisee could possibly sell.

So where to now? Well, if Sherry continues with his failure to impose financial penalties for breaches of the Franchising Code then the States will be forced to move in that direction. South Australia is committed to doing the right thing. It’s only a matter of time before Western Australia does the right thing. With franchisees continuing to suffer at the hands of rogue franchisors it’s only a matter of time before the consciences of other State MPs leads to real action in the remaining States.

For Sherry it may be time to listen carefully to the horror stories from franchisees who have lost everything at the hands of rogue franchisors. If that doesn’t move Sherry to action, then surely Julia Gillard should intervene to stop the rogue franchisors in the same way that her State Labor colleagues are moving to do so.