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2019-2020
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (2020 MEASURES NO. 4) BILL 2020
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Minister for Housing and Assistant Treasurer,
the Hon Michael Sukkar MP)
Table of contents
Glossary................................................................................................. 1
General outline and financial impact ...................................................... 3
Chapter 1 Refund of large-scale generation shortfall
charge.......................................................................... 7
Chapter 2 Transitional provisions relating to the repeal of
the Superannuation (Resolution of Complaints)
Act 1993 .................................................................... 11
Chapter 3 Industry code penalties under Part IVB of the
Competition and Consumer Act 2010 ........................ 19
Chapter 4 Regulation impact statement - Industry code
penalties under Part IVB of the Competition and
Consumer Act 2010 ................................................... 21
Chapter 5 Extension of modification power ................................ 67
Chapter 6 Statement of Compatibility with Human Rights .......... 71
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AFCA Australian Financial Complaints Authority
AFCA Act Treasury Laws Amendment (Putting
Consumers First--Establishment of the
Australian Financial Complaints Authority)
Act 2018
ASIC Australia Securities and Investments
Commission
Bill Treasury Laws Amendment (2020 Measures
No. 4) Bill 2020
CCA Competition and Consumer Act 2010
Coronavirus Coronavirus known as COVID-19
Coronavirus (Measures No. 2) Coronavirus Economic Response Package
Act Omnibus (Measures No. 2) Act 2020
Electronic Transactions Act Electronic Transactions Act 1999
ITAA 1997 Income Tax Assessment Act 1997
Legislation Act Legislation Act 2003
NANE income non-assessable non-exempt income
Ramsay Review Review of the financial system external
dispute resolution and complaints framework
REE Act Renewable Energy (Electricity) Act 2000
SCT Superannuation Complaints Tribunal
Superannuation Complaints Superannuation (Resolutions of Complaints)
Act Act 1993
the Guide A Guide to Framing Commonwealth
Offences, Infringement Notices and
Enforcement Powers
1
General outline and financial impact
Schedule 1 - Refund of large-scale generation shortfall
charge
Schedule 1 to the Bill amends the ITAA 1997 to make refunds of
large-scale generation shortfall charges NANE income for income tax
purposes.
Date of effect: This measure will apply to refunds of large-scale
generation shortfall charges made on or after 1 January 2019.
Proposal announced: Schedule 1 fully implements the measure
'Corporate Taxation -- removing the tax on refunds of large-scale
generation shortfall charges' from 2019-20 Mid-Year Economic and
Fiscal Outlook.
Financial impact: Schedule 1 was estimated to have a cost to revenue of
$70.0 million over the forward estimates period at the time of the 2019-20
MYEFO comprising ($m):
2019-20 2020-21 2021-22 2022-23
-5.0 -15.0 -15.0 -35.0
Human rights implications: Schedule 1 does not raise any human rights
issues. See Statement of Compatibility with Human Rights -- Chapter 6.
Compliance cost impact: Nil.
Schedule 2 - Transitional provisions relating to the repeal of
the Superannuation (Resolution of Complaints) Act 1993
Schedule 2 to the Bill amends the AFCA Act to facilitate the closure and
any transitional arrangements associated with AFCA replacing the SCT.
Schedule 2 provides for the transfer of records and documents from the
SCT to ASIC, the remittal of matters on appeal by the Federal Court, and
introduces a rule-making power to allow the Minister to prescribe other
matters of a transitional nature.
Date of effect: Schedule 2 will come into effect on the commencement of
Schedule 3 to the AFCA Act. Commencement of Schedule 3 of the
AFCA Act will be following a proclamation by the Treasurer or the day
after 4 years of the commencement of the AFCA Act. This latter date is
the 5 March 2022.
3
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Proposal announced: Schedule 2 partially implements the measure
'Superannuation Complaints Tribunal--completion of casework' from the
2019-20 Budget.
Financial impact: Nil.
Human rights implications: Schedule 2 does not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 6.
Compliance cost impact: Nil.
The 2017 Review of the Financial System External Dispute Resolution
and Complaints Framework (the Ramsay Review)1 has been certified as
being informed by a process and analysis equivalent to a Regulation
Impact Statement.
Schedule 2 - Summary of regulation impact statement
Regulation impact on business
Impact: Nil.
Main point:
• The review found that the dispute resolution arrangements for
superannuation were not effective and that superannuation disputes
should be resolved by an ombudsman scheme, rather than a statutory
tribunal (such as the SCT).
Schedule 3 - Industry code penalties under Part IVB of the
Competition and Consumer Act 2010
Schedule 3 to the Bill amends the CCA by increasing the maximum
amount of penalty units that can be included in regulations that prescribe
an industry code from 300 penalty units to 600 penalty units.
Date of effect: Schedule 3 will commence on the day after the Bill
receives Royal Assent
Proposal announced: This measure was announced in the Government's
response to the Parliamentary Joint Committee on Corporations and
Financial Services inquiry into the operation and effectiveness of the
Franchising Code of Conduct report: Fairness in Franchising
Financial impact: Nil.
1
Details of the review and access to the report are available at the Treasury, Review into
Dispute Resolution and Complaints Framework, https://treasury.gov.au/review/review-into-
dispute-resolution-and-complaints-framework/ (Accessed 6 August 2020).
4
General outline and financial impact
Human rights implications: Schedule 3 engages human rights but does
not raise any human rights issue. See Statement of Compatibility with
Human Rights -- Chapter 6.
Compliance cost impact: Nil.
A Regulation Impact Statement was prepared and certified by the
Department of Industry, Science, Energy and Resources. It has been
included at Chapter 4.
Schedule 3 - Summary of regulation impact statement
Regulation impact on business
Impact: Nil.
Main point:
• The increase in penalty units will not impose any additional
regulatory burdens on businesses that comply with the law.
Schedule 4 - Extension of modification power
This Schedule was prepared by the Attorney-General's Department.
Schedule 4 to the Bill amends Schedule 5 to the Coronavirus (Measures
No. 2) Act to extend the operation of Schedule 5 of the Coronavirus
(Measures No. 2) Act, which provides a temporary mechanism for
responsible Ministers to change arrangements for meeting information and
documentary requirements under Commonwealth legislation, including
requirements to give information and produce, witness and sign
documents, in response to the challenges posed by the Coronavirus.
Schedule 4 of this Bill also includes a mechanism to further extend the
operation of Schedule 5 of the Coronavirus (Measures No. 2) Act by
legislative instrument, should it be required due to challenges posed by the
Coronavirus.
Date of effect: Schedule 4 will commence the day after the Bill receives
Royal Assent.
Proposal announced: This measure has not been announced.
Financial impact: Nil.
Human rights implications: Schedule 4 does not raise any human rights
issues. See Statement of Compatibility with Human Rights -- Chapter 6.
Compliance cost impact: The exemption from Regulation Impact
Statement requirements previously granted by the Prime Minister in
relation to measures responding to the impacts of the Coronavirus applies
to this proposal. This is on the basis that this proposal is simply to extend
a measure that was originally implemented in response to the Coronavirus
pandemic.
5
Chapter 1
Refund of large-scale generation shortfall
charge
Outline of chapter
1.1 Schedule 1 to the Bill amends the ITAA 1997 to make refunds
of large-scale generation shortfall charges NANE income for income tax
purposes.
1.2 All legislative references in this Chapter are to the ITAA 1997,
unless otherwise stated.
Context of amendments
1.3 The REE Act operates to:
• encourage the additional generation of electricity from
renewable sources;
• reduce emissions of greenhouse gases in the electricity
sector; and
• ensure that renewable energy sources are ecologically
sustainable.
1.4 This is done through the issuing of large-scale generation
certificates for the generation of electricity using eligible renewable
energy sources and requiring certain electricity purchasers (called liable
entities) to surrender a specified number of certificates for the electricity
that they acquire during a year (section 3 of the REE Act).
1.5 Liable entities are generally electricity retailers and large
industrial users of electricity.
1.6 Where a liable entity does not surrender sufficient certificates,
the liable entity must pay a renewable energy shortfall charge.
1.7 A charge that is payable under the REE Act is not deductible for
income tax purposes (section 7A of the REE Act). Liable entities which
pay the large-scale generation shortfall charge can apply to have the
shortfall charge refunded if they surrender outstanding large-scale
generation certificates within, broadly, three years of paying the charge
(section 95 of the REE Act). Currently, there is some uncertainty as to
whether a refund of shortfall charges is assessable income for income tax
purposes.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
1.8 As part of the 2019-20 Mid-Year Economic and Fiscal Outlook,
the Government announced that it will amend the income tax law to
ensure that no tax is payable on refunds of large-scale generation shortfall
charges. This will enable the market for renewable energy certificates to
work as intended, meeting targets for clean energy while ensuring
affordable electricity for consumers.
Summary of new law
1.9 Schedule 1 to the Bill makes refunds of large-scale generation
shortfall charges NANE income for income tax purposes.
1.10 As a result, no income tax is payable on refunds of large-scale
generation shortfall charges. However, deductions for expenses incurred
in relation to large-scale generation certificates are not affected by making
refunds of shortfall charges NANE income.
Comparison of key features of new law and current law
New law Current law
A refund of large-scale generation There is some uncertainty as to
shortfall charge is NANE income, whether a refund of large-scale
except for the purpose of generation shortfall charge is
determining the deductibility of assessable income.
expenses incurred in relation to the
large-scale generation certificates.
Detailed explanation of new law
1.11 Schedule 1 to the Bill amends the ITAA 1997 to make refunds
of large-scale generation shortfall charges NANE income for income tax
purposes. [Schedule 1, item 2, subsection 59-100(1)]
1.12 As a result, no income tax will be payable on refunds of
large-scale generation shortfall charges made to electricity retailers and
large industrial users of electricity.
1.13 Under the general deduction provision in the income tax law
(section 8-1), a taxpayer cannot deduct a loss or an outgoing incurred in
relation to gaining NANE income. However, the fact that refunds of
large-scale generation shortfall charges are NANE income is disregarded
for the purposes of determining whether an entity can deduct expenditure
incurred in relation to large-scale generation certificates. [Schedule 1, item 2,
subsection 59-100(2)]
1.14 Therefore, deductions for expenses incurred in relation to
large-scale generation certificates are not affected by making refunds of
large-scale generation shortfall charges NANE income. This will ensure
8
Refund of large-scale generation shortfall charge
that taxpayers are not inadvertently disadvantaged by the amendment to
make refunds of shortfall charges NANE income.
Consequential amendments
1.15 A consequential amendment is made to the list of NANE income
provisions to add a reference to refunds of large-scale generation shortfall
charges. [Schedule 1, item 1, section 11-55]
Application and transitional provisions
1.16 Schedule 1 to the Bill commences on the first day of the first
quarterly period following the day the Bill receives Royal Assent.
1.17 The amendments apply to refunds of large-scale generation
shortfall charges made on or after 1 January 2019. [Schedule 1, item 3]
1.18 In this regard, the amendments are beneficial to taxpayers and
were sought by affected stakeholders to clarify the operation of the law.
No taxpayers receiving a shortfall charge refund will be disadvantaged by
the amendments.
9
Chapter 2
Transitional provisions relating to the
repeal of the Superannuation (Resolution
of Complaints) Act 1993
Outline of chapter
2.1 Schedule 2 to the Bill amends the AFCA Act to facilitate the
closure and any transitional arrangements associated with AFCA
replacing the SCT.
2.2 Schedule 2 amends the AFCA Act to provide for the transfer of
records and documents from the SCT to ASIC, includes an express power
for the Federal Court to remit cases back to AFCA instead of the SCT,
and introduces a rule-making power to allow the Minister to prescribe
other matters of a transitional nature.
Context of amendments
2.3 The SCT is a statutory tribunal established under the
Superannuation Complaints Act which considers complaints about
superannuation.
2.4 In 2017, the Ramsay Review found that the existence of multiple
financial services external dispute resolution schemes with overlapping
jurisdictions means resulted in difficulties in achieving comparable
outcomes for consumers with similar complaints. The Ramsay Review
also found long-standing problems with the arrangements for resolving
superannuation complaints in the SCT.
2.5 In the Government's response to the Ramsay Review, the
Government announced the creation of a new framework for dispute
resolution with a 'one stop shop' external dispute resolution scheme
which will be known as AFCA. The purpose is to improve outcomes for
consumers in the financial system.
2.6 With the introduction of the AFCA Act, AFCA replaced the
SCT, as well as other bodies such as the Financial Ombudsman Service,
and the Credit and Investments Ombudsman. Since 1 November 2018,
AFCA has been the external dispute resolution body for complaints
against financial firms, as well as superannuation disputes. It is a company
limited by guarantee. The AFCA Act received Royal Assent on
5 March 2018.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
2.7 Under Schedule 3 to the AFCA Act, the Superannuation
Complaints Act along with consequential amendments are to be repealed
following a proclamation by the Treasurer or the day after 4 years of the
commencement of the AFCA Act. This latter date is the 5 March 2022.
2.8 In the 2019-20 Budget, the Government announced it would
provide an additional $2.3 million over three years from 2020-21 to ASIC
for the SCT to resolve outstanding complaints by 31 December 2020, after
which the SCT is intended to cease operations. This funding would also
assist ASIC with any other administrative requirements needed to
facilitate the wind down of the SCT.
Summary of new law
2.9 Schedule 2 to the Bill amends the AFCA Act to assist in the
closure of the SCT and to efficiently facilitate any transitional
arrangements associated with moving the handling of superannuation
complaints from the SCT to AFCA.
2.10 Schedule 2 amends the AFCA Act to insert a provision dealing
with the transfer of records and documents from the SCT to ASIC
following the commencement of the Schedule 3 to the AFCA Act. These
records and documents are taken to be protected information for the
purposes of section 127 of the ASIC Act.
2.11 Schedule 2 also includes a power for the Federal Court to remit
cases back to AFCA, where ordinarily, these would be remitted to the
SCT
2.12 Schedule 2 also introduces a rule-making power to the
AFCA Act to allow the Minister to prescribe matters of a transitional
nature.
Comparison of key features of new law and current law
New law Current law
The AFCA Act includes a rule- No equivalent.
making power for prescribing
matters of a transitional nature
relating to the closure of the SCT.
Records and document previously No equivalent.
held by the SCT are transferred to
ASIC. Such records and documents
are protected information.
In making an appeal determination, No equivalent.
the Federal Court may remit cases
12
Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints)
Act 1993
New law Current law
back to AFCA to remake a decision,
where originally, these would be
remitted back to the SCT.
Detailed explanation of new law
2.13 Schedule 2 to the Bill amends the AFCA Act to assist in the
closure of the SCT and to efficiently facilitate any transitional
arrangements associated with moving the handling of superannuation
complaints from the SCT to AFCA.
Transfer of records and documents to ASIC
2.14 The repeal of the Superannuation Complaints Act will occur
from the commencement of Schedule 3 to the AFCA Act. These
provisions are inserted into Schedule 3 and therefore will commence in
line with repeal of the Superannuation Complaints Act. This will signify
the closure of the SCT.
2.15 Upon the closure of the SCT, ASIC becomes the administrator
of any document in possession of the SCT at the time of closure.
[Schedule 2, item 2, subsection 33(2) of Schedule 3 to the AFCA Act]
2.16 In their role as administrator, ASIC will respond to any freedom
of information requests, as well as prepare and disclose relevant
documents to AFCA or the Federal Court where necessary for the
purposes of AFCA or the Federal Court undertaking their functions.
2.17 Prior to the SCT's closure, outstanding cases that are not able to
be resolved will be transferred to AFCA for resolution. Subsequent
disclosure from ASIC to AFCA may be as a result of a request by AFCA
for information relating to those outstanding cases following the closure
of the SCT.
2.18 Under the Superannuation Complaints Act, a party may appeal
to the Federal Court on questions of law from a determinations made by
the SCT. Disclosure to the Federal Court from ASIC will be in the course
of this appeal process. Where the request for information would have
previously gone to the SCT, it will now be directed to ASIC for
information regarding that original determination.
2.19 In disclosing this information, ASIC must comply with the
principles contained in the Privacy Act 1988 and section 127 of the
ASIC Act. Under this section, disclosure to AFCA and the Federal Court
for the purposes of their role and function is considered to be an
'authorised disclosure.'
13
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
2.20 In practice, the transfer of records or documents will not include
the physical transfer of documents from the SCT to ASIC. These
documents are already physically held by ASIC as the SCT is staffed by
members of the staff of ASIC who have been made available to the SCT
under section 62 of the Superannuation Complaints Act. The systems and
storage used by the SCT for their documents and records are the same
systems and storage as ASIC. Therefore, the existence of these provisions
are operational for ASIC to be transferred legal responsibility of these
documents or records following the closure of the SCT.
2.21 This applies to any record or document that was in the SCT's
possession immediately before the closure of the SCT. Possession applies
broadly to include any:
• member of the SCT; or
• member of the staff of ASIC who had been made available to
the SCT under section 62 of the Superannuation
Complaints Act.
[Schedule 2, item 2, subsection 33(1) of Schedule 3 to the AFCA Act]
2.22 In considering what information is to be transferred to ASIC, the
phrase 'records or documents' is an intentionally broad phrase to capture
all electronic and physical documents currently held by the SCT. These
may include historical documents. However, nothing in the transfer of
document is intended to amount to disclosure for the purposes of waiving
legal professional privilege.
2.23 The words 'record' and 'document' are defined in section 25 of
the Acts Interpretation Act 1901.
2.24 Record is defined to include information stored or recorded by
means of a computer.
2.25 Document is defined in as any record of information, and
includes:
• anything on which there is writing; and
• anything on which there are marks, figures, symbols or
perforations having a meaning for persons qualified to
interpret them; and
• anything from which sounds, images or writings can be
reproduced with or without the aid of anything else; and
• a map, plan, drawing or photograph.
2.26 Despite the transfer, these documents or records continue to be
Commonwealth records for the purposes of the Archives Act 1983.
Therefore, following the transfer, ASIC will have responsibility for the
disposal and archiving of these documents in line with their
14
Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints)
Act 1993
responsibilities under the Archives Act 1983. This position is clarified in
the note to section 33 of Schedule 2.
Protected information
2.27 Schedule 2 to the Bill ensures that the transferred records or
documents will be considered 'protected information' for the purposes of
section 127 of the ASIC Act. [Schedule 2, item 2, subsection 33(3) of Schedule 3 to
the AFCA Act]
2.28 This provision safeguards against any unauthorised disclosure of
sensitive and personal information that may be contained in the
transferred documents and records. These safeguards reflect the privacy
and confidentiality provisions contained in the Superannuation
Complaints Act which prohibit disclosure of sensitive information.
2.29 Section 127 of the ASIC Act requires that ASIC will take all
reasonable measures to protect information that has been classified as
'protected information' from unauthorised use or disclosure. Disclosure to
the Federal Court and AFCA are considered to be an 'authorised
disclosure'.
2.30 However, a document or record that has already been lawfully
made available to the public will not be covered by section 127 of the
ASIC Act. [Schedule 2, item 2, subsection 33(3) of Schedule 3 to the AFCA Act]
2.31 The effect of this is that a document that is already public (such
as an annual report) will not have the same confidentiality requirements as
personal or sensitive information.
Federal Court power
2.32 Schedule 2 includes an express provision for appeals of SCT
determinations to the Federal Court following the repeal of the
Superannuation Complaints Act. [Schedule 2, item 2, subsection 34(1) of
Schedule 3 to the AFCA Act]
2.33 Under the Superannuation Complaints Act, a party may appeal
to the Federal Court on questions of law from a determination made by
the SCT. The Federal Court may hear and determine the appeal and make
an order as it thinks appropriate. The same appeal process is available for
determinations made by AFCA under the AFCA Act.
2.34 The orders that may be made by the Federal Court on an appeal
include an order affirming or setting aside the determination of the SCT or
an order remitting the matter to be determined again by the SCT in
accordance with the directions of the Federal Court.
2.35 Without limiting the powers of the Federal Court, the provision
provides that the Federal Court may make an order remitting the matter
15
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
back to AFCA where this would have ordinarily been remitted back to the
SCT. The determination will then be made by AFCA in accordance with
the directions of the Federal Court. [Schedule 2, item 2, subsection 34(2) of
Schedule 3 to the AFCA Act]
Transitional Rules
2.36 Schedule 2 provides that the Minister may, by legislative
instrument, make rules of a transitional nature (including prescribing any
saving or application provisions) relating to the repeal of Schedule 3 to the
AFCA Act. [Schedule 2, item 2, subsection 35(1) of Schedule 3 to the AFCA Act]
2.37 A broad rule-making power provides flexibility for the
Government to address any additional issues that emerge to accommodate
the closing of the SCT, and the repeal of the Superannuation Complaints
Act.
2.38 The rules will provide for transitional issues such as providing
appropriate operational requirements that will assist AFCA with the
handling of the SCT cases and may provide further specificity of ASIC's
role as administrator following the closure of the SCT.
2.39 Any such rules would be a legislative instrument under section 8
of the Legislation Act. Therefore, these rules will be subject to the
disallowance process which will allow for appropriate parliamentary
oversight and scrutiny (section 42 of the Legislation Act). The rules will
also be subject to sunsetting (section 50 of the Legislation Act).
2.40 To avoid doubt, the rules may not do the following:
• create an offence or civil penalty;
• provide powers of:
- arrest or detention; or
- entry, search or seizure;
• impose a tax;
• set an amount to be appropriated from the Consolidated
Revenue Fund under an appropriation the AFCA Act;
• directly amend the text of the AFCA Act.
[Schedule 2, item 2, subsection 35(2) of Schedule 3 to the AFCA Act]
Application and transitional provisions
2.41 The transitional measures in Schedule 2 commence on the day
after the Bill receives Royal Assent.
16
Transitional provisions relating to the repeal of the Superannuation (Resolution of Complaints)
Act 1993
2.42 The provisions will be inserted into the AFCA Act on the
commencement date. After they are inserted into the AFCA Act, they will
only commence when Schedule 3 to that Act commences.
2.43 Commencement of Schedule 3 will be following a proclamation
by the Treasurer or the day after 4 years of the commencement of the
AFCA Act. This latter date is the 5 March 2022.
17
Chapter 3
Industry code penalties under Part IVB of
the Competition and Consumer Act 2010
Outline of chapter
3.1 Schedule 3 to the Bill amends the CCA by increasing the
maximum amount of penalty units that can be included in regulations that
prescribe an industry code from 300 penalty units to 600 penalty units.
Context of amendments
3.2 Part IVB of the CCA allows for industry codes to be prescribed
in regulations. Industry codes may prescribe pecuniary penalties for
breaches of civil penalty provisions of the industry code. The existing law
allows for civil penalties up to 300 penalty units.
3.3 On 22 March 2018 the Senate referred an inquiry to the
Parliamentary Joint Committee on Corporations and Financial Services
into the operation and effectiveness of the Competition and Consumer
(Industry Codes--Franchising) Regulation 2014.
3.4 The Committee's report noted that where penalties are
insufficient, franchisors are likely to factor the risk of a penalty into the
cost of doing business. The Committee's report recommended the
quantum of penalties available for a breach of the Franchising Industry
Code be significantly increased to ensure the penalties are a meaningful
deterrent from non-compliance.
3.5 The Committee recommended the civil penalties should be
increased to at least reflect the penalties in the Australian Consumer Law
which, for a corporation, are the greater of:
• $10 million; or
• three times the value of the benefit obtained from the offence
(if the court can determine this value); or
• 10 per cent of the annual turnover of the body corporate
during the 12-month period in which the act or omission
occurred or started to occur.
3.6 The Government agreed to increase the quantum of penalties in
the Franchising Code to 600 penalty units. As the Franchising Code is
prescribed in regulations, amendments to the enabling legislation are
required in order to allow for this change to be made in the Code itself.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
The amendments in Schedule 3 to the Bill allow for any industry code
prescribed under Part IVB of the CCA to prescribe a maximum civil
penalty of up to 600 penalty units. This amount is less than the amount
recommended in the Committee's final report.
3.7 As per the Guide, serious pecuniary penalties are most
appropriately placed in primary Acts of Parliament rather than subordinate
legislation. The penalties in industry codes are prescribed in regulations.
As such, an increase to 600 penalty units balances the recommendations in
the Committee's report to significantly increase penalties in industry
codes to ensure they are a meaningful deterrent, with the principles set out
in the Guide.
3.8 The Regulatory Impact Statement found that the consequences
of poor franchisor conduct have been devastating for some franchisees
and has undermined confidence in the franchising business model.
Increasing the maximum penalty amount is intended to provide a balanced
deterrent from such conduct.
3.9 The courts will continue to have discretion to apply an
appropriate penalty up to the maximum amount. The court would consider
the relevant facts of any given case, and impose a penalty that is
proportionate to that conduct, making it unlikely that the maximum
penalty would be imposed in every instance. In practice, the maximum
amount would only be applied in the most egregious instances of
non-compliance.
Detailed explanation of new law
3.10 Schedule 3 to the Bill amends section 51AE(2) of the CCA to
increase the maximum amount of penalty units that can be included in
regulations that prescribe an industry code from 300 penalty units to
600 penalty units. [Schedule 3, Item 1, subsection 51AE(2) of the CCA]
Application and transitional provisions
3.11 Schedule 3 to the Bill contains necessary application provisions
ensuring the amendments apply to regulations, including regulations that
amend regulations, made on or after commencement of the Schedule.
[Schedule 3, item 2]
20
Chapter 4
Regulation impact statement - Industry
code penalties under Part IVB of the
Competition and Consumer Act 2010
Executive Summary
4.1 The franchising sector is an important contributor to the
Australian economy. Franchising is underpinned by the relationship
between franchisor and franchisee. This relationship is directly regulated
by the Franchising Code and the broad protections available in the
Australian Consumer Law.
4.2 Despite existing interventions, there is widespread evidence that
problems in the relationship between franchisees and franchisors continue.
The PJC heard evidence that franchisees are not always sufficiently
informed prior to entering into a franchise agreement, franchisors continue
to engage in poor conduct, and existing mechanisms to support
enforcement, exit and dispute resolution do not go far enough to address
power imbalance and problematic conduct of franchisors.
4.3 A range of options for regulatory improvements is identified in
this Regulation Impact Statement (RIS) to inform the future direction of
the regulation of franchising. This RIS concludes that a package of
regulatory and non-regulatory reforms, while imposing low to moderate
additional regulatory burden on franchisors, would result in an overall net
benefit.
Background
The franchising sector
4.4 Franchising is a popular business model, and makes a significant
contribution to the Australian economy. There are approximately
1,240 franchise brands in Australia with 95,600 franchise establishments,
providing employment for approximately 580,000 people. The sector's
estimated revenue is $170.5 billion in 2019-2020.2
4.5 The franchising business structure is used in a diverse range of
industries - ranging from large accommodation providers to garden
maintenance businesses and everything in between. There is also a
2
IBISWorld, Franchising in Australia, Industry Report X0002 (July 2020).
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
diversity in the approach to the franchisor-franchisee relationship in
individual systems. In addition, the changing economic environment -
such as the generally tough retail environment, the emergence of the
gig economy and the growth of alternative models for self-employment,
and more recently the Coronavirus - have created challenges for the
sector.
4.6 In Australia, around 90 per cent of franchisors, and almost all
franchisees are small businesses.3 Franchise systems involve a franchisor
with experience in operating the brand, an understanding of the market
and access to resources. Franchisees by comparison are likely to be
smaller operators, without the same business knowledge or experience,
and are often from a culturally and linguistically diverse background.
Sources suggest many franchisees enter into franchising from wage-
dependent employment.4
Current regulatory framework
4.7 In Australia, the relationship between franchisor and franchisee
is regulated primarily by the Franchising Code. The Franchising Code is a
mandatory industry code prescribed by regulation under Part IVB of the
Competition and Consumer Act 2010 (CCA).
4.8 The mandatory Franchising Code was first introduced in 1998 to
promote positive relationships in the franchising sector. Since 1998 the
Franchising Code has undergone a number of policy reviews and
legislative changes.5 The Franchising Code was most recently revised
with effect from 2015. Key changes include a requirement for franchisees
and franchisors to act in good faith and the introduction of financial
penalties for breaches of key provisions of the Franchising Code.
4.9 In addition to the Franchising Code, participants in the sector are
also subject to the general laws governing business relationships and fair
trading in Australia. These laws include prohibitions on unconscionable
conduct, false or misleading representations, and the regulation of unfair
contract terms in standard form contracts under the Australian Consumer
Law. Some of the issues faced by the franchising sector are unique to the
sector while others are faced by small businesses in general.
4.10 Changes to broader economic policy settings and laws are
relevant to the franchising sector. For example, since the Franchising
Code was amended in 2015:
3
Franchise Council of Australia's submission to the PJC, page 5.
4
Franchise Law Review, page 101, 2018 Law Business Research Ltd.
5
Fairness in Franchising report, Appendix 3, pages 319-320.
22
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
• There have been amendments to the Fair Work Act 2009
(FWA) to extend liability to franchisors, in certain
circumstances, for franchisee breaches of the FWA.
• The Australian Small Business and Family Enterprise
Ombudsman (ASBFEO) was established in 2016 to advocate
for, and provide assistance to, small business including
franchisees and franchisors.
4.11 Industry compliance with the Franchising Code is overseen by
the ACCC, which has a range of enforcement options. These options
include issuing infringement notices and taking court action seeking
pecuniary penalties.
4.12 The ACCC's enforcement activity focuses on the most systemic
and egregious breaches of the Franchising Code, the CCA or the ACL.
Many stakeholders have identified that this can lead to a gap in
enforcement for cases that may not be systemic or egregious, but are
nonetheless clear breaches. Stakeholders submitted that private action in
the courts to remedy breaches is expensive and time consuming for
franchisees and franchisors.
4.13 Parties to a dispute are able to approach ASBFEO for assistance
with the Franchising Code mediation process. The parties to a franchise
agreement are also able to take action through the courts to resolve
disputes or pursue breaches of the Franchising Code.
The Parliamentary Joint Committee on Corporations and Financial
Services' inquiry into the franchising sector, and the Fairness in
Franchising report
4.14 On 14 March 2019, the Parliamentary Joint Committee on
Corporations and Financial Services (PJC) handed down its Fairness in
Franchising report, making 71 recommendations to improve the operation
and effectiveness of the franchising sector. This included a
recommendation that the Government form a Franchising Taskforce to
consider a number of the recommendations made in the report.
4.15 On 21 June 2019, the Government announced it had agreed to
establish the Franchising Taskforce.6 The Franchising Taskforce was
comprised of senior officials within the Department of the Treasury, the
Department of Industry, Science, Energy and Resources, and the
Department of the Prime Minister and Cabinet and was tasked with
6
See Media Release, Building a fair, effective and accountable franchising network,
21 June 2019, https://ministers.employment.gov.au/cash/building-fair-effective-and-
accountable-franchising-network.
23
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
providing advice to Government on the recommendations in the PJC's
Fairness in Franchising report.
4.16 The Franchising Taskforce consulted on the PJC's
recommendations, and principles underpinning franchising regulation and
that consultation is reflected in this RIS.
What is the problem?
4.17 There are widespread problems in the franchising sector. These
have been documented in the PJC's comprehensive Fairness in
Franchising report, which was informed by a 12-month inquiry and over
400 submissions. Consultation undertaken by the Franchising Taskforce
built on the work of the PJC.
4.18 The ACCC oversees enforcement of the Franchising Code and
the Australian Consumer Law, and confirms that there are widespread
problems in the sector, warranting robust regulatory reform. ASBFEO has
a role in helping franchising parties in dispute and also supports
regulatory reform.
4.19 The social impacts of problems in this sector include significant
mental health impacts and relationship breakdowns. The economic
impacts include significant direct financial losses incurred by franchisees7,
and secondary impacts in relation to employee entitlements and
competition.
4.20 Underlying these problems are franchisees entering into
franchise agreements without adequate information, evidence of poor
franchisor conduct, and insufficient enforcement and dispute resolution
mechanisms. These issues are discussed below.
Prospective franchisees are not always well informed before buying a
franchise
4.21 Evidence shows many franchisees are not well informed before
making the decision to buy a franchise. Disclosure documents are difficult
to comprehend, and do not contain all critical information relevant to
entering into a franchise agreement. The reliability of information
provided may also be difficult for a potential franchisee to assess and they
might be unaware what is crucial for their decision making. Reliable
information, particularly financial information (capital expenditure,
supplier rebates, financial performance and leasing), assists prospective
franchisees to conduct due diligence and compare different franchise
7
See discussion on the limitations of franchising data below
24
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
offerings. 8 A lack of transparency in the use of marketing funds has also
been highlighted as a problem, which has been shown to lead to reduced
trust and disputes.
4.22 Franchisees can also be affected by 'optimism bias', where they
are reluctant to face the downside of an investment to which they have
become emotionally attached. For poorly informed or overly optimistic
franchisees, the cooling off period available to exit the franchise
agreement is important. The current seven-day cooling off period is
insufficient, and in some cases (for example transfers, extensions and
renewals) franchisees receive no cooling off period at all.
4.23 Issues relating to inadequate disclosure, transparency and
reliability of information are further compounded when franchisees do not
seek professional advice. The ACCC found that 40 per cent of prospective
franchisees did not seek any independent professional advice before
entering a franchise agreement.9 Concerns have also been raised about the
adequacy of educational material to inform and assist prospective
franchisees.
Some franchisors behave poorly
4.24 The franchising sector is very diverse. Across the estimated
1,240 franchise systems operating in Australia, the ACCC receives more
than 450 reports a year.10 Particular concerns have been raised in relation
to retail food franchising, with evidence of systemic poor disclosure
practices.11 However problems are widespread, with the ACCC taking
action against franchisors in a range of other sectors alleging beaches of
the Franchising Code and the Australian Consumer Law.12 This confirms
evidence provided to the PJC and the Franchising Taskforce highlighting
8
See example cited at page 65 of the PJC Fairness in Franchising report, provided by
7-Eleven stores.
9
See, for example, ACCC's Disclosure practices in food franchising report. This report
found that 40 per cent of prospective franchisees did not seek any independent professional
advice before entering a franchise agreement.
10
The ACCC report Small Business in Focus, showed that for the 12 months to 31 December
2019, the ACCC received 465 reports relating to franchising. This was an increase from the
previous 12 month period in which 405 reports were received. More detailed information on
these complaints, such as the breakdown of issues by industry sector, is not reported. See
discussion on limitations to franchising data below.
11
ACCC Disclosure practices in food franchising, August 2019 report. Compliance in this
sector was targeted because '[t]he ACCC receives more franchising code related reports
from café, restaurant and take-away food franchisees than any other sector' (Media Release,
ACCC to focus on franchisors; disclosure in the food services sector, 7 February 2019).
12
Recent ACCC action has been taken against Bob Jane Corporation Pty Ltd, Geowash, Ultra
Tune and Jump Swim Schools. Details on www.accc.gov.au.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
instances of egregious conduct by franchisors. It also confirms the
outcomes of reviews into automotive franchising which highlighted
problematic conduct by automotive franchisors in relation to dispute
resolution, capital expenditure and end of term arrangements.13
Current regulation and penalties have not deterred poor conduct
4.25 The current penalties for breaches of the Franchising Code have
not prevented poor conduct from franchisors. This is despite the ACCC
making small business, and compliance with the Franchising Code of
Conduct, a Compliance and Enforcement Policy and Priority in recent
years.14
4.26 Evidence has been submitted that the scope and quantum of
current penalties is insufficient to encourage compliance and some
franchisors may factor the cost of penalties into their cost of doing
business.15 There have also been allegations of franchisors not mediating
in good faith, which would be considered a breach of the Franchising
Code. This evidence around non-compliance supports the ACCC's
findings of systemic poor disclosure practices in food franchising.16
4.27 Non-compliance undermines the intent of industry codes to raise
standards of business conduct by guarding against misconduct and
opportunistic behaviour. In order for broader improvements in disclosure
and the Franchising Code to be effective, there needs to be a culture of
compliance across the sector.
Exit and dispute resolution processes for franchisees are insufficient
4.28 Small business franchisees, unlike independent small businesses,
are entirely dependent on a functional relationship with their franchisor to
continue in business. Accessible, affordable and effective dispute
resolution processes are important to resolve disagreements between
franchisors and franchisees.
13
Department of Industry, Science, Energy and Resources, Regulation Impact Statement:
Franchise relationships between car manufacturers and new car dealers, February 2020.
14
https://www.accc.gov.au/about-us/australian-competition-consumer-
commission/compliance-enforcement-policy-priorities#2020-priorities
15
The maximum penalty for breach of an industry code provision is 300 penalty units
(currently $66,600). These amendments also allowed for the ACCC to issue infringement
notices where it has reasonable grounds to believe a person (or body corporate) has
contravened a civil penalty provision of an industry code. Infringement notice amounts are
50 penalty units (currently $11,100) for a body corporate and 10 penalty units (currently
$2,220) in any other case.
16
ACCC Disclosure practices in food franchising, August 2019 report.
26
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
4.29 Many franchisees are not aware of available dispute resolution
processes and the PJC noted that the Franchising Code does not provide
for conciliation or arbitration to facilitate dispute resolution outside of
court in cases where mediation fails.
4.30 It is also unclear whether existing provisions in the Franchising
Code enable multi-party mediations, particularly where the franchisor
seeks to avoid multi-franchisee mediation.
4.31 Franchisees wishing to exit the system due to hardship or faced
with poor conduct from the franchisor are not well supported by the
current Franchising Code which only supports a process for
franchisor-initiated exits. The treatment of goodwill at the point of exiting
a franchise agreement and the restraint of trade clauses prohibiting
franchisees pursuing legitimate business ventures after exiting a franchise
have also been identified as concerns for franchisees.
Limitations to franchising data
4.32 The availability of statistics on the franchising sector is limited.
For example, aggregate data on the financial losses incurred by
franchisees and complaints data by industry within the franchising sector
are not available. However, consistent evidence in submissions to the PJC
and the Franchising Taskforce, and the problems illustrated in the Fairness
in Franchising report, provide insight into the level of financial loss and
the spread of issues in the sector.
4.33 For example, the PJC heard from a franchisee whose family lost
in excess of $800,000 due to their involvement with their franchisor. The
Franchising Taskforce heard similar stories, including from a former
franchisee who stated that her and her husband 'lost everything [they] ever
worked for' due to their franchisor and were left with a $500,000 debt.
4.34 Although the ACCC does not report on the industry breakdowns
of franchising complaints, problems in the franchising sector appear to be
widespread. Submissions to the PJC and Franchising Taskforce indicate
evidence of poor behaviour from a variety of sectors including food and
non-food retailing, transportation, automotive and fuel retailing.
Why is government intervention necessary?
4.35 The Government introduced the mandatory Franchising Code in
1998. Since then it has been revised a number of times to address issues in
the sector. The fair trading provisions of the Australian Consumer Law are
also relevant to franchisees and franchisors. The PJC report and work of
the Franchising Taskforce have confirmed that further reform is needed to
deter systemic non-compliance, improve transparency and prevent poor
franchisor conduct.
27
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
The impact of poor behaviour can be severe
4.36 While the most egregious behaviour is not widespread, the
consequences of poor franchisor conduct have been devastating for some
franchisees and undermined confidence in the franchising business model.
4.37 The PJC and Franchising Taskforce heard directly from current
and former franchisees about the significant personal and financial
impacts arising from poor practices in the sector. This included
bankruptcies, mental health issues and marriage breakdowns, noting that
many franchisees businesses are run as family businesses.
At the end ... my life no longer resembled anything I had previously
known before my involvement with franchising. I am separated from
my husband and have lost in excess of $280 000. It is almost
impossible to recover from this amount of financial loss with the time I
have left before I retire. I will then become a burden on the tax paying
public.17
4.38 The impact of poor franchisor behaviour has also extended
beyond franchisees. One example is the underpayment of employees.
Since 2016-17, the Fair Work Ombudsman (FWO) has received more
than 4,500 anonymous reports of underpayment of staff that relate to
franchises (or just over 11 per cent of all anonymous reports received
during that period), with more than half of these reports related to the
hospitality industry. In March 2019 the Migrant Workers Taskforce found
that some franchising models lead to the underpayment of wages by
franchisees.18
4.39 Problems in the franchising sector can also undermine fair
competition with other businesses. Independent businesses may be unable
to compete with lower wages, or unviable prices set by the franchisor. In
the case of the latter, franchisees may continue to trade because they are
unable to exit their franchise agreements. This may in turn have broader
economic and consumer impacts.
Franchisees face unique challenges
4.40 In addition to the general issues faced by small businesses,
franchisees face unique challenges.
4.41 In addition to usual business overheads, franchisees pay fees to
the franchisor. The Coronavirus economic downturn has further
exacerbated cost pressures, with some franchisors continuing to charge
franchise fees despite their businesses being forced to close, such as gym
17
Submission 184 to the PJC inquiry.
18
Report of the Migrant Workers' Taskforce, https://www.ag.gov.au/sites/default/files/2020-
03/mwt_final_report.pdf, p. 37
28
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
operators, or suffering significant losses in trade, such as in the food and
personal services sectors.
4.42 Other financial controls include the franchisor having control
over the prices that the franchisee charges customers, mandating capital
investments, mandating suppliers used and the cost of supplies.
4.43 Franchisees can be limited in responding to market conditions,
when compared to independent small businesses. The Coronavirus has
seen many examples of small businesses pivoting to take up new
opportunities, but franchisees are often constrained in this regard.
4.44 Franchisors can often make unilateral changes to the franchise
agreement and business model. While there are may be legitimate reasons
to do this, it can change the basis on which the franchisee made their
investment decision. For example, some franchisees described how their
franchisor changed food products being sold from 'fresh' to 'frozen'
products.
4.45 Compared to independent small businesses, franchisees often
face additional challenges winding down or exiting an unsuccessful
business venture. They are more likely to continue as an unprofitable
business than independent businesses. Allocative efficiency in the
economy is harmed when a franchisee is unable to operate a viable
business but also unable to exit. Resources that could operate more
productively elsewhere are 'tied up' in an unviable operation. One
franchisee in submitted to the PJC Inquiry on her experiences exiting the
franchise system:
"I was nearly five years locked into a business I couldn't sell, couldn't
walk away from and that no one wanted. Three years later I had seven
19
failed attempts at selling my business".
4.46 Another submission commented on the difficulties in selling
their food retail business.
... we wanted to sell the business but there were no buyers due the high
exit and entry costs ... In the end, we had to make the hard decision of
walking away from the business and losing everything. Worked extra-
long hours and felt trapped in the system, impacting our health and
family life ... We personally have never encountered the stress and
strain as we felt by joining this franchise. We have lost almost
$800,000 plus our health ... ".20
4.47 While the interests of a franchisor and franchisee can be aligned,
this is not always the case. An example is where the franchisee may be
19
Submission 32 to the PJC inquiry.
20
Submission 185 to the PJC inquiry.
29
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
required to acquire supplies from a third party that provides a rebate or
incentive to the franchisor. The franchisee may be incentivised to choose a
supplier who offers the best rebate to the franchisor, instead of providing
the best value goods. In other cases, the franchisor's business model may
be premised on 'churning and burning', where the franchisee's success is
irrelevant to (or even opposed to) the franchisor's success.
"Franchise sellers foment unwarranted franchise churn which can cost
franchisees their life's savings, their homes, sometimes their marriages
21
and even their lives through suicide."
4.48 Finally, there is often a disparity in resources between franchisor
and franchisee which is acutely felt in the context of dispute resolution
(including access to legal remedies for franchisees).
Reform is required to level the playing field
4.49 The problems observed by the PJC, ACCC and ASBFEO have
established that there is a case for reform. Submissions to the PJC Inquiry,
as well as consultations by the Franchising Taskforce, indicate that there
is broad stakeholder support for further Government action in this sector.
4.50 Noting that the Franchising Code has been subject to successive
reviews, some stakeholders have argued for fundamental changes to the
franchising relationship. The ACCC has argued that the Franchising Code,
even in an amended form, will never be adequate to address the systemic
issues in the sector, and that serious consideration should be given to an
ex-ante regulatory model, such as a licensing regime. In its submission to
the Taskforce's consultation process, the Australian Association of
Franchisees suggested that franchisees should be considered co-investors,
with protections similar to those provided to shareholders.
4.51 The following section describes policy options being considered
to address problems in franchising.
What policy options are being considered?
Option 1: Status Quo
What does this option involve?
4.52 Under this option, there would be no changes to the Franchising
Code or the enforcement framework in the CCA. No other action would
be taken in response to the PJC report recommendations or following the
work of the Franchising Taskforce. Franchising participants would
continue to be subject to the existing provisions in the Franchising Code
21
Submission 27 to the PCJ inquiry
30
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
as well as the general provisions of the CCA and ACL. The need for
change could be re-examined at a future point.
What are the costs and benefits of this option?
4.53 The major benefit of this option is that there would be no
additional regulatory impact on the franchise sector. Noting that the sector
has been adversely affected by the economic downturn caused by the
Coronavirus, franchisors in particular would likely benefit from not
incurring transitional and ongoing compliance costs.
4.54 This option also provides a longer timeframe to evaluate the
effectiveness of the changes to the Franchising Code that took effect in
2015. Noting that the average term of a franchise agreement is around five
years, and the PJC inquiry took place across 2018-19, it is possible that
the full effect of those changes was not reflected in evidence considered
by the PJC.
4.55 However, not addressing known problems in the sector is likely
to result in continuation of the significant negative social and economic
impacts. Ongoing disputes and dissatisfaction will draw resources away
from more productive economic pursuits, with continuing low confidence
in the franchising business model. Poorly informed franchisees may
continue to over value franchise opportunities. Non-compliance is
expected to continue. Dispute resolution will continue to be difficult and
expensive, with resources devoted to dispute resolution not available for
more productive outcomes.
4.56 On balance, noting that the regulatory impacts associated with
reform are low-moderate, the costs associated with this option outweigh
the benefits.
Option 2: Regulatory reforms to the franchising sector
What does this option involve?
4.57 Under this option, the Government would implement the
following regulatory measures to address the problems outlined in section
3 of this document.
Reforms to better inform franchisees and improve transparency
A public register of franchisors
4.58 Under this option, a public register of franchisors would be
established by the Government. All franchisors would be required to
provide information to the register. In addition to improving transparency
for franchisees, the register would assist the ACCC in its enforcement
role, and improve the information available to government about the
31
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
franchising sector. Consultation will inform the design and
implementation of the register.
Stakeholder views
4.59 A register may address a range of issues in the franchising
sector. For example, a register could increase transparency by allowing
prospective franchisees to compare different franchise systems and make
a more informed decision before committing to a particular system or
brand. The AAF proposed that franchisors, franchisees and franchisee
associations should be registered, and that franchise agreements and
disclosure documents should be lodged. The FCA also supported
registration with updated documentation being provided as it felt this
would assist the ACCC in its enforcement role, build a culture of
transparency and improve confidence in the sector.
4.60 Industry associations such as MTA Queensland suggested a
public register could also lift standards across the sector by incentivising
franchisors to ensure their conditions are competitive, as well as
increasing the Government, regulators' and academics' knowledge of the
franchising sector. A more robust model was also supported, including
registration of all franchisors and all individual franchising arrangements.
4.61 Some stakeholders raised concerns that a register may require
the disclosure of commercial-in-confidence information to the detriment
of the franchising business model. Franchisors have highlighted concerns
that a public register would impose an additional compliance burden.
4.62 Most significantly, some stakeholders (including the ACCC)
have raised concerns that a register could lead some prospective
franchisees to believe that the franchise system and any documents or
statements on the register have been vetted and can be relied upon. This
may, in turn, result in reduced due diligence by prospective franchisees.
4.63 Submissions in response to the Taskforce's earlier issues paper
showed that there was general support for a registry function amongst
stakeholders, with a number of options suggested about who should host
it, what information should be available on it and in what form. Under this
option, the Government would consult further on the final design of the
Register.
A Key Disclosure Information Fact Sheet containing information that is
taken from disclosure documents
4.64 Under this option, the Government would design a new
mandatory Key Disclosure Information Fact Sheet in consultation with the
franchising sector to improve and simplify upfront disclosure, highlight
key information, and assist franchisees to understand obligations and the
risks associated with entering a particular franchise agreement. Further
consultation would be conducted on the design of the Fact Sheet.
32
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Stakeholder views
4.65 Submissions to the consultation paper showed there was a
general consensus amongst stakeholders that the provision of more
information was not necessarily desirable. Rather, the focus should be on
appropriate information being provided in a concise form, including
relevant leasing information. Many stakeholders stated that current
disclosure is too complex and needs to be made simpler and more
relevant.
Electronic and hard copy disclosure documents
4.66 Under this option franchisors would be required to provide
disclosure documentation in electronic form. Having access to an
electronic copy would allow prospective franchisees to more easily share
disclosure documentation with relevant professional advisors and more
easily search for information.
Stakeholder views
4.67 Submissions to the consultation paper process showed that there
was general support for electronic disclosure.
Separate information statement
4.68 Under this option it would be made clear the information
statement (Annexure 2 of the Franchising Code) should be provided as a
separate document to the rest of the disclosure material. This change is
intended to make it more likely the information statement will be read
before the prospective franchisee commits to entering the agreement.
Stakeholder views
4.69 Stakeholders have not raised any significant objections to this
recommendation.
Provision of the ACCC's Franchisee Manual to prospective franchisees
4.70 A franchisor would be required to provide a prospective
franchisee with the ACCC's Franchisee Manual when it first provides the
disclosure document.
Stakeholder views
4.71 Concerns were not raised by stakeholders in relation to this
recommendation by the PJC and is expected to have only a most minimal
regulatory burden on franchisors.
Financial disclosure in disclosure document
4.72 Under this option, the Government would amend the
Franchising Code so that any financial information must be part of the
disclosure document (and not provided separately).
33
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Stakeholder views
4.73 No significant concerns were raised about the inclusion of
financial information, where provided, in the disclosure document.
Increase transparency around retail leasing
4.74 Under this option, the Government would implement technical
changes to clause 13 of the Franchising Code, to increase transparency
surrounding retail leases, subject to consultation with the sector to ensure
there are no unintended consequences. Franchisors will not need to
provide documents they do not possess.
Stakeholder views
4.75 Franchisors have indicated that site negotiation can take a
significant period of time, such that providing franchisees with a right to
'cool off' until a site is formally agreed (including the cost) would see the
franchisor faced with an extended period of uncertainty. Further, where a
franchisor signs a head lessee and then the franchisee utilises their cooling
off right, this may leave the franchisor with a premises, but no franchisee
to run the business. However, franchisees raised concerns that they cannot
make reasonable assessments of the value (including costs, obligations,
benefits and risks) of a franchise business without knowing the terms of
the lease.
Improved disclosure around supplier rebates
4.76 Under this option, the Government would amend the
Franchising Code to require franchisors to disclose information on
supplier rebates, commissions and other payments and to disclose whether
a master franchisor controls and/or receives rebates from suppliers.
Stakeholder views
4.77 Submissions to the consultation paper process showed that
stakeholders did not agree about the extent of disclosure of supplier
rebates and whether third line forcing could be used to exploit franchisees.
There was considerable support however for the amount of rebates
received to be included as a line in franchisors' profit-and-loss statement.
A number of franchisors argued that the unintended consequences of
regulating rebates could be standardised pricing and reduced incentives to
negotiate better deals.
Extend cooling off and parameters to trigger start of cooling off period
4.78 Under this option, the Government would amend the
Franchising Code to allow a franchisee to terminate any and all
arrangements between the franchisor and franchisee at any time up to 14
days after the last of the following have occurred:
• a franchise agreement has been signed;
34
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
• a payment has been made by the franchisee to the franchisor;
• the required disclosure documents set out in the
recommendations in Chapter 6 of the report have been
received by the franchisee, within the required disclosure
period; and
• where the franchisor is the lessor or an associate of the lessor,
the franchisee has received a document setting out the terms
of the lease provided that the final lease is substantially
similar to the terms provided.
Stakeholder views
4.79 Stakeholders have stated that the cooling off period is only
beneficial if there is adequate and transparent disclosure of the costs
involved. Stakeholders did not support mandating the provision of a
signed lease as a condition of triggering the cooling off period due to the
significant risk and difficulties put on the franchisor in doing so. Instead,
there was considerable support to replace that condition with the
requirement to provide of the terms of the lease.
Cooling off rights extended to transfers
4.80 Under this option, cooling off rights would be extended to the
transfer of an agreement to a new franchisee and where the franchisee
enters a substantially new agreement with the franchisor (a deemed
transfer) but not to renewals or extensions.
Stakeholder views
4.81 There was general support for the view that a new franchisee
should not be disadvantaged because they are purchasing from another
franchisee, as opposed to the franchisor.
Amend the relevant clauses of the Franchising Code to apply recent
automotive franchising changes relating to capital expenditure
4.82 The Government recently amended the Franchising Code to
strengthen the right of franchisees in the automotive sector when a
franchisor requires a franchisee to make a significant capital expenditure.
Those amendments will be expanded to apply to the broader franchising
sector.
4.83 This means that before agreements are signed, there will be
increased transparency and communication about when capital
expenditure will be required, including the circumstances under which the
franchisee is likely to recoup the expenditure.
4.84 Franchisors and franchisees will be obligated to discuss
significant capital expenditure requirements prior to entering an
35
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
agreement. The franchisor must include as much information as
practicable about the expenditure in the disclosure document, including:
• the rationale for the expenditure;
• the amount, timing and nature of the expenditure;
• the anticipated outcomes and benefits of the expenditure;
• the expected risks associated with the expenditure.
4.85 Franchisors will not be able to impose significant capital
expenditure just because they unilaterally consider there to be a business
case. However, franchisors will still be able to require expenditure when:
• it is disclosed to the franchisee before they enter the
agreement
• is legally required
• it applies to all franchisees and has been approved by a
majority of them or
• if it applies to a minority of franchisees, has been agreed to
by the franchisee.
Stakeholder views
4.86 There was no clear agreement amongst stakeholders although
many agreed that capital expenditure associated with leasing arrangements
in shopping centres complicated the issue. Some stakeholders suggested
that capital expenditure should be commensurate with the timeframe of
the franchising agreement so that costs could be recuperated by the
franchisee.
Require disclosure of end-of-term arrangements for franchisee goodwill
4.87 Under this option, the Government would require franchisors to
disclose end-of-term arrangements for franchisee goodwill (if any) in the
disclosure document.
Stakeholder views
4.88 Stakeholders have indicated this measure would help align
franchisees' and franchisors' expectations at disclosure, and assist
franchisees in making a more informed decision before entering into the
franchise agreement. Stakeholders have further indicated this could help
minimise disputes at the end of, or at a later point, in the agreement.
Require master franchisors to meet requirements of marketing funds
4.89 Under this option the Government would amend clause 12 of the
Franchising Code of Conduct to provide that a master franchisor must
comply with clauses 15 and 31 where the sub-franchisee is directly or
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Consumer Act 2010
indirectly required to contribute to a marketing or cooperative fund
controlled or administered by the master franchisor.
Stakeholder views
4.90 Franchisees and the FCA are generally supportive of this
change.
Franchisors would be required to include a statement about the accuracy
of financial statements
4.91 Under this option the franchisor would be required to make a
statement confirming that, 'to the best of the franchisor's knowledge',
financial statements provided in the disclosure document are 'accurate,
correct and compliant' with the Franchising Code and accounting
standards.
4.92 Some stakeholders have suggested that this statement is not
required, as franchisors are already banned from making false or
misleading representations by the ACL. Others suggested it would remind
franchisors of their obligations and promote confidence in disclosure
amongst prospective franchisees.
4.93 Franchisors have indicated that they may not have access to the
financial information of their franchisees. Several franchisors raised
concerns that they feel they open themselves to liability if they provide
franchisees with financial information that may be misleading, even if it is
done so inadvertently.
Stakeholder views
4.94 Franchisors were concerned about a requirement to actively
verify financial information provided by an exiting franchisee to
prospective franchisees unless they are able to state without liability that
the information is 'unverified'.
4.95 Many stakeholders, including franchisees, advisers and Small
Business Commissioners, were of the view that the provision of accurate
financial information at disclosure was important. Accurate financial
information is needed for franchisees to make an informed business
decision about the franchise.
Additional requirements where the franchisor is terminating in special
circumstances
4.96 Under this option the Government would amend the Franchising
Code to require the franchisor to provide the franchisee with seven days'
notice of a proposed termination in special circumstances (clause 29), so
that a mediator or arbitrator can assist the parties to negotiate.
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Stakeholder views
4.97 Submissions to the consultation paper process showed that a
number of stakeholders, including the FCA, thought it important that
franchisors maintain the ability to terminate an agreement where there was
the possibility of reputational risk, fraud or a health and safety risk.
4.98 Franchisees have stated that there should be some ability to
challenge termination through the Code, and to ensure that special
termination rights are not used opportunistically. For example, the Caltex
National Franchise Council submitted to the PJC that many franchisees
experienced the termination of their Franchise Agreements for what they
considered were non-material breaches or alternatively minor breaches
capable of remediation.
What are the costs and benefits of this option?
Quantitative costs
4.99 See Appendix A for the assumptions made in order to complete
the costings below.
4.100 See Appendix B for the full costings of this option.
Table 4.1 Regulatory Burden estimate
T Business Community Individual
Total costs
h costs costs costs
eTotal Costs $ 3.92M $ n/a $ n/a $ 3.92M
regulatory burden estimate (RBE) is calculated as the average annual
equivalent cost over the first 10 years of the policy. For a breakdown of
this estimate see Appendix B
Qualitative costs and benefits
Public Franchisor Register
4.101 The costs and benefits of a public franchisor register is currently
not quantifiable due to the need to consult on the final design of the
register. An impact analysis of the register will be conducted separately
following consultation with the sector. Depending on the design, some
possible costs and benefits are identified under 'stakeholder views' in the
discussion above relating to the register. These will be explored further
through consultation.
Key Disclosure Information Fact Sheet
4.102 The Fact Sheet would benefit franchisees by providing them
with a simple summary of financial and other critical information that is
important for making an initial assessment about the franchise offer.
Although it is not intended to be a substitute for the full disclosure
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Consumer Act 2010
document, it will help franchisees, and their professional advisers,
prioritize the consideration of critical information.
4.103 A summary disclosure document will impose only a minor
compliance burden on franchisors because it will be a summary of
information already prepared, at least annually, for the disclosure
document update. Franchisors would also benefit from franchisees being
better informed at the point of disclosure, as this will likely reduce
disputation caused by misunderstandings between the n
4.104 It is expected that the introduction of the Fact Sheet will provide
the sector with a net benefit to the sector over all.
Changes in disclosure practices
4.105 Better disclosure practices will benefit both franchisees and
franchisors - as discussed above in relation to the Key Disclosure
Information Fact Sheet, franchisees being better informed at the point of
disclosure will likely reduce disputation caused by misunderstandings
between the franchisor and franchisee during the agreement term.
4.106 There is a small possibility that overly burdensome disclosure
requirements could deter businesses from utilizing the franchising
business model, or deterring international franchises from entering the
Australian market. On the other hand, a well-regulated sector with a high
standard of pre-entry due diligence may be beneficial for attracting
international investment.
4.107 The regulatory costs associated with improved disclosure are
outweighed by the benefits associated with better informed prospective
franchisees.
Cooling off measures
4.108 Under existing provisions in the Franchising Code, the
franchisor can recoup costs associated with a franchisee exercising their
right to cool-off. This will have the effect of negating the costs associated
with an extended cooling off period for franchisees.
4.109 As was discussed in the problem section above, franchisees can
be affected by 'optimism bias', where they are reluctant to face the
downside of an investment to which they have become emotionally
attached. The proposed cooling off measures will be beneficial to
franchisees who have been motivated to sign on due to an initial
emotional impetus - these measures are a chance for poorly informed or
overly optimistic franchisees to get out when 'reality hits'.
4.110 Additional benefits to franchisees of these measures would
include the ability to examine important documents (including the terms
of the lease in certain circumstances) over an additional seven days before
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being locked into the franchise agreement. Proper due diligence,
especially on financial disclosure, is needed in order for the franchisee to
make an optimal business decision.
4.111 Further, these measures would extend cooling off provisions to
the transfer of agreements. This will ensure that all prospective
franchisees will have the opportunity to contemplate their decision more
thoroughly, not just those signing on to a new franchise agreement.
4.112 Given the above, the benefits are expected to outweigh the costs
of this measure.
Amending the relevant clauses of the Franchising Code to apply recent
automotive franchising changes relating to capital expenditure
4.113 While this measure will impose a regulatory burden on
franchisors (see discussion in Appendix B), the cost to franchisors would
be outweighed by the benefit to franchisees from the increased
transparency and the protections against capital expenditure requirements
that they are not able to recoup. Benefits include reduction in disputes and
improved financial security for franchisees. The qualitative costs and
benefits outlined in changes in disclosure practices above would also
apply to this measure.
Requiring master franchisors to meet requirements of marketing funds
4.114 Improved understanding will likely arise from making the
requirements under clauses 15 and 31, relating to disclosure on marketing
and other cooperative funds consistent, and ensuring disclosure provisions
apply to master franchisors. There is likely to minimal regulatory burden
on franchisors arising from these proposals. Indeed, they may reduce the
burden of compliance with the current inconsistent provisions.
4.115 The qualitative costs and benefits outlined in changes in
disclosure practices above would also apply to this measure.
Additional requirements where the franchisor is terminating in special
circumstances
4.116 Currently, franchisors are able to terminate in special
circumstances (as defined by the Franchising Code) without notice to the
franchisee if the franchise agreement provides for them to do so.
4.117 Amending the Franchising Code to require the franchisor to
provide the franchisee with seven days' notice of the proposed
termination, so that a mediator or arbitrator can assist the parties to
negotiate in the context of termination of the franchise agreement, will
benefit franchisees by ensuring that franchisees have an opportunity to
challenge the termination, or initiate dispute resolution.
4.118 In circumstances where immediate termination is warranted, this
delay may be costly to the franchisor or even the public - for example, if a
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franchisee business has somehow endangered public health and safety,
further people could be at risk, as well as the reputation of the whole
franchise brand. However, it is expected that if conduct of a franchisee has
been severe enough to warrant immediate termination, there will be
mechanisms to ensure swift termination where necessary.
4.119 While this measure will impose a slight regulatory burden on
franchisors, it will decrease the franchisor's ability to quickly stem the
effects of the likely serious nature of the circumstances in which the
franchisee is to be terminated. For example, if a franchisee's business has
somehow endangered public health and safety, the wider community
could be at risk, as well as the possibility of reputational damage to the
franchise brand.
4.120 However, it is important terminations arising from breaches are
justifiable. This measure will protect the rights of franchisees to have
recourse to alternative dispute resolution processes.
Option 3: Non-regulatory reforms to the franchising sector
What does this option involve?
4.121 Under this option, the Government would take non-regulatory
action to address problems identified such as initiatives to improve the
education levels of franchisees prior to entering into franchising, and other
measures which do not have an associated compliance burden.
4.122 Improving prospective franchisees' understanding of the
importance of due diligence and other key information regarding
operating a franchise would assist in avoiding many of the problems
identified by PJC and Franchising Taskforce consultation process.
Reforms to better inform franchisees and improve transparency
A new government online educational resource for the franchising sector
4.123 The Government would develop a website, consistent with
Recommendation 18.2 of the PJC's Fairness in Franchising report. The
proposed website would contain a range of information relevant to all
stages of the franchise relationship such as information on due diligence
when entering into a franchise agreement to information on options to exit
the franchise system. Further consultation will be conducted to ensure the
design of the website promotes the objectives of better informed
franchisees
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Stakeholder views
4.124 Submissions to the Franchising Taskforce's Issues Paper showed
that most stakeholders considered that a franchising website would be
helpful.
Amend Information Statement with existing franchisee obligations
4.125 Under this option, the Government would amend the
Information Statement to advise prospective franchisees that their
obligations include obtaining information about employment matters and
compliance with relevant laws.
Stakeholder views
4.126 Franchisees and FCA were generally supportive of this measure.
Raise awareness of the use of 'no agent' and 'entire agreement' clauses
4.127 Under this option, the Government would amend the
Information Statement to address the use of 'no agent' and 'entire
agreement' clauses, and ask the ACCC to refer to these terms in its
educational material.
Stakeholder views
4.128 The FCA supported these measures, but notes that it is not clear
whether 'no agent' and 'entire agreement' clauses protect franchisors. The
FCA argues mandating legal and business advice will have a far greater
impact.
4.129 The ACCC was supportive of include a warning about these
terms as part of its general educational material.
Clarification of cooling off period
4.130 Clarification would be provided in the Franchising Code that the
cooling off and disclosure periods are measured in calendar days and that
the 14 day disclosure period must begin at least 14 days before the signing
of a franchise agreement.
Stakeholder views
4.131 Submissions to the consultation paper process showed that there
was general support for the clarification of franchise cooling off periods.
Improve consistency within the Franchising Code about the treatment of
marketing funds, particularly clauses 15 and 31
4.132 The Franchising Code would be changed to clarify obligations
with respect to marketing funds. This may include clarifying what would
be 'meaningful information' for the purposes of clause 15 of the
Franchising Code. This could assist parties in understanding their
obligations.
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Consumer Act 2010
Stakeholder views
4.133 Franchisees and the FCA were generally supportive of this
option.
Education on best practice financial statements for marketing funds
4.134 Under this option, the Government would work with the sector
to emphasise the importance of developing best practice financial
statements for marketing funds, and additional efforts would be made to
educate the franchising sector on the preparation of financial statements.
Stakeholder views
4.135 Stakeholders have suggested that improved interpretation of the
existing provisions may reduce the incidence of disputes over the use of
marketing funds.
Education on distribution of unused marketing funds
4.136 Under this option, the Government would amend the
Information Statement and use educational materials to improve
franchisees' understanding that, if the franchisor becomes insolvent, they
may lose the benefit of shared funds such as marketing funds.
Stakeholder views
4.137 Some stakeholders advocated for the Code to expressly clarify
the distribution of unused marketing funds in the event of the franchisor
going into liquidation. Other stakeholders argued that should the costs and
risks of administration become too onerous, franchisors may choose not to
operate shared marketing funds and instead recoup marketing costs
through other means (such as franchise system fees).
Improve awareness of wastage and shrinkage payments
4.138 Under this option, the Government would improve awareness of
the issue of wastage and shrinkage payments by franchisees. The
government will draw on existing channels designed for education and
guidance, in addition to the proposed website.
Stakeholder views
4.139 There was no significant feedback on the issue of wastage and
shrinkage.
Measures to address poor conduct and improve compliance and
enforcement
Introduce civil pecuniary penalties for a breach of clause 31
4.140 Creating a civil pecuniary penalty for marketing fund provisions
in clause 31 will deter breaches of the Franchising Code. Penalties for
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non-compliance may boost confidence in the operation of marketing
funds.
Stakeholder views
4.141 Franchisees and the FCA were generally supportive of this
measure.
Double the civil pecuniary penalties for breaches of the code
4.142 Under this option the Government would double the civil
pecuniary penalty for breaches of the Franchising Code from 300 penalty
units to 600 penalty units.
4.143 There is compelling evidence that existing penalties do not deter
poor conduct. This is a significant increase in penalties and will further
deter parties from breaching the Franchising Code. The power to seek
financial penalties is a fundamental part of the ACCC's enforcement
toolkit.
Stakeholder views
4.144 Submissions to the consultation paper process showed that many
stakeholders supported increasing penalties to deter non-compliance and
prevent misrepresentations and abuse of the franchising relationship. FCA
thought any increase should be accompanied by greater clarity for
franchisors about what was expected of them.
Prohibition of franchisors passing on the legal costs to the franchisee
4.145 Under this option, the Government would prohibit (and have
pecuniary penalties for) franchisors passing on the legal costs of
preparing, negotiating and executing documents to the franchisee (except
where it is already incorporated into a joining fee).
Stakeholder views
4.146 The FCA made the point that franchisors would probably raise
entry fees if a prohibition is introduced, though it would support a
prohibition on charging above the standard fixed fee for costs of
negotiations.
4.147 The AAF did not comment on this recommendation.
Government to develop best practice models for unilateral variations
4.148 Under this option, the Government would work with
stakeholders to develop best practice models in relation to the process by
which a franchisor makes unilateral variations to contracts and subsidiary
documents.
4.149 The PJC and the Taskforce received evidence that the practice of
unilateral variation of franchise agreements (and associated documents
such as operations manuals) is widespread in the franchise sector.
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Consumer Act 2010
Stakeholder views
4.150 Stakeholders, including the FCA and franchisors considered that
there are good reasons for making unilateral decisions, including for
health and safety requirements, to implement new legislation, to innovate
or grow the business and maintain market relevance. Franchisees on the
other hand felt that franchisors were insulated from the risk of business
failure and that they were forced by franchisors at times to opt into deals
they did not want.
Improvements to exit and dispute resolution
Incorporate the functions of the Franchising Mediation Adviser into
ASBFEO
4.151 The FMA role under the Franchising Code would be
incorporated into the functions of ASBFEO. This would formalise
existing administrative arrangements.
Stakeholder views
4.152 Many stakeholders such as 7-Eleven convenience store had no
objection to OFMA merging with ASBFEO. Submissions to the
consultation paper process showed that stakeholders are generally happy
with the mediation process and thought ASBFEO was doing a good job
and was well-placed to deliver the mediation adviser services. The
rationalisation of OFMA and ASBFEO was broadly supported by
franchisors and franchisees, including peak industry associations like
FCA, and by ASBFEO.
Introduce conciliation and voluntary arbitration
4.153 Under this option, the Government would introduce conciliation
to complement existing dispute resolution provisions and implement a
voluntary arbitration model by appointing a Franchising Arbitration
Adviser, utilising a model similar to that in the Dairy Code of Conduct.
Stakeholder views
4.154 Access to justice, including costs and timeliness, was raised by a
number of stakeholders in submissions to the consultation paper. Some
franchisees considered that mediation outcomes were limited by the
power imbalance between the parties entering into mediation. Others
considered a fear of retribution meant mediation was underutilised.
Advisers thought many disputes were brought to mediation too late to
save the relationship between the parties. There was support for a three-
stage approach to dispute resolution: mediation, conciliation and
arbitration.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Clarify the availability of multi-party mediation
4.155 Under this option, the Government would amend the
Franchising Code to clarify that, if the person conducting the dispute
resolution process determines it is appropriate to conduct a multi-party
process, the franchisor cannot refuse to take part in that process.
4.156 If implemented, the Government would increase awareness of
these measures to ensure the franchising sector is informed of their
obligations and rights in relation to multi-party mediation.
Stakeholder views
4.157 The Government has heard from the Office of the ASBFEO that
under the current Code, franchisors are able to refuse multi-party
mediation, and this can lead to franchisees being 'picked-off' by the
franchisor through separate mediation processes. ASBFEO has stated that
multi-party mediation is not common, despite that it is a process that
works well.
4.158 Furthermore, many stakeholders indicated that they were
unaware of their ability to engage in multi-party mediation.
4.159 Submissions to the consultation paper process showed that there
was considerable support for clarifying multi-party dispute resolution.
Develop amendments to the Franchising Code to facilitate negotiated
early exit
4.160 Under this option, the Government would consult with the
franchising sector to develop amendments to the Franchising Code to
facilitate negotiated early exit that balances the rights and interests of
franchisors and franchisees.
Stakeholder views
4.161 Some stakeholders, primarily franchisors and professional
advisors, claim that introducing franchisee termination rights may affect
the franchisor's ability to make long-term investment decisions due to the
reduced certainty of the contract, and may also lead to a higher turnover in
franchise systems.
4.162 Furthermore, some stakeholders claim that not all franchisees
exit their franchise in good faith, arguing that franchisees should not be
permitted an easy exit from their contract for reasons outside the
franchisor's control, such as unfavourable economic conditions.
4.163 Submissions to the consultation paper process showed that there
was no clear agreement amongst stakeholders on this measure. A number
were happy with the current provisions of the Code but thought the terms
of the agreement should outline the exit arrangements so the parties are
clear about them at the outset. Academics, lawyers and other advisors
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noted the current existence of legal options to deal with 'unreasonable
impositions', such as unconscionable conduct and UCT laws.
4.164 Some franchisees considered that franchisors should be obliged
to specify their deliverables and only change them with the agreement of
the franchisee. If franchisees are not able to meet their deliverables,
franchisees should be able to exit the agreement.
Clarify and educate regarding restraint of trade clauses in franchising
4.165 Under this option, the Government would increase prospective
franchisees' awareness of the effect of restraint of trade clauses, clarify
what constitutes a breach of clause 23 of the Franchising Code, and
amend the Information Statement to warn prospective franchisees of the
need to obtain legal advice on restraint of trade before entering the
agreement.
Stakeholder views
4.166 Submissions to the consultation paper process showed that
stakeholders did not agree on the operation of restraint of trade clauses.
Some franchisors noted that dilution of restraint of trade clauses could
lead to hardship to small franchisor business. Others supported greater
awareness raising amongst franchisees of restraint of trade provisions
within franchise agreements.
What are the costs and benefits of this option?
Quantitative benefits
4.167 See Appendix A for the assumptions made in order to complete
the cost offsets below.
4.168 See Appendix C for the full costings of this option.
4.169 Note that the cost offsets in the table below are only associated
with the multi-party mediation component of this option.
Table 4.2 Cost offset estimate
Business Community Individual Total cost
cost offsets cost offsets cost offsets offsets
Total cost
$ 3.12M $ n/a $ n/a $ 3.12M
offset
The cost offset estimate is calculated as the average annual equivalent cost
offset over the first 10 years of the policy. For a breakdown of this
estimate see Appendix C.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Qualitative costs and benefits
Education and awareness measures22
4.170 Education and awareness will benefit both franchisees and
franchisors. The proposed measures will assist prospective franchisees
with conducting proper due-diligence prior to entering a franchise
agreement by simplifying and streamlining the process, and filling
information gaps that were identified by the PJC.
4.171 The online resource would be a central point where prospective
franchisees, and industry stakeholders in general, would be able to access
crucial, reliable and current information. Although the final design of the
website is pending consultation, it would likely bring existing information
produced by the ACCC, ASBFEO, the Fair Work Ombudsman (FWO),
business.gov.au, and the Australian Taxation Office (ATO) together, in
addition to further guidance material. It would act as a comprehensive
online resource for the franchising sector, and save on search costs and
create efficiencies in the process of information gathering for franchisees.
4.172 Franchisees who have conducted proper due-diligence would be
in a better position to make reasonable assessments of the value (including
costs, obligations, benefits and risks) of a franchise before entering into a
contract with a franchisor. This could also reduce the risk of falling into a
dispute with the franchisor due to unforeseen issues arising from a lack of
understanding of the franchise agreement, thus reducing the number of
incidences of parties entering into dispute resolution.
4.173 There will be no cost to industry. As such, the aforementioned
measures will result in a net benefit to the sector as a whole.
Improvements to access to justice in the franchising sector
4.174 This section considers costs and benefits associated with
incorporating the functions of the Franchising Mediation Advisor (FMA)
into ASBFEO, and introducing conciliation and voluntary arbitration to
the franchising dispute resolution process.
4.175 Incorporating the FMA role into ASBFEO would make it clearer
to franchisees and franchisors where they should seek assistance from.
22
This discussion considers costs and benefits associated with developing an online
educational resource for the franchising sector; amending the Information Statement to
emphasise the importance of prospective franchisees understanding Franchising Code
requirements and to warn prospective franchisees of the need to obtain advice about
restraints of trade before entering the agreement; raising awareness of the use of 'no agent'
and 'entire agreement' clauses; providing education on best practice financial statements;
providing education on distribution of unused marketing funds; improving awareness of
wastage and shrinkage payments.
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Consumer Act 2010
This is also consistent with the broader dispute resolution assistance that
ASBFEO provides to small business.
4.176 Arbitration is generally more expensive than mediation,
however it can deliver a binding outcome. It is likely to be cheaper and
more flexible than pursuing court action. Conciliation is a variation on
mediation which gives the party facilitating dispute resolution more
flexibility to assist the parties to reach an outcome where needed.
4.177 The combination of these two measures would simplify the
franchising dispute resolution process and provide multiple avenues for
industry parties to accessible, affordable and effective dispute resolution.
Exact costs and benefits cannot be estimated as this would depend on the
number of instances of dispute and the nature of the disputes themselves,
however these reforms would have a beneficial impact on the sector as a
whole.
Best practice models and amendments to facilitate negotiated early exit
4.178 Under this option, there are a number of measures that the
Government would need to consult on with the sector to ensure changes to
the Franchising Code are fit for purpose.
4.179 Working with the sector on the design of reforms would involve
costs for both Government and sector participants, which includes time
taken to organize and respond to consultation.
4.180 However, involving end-users in the reform process is important
- it ensures that the utility of the Code is maximised for sector participants
and reduces unintended consequences. The industry codes framework
administered by the Department of the Treasury confirms the importance
of public consultation as an element of the policy making process,
particularly in determining whether a code can provide the right
regulatory support without imposing unnecessary red tape on businesses.
4.181 Exact costs and benefits of the specific changes cannot be
estimated at this time as they are subject to the final design of the
measures, which would be settled through consultation.
Extending and increasing penalties
4.182 The maximum penalty for a breach of the Code is set by the
CCA. Under this option, the Government would amend the CCA to
increase the maximum civil pecuniary penalty available for a breach of an
industry code from 300 to 600 penalty units, and increase the civil
pecuniary penalties for breaches of the Franchising Code accordingly. The
Government would also extend penalties to a breach of clause 31 of the
Franchising Code which relate to the management of marketing and
advertising fees.
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4.183 The PJC found franchisors do not face sufficient deterrents for
non-compliance with the Franchising Code. Penalties are an important
part of the ACCC's enforcement toolkit and raising penalties would
benefit the franchising sector by deterring breaches of the Franchising
Code, lifting standards of behaviour in the sector and restoring confidence
in the franchise business model. There would be no additional cost to
franchisors who do not breach the Code.
4.184 Doubling penalties available under the Code may impose
significant costs for small franchisors who breach the Code and do not
have the financial means to pay for it. This would have further
ramifications for the affected franchisor's franchisees who would be at
risk if the franchisor were to wind-up its operations as a result of the
imposed penalty. However, the prescribed penalties would be a maximum
and a court could impose a lesser amount if in the judgment of the court
that is warranted.
4.185 The doubling of financial penalties available under the
Franchising Code, coupled with existing protections provided by the CCA
and ACL, would improve deterrence, enhance compliance and increase
standards of franchisor behaviour. This would provide a net benefit to the
sector as a whole.
Option 4: Reform and refine the franchising sector with regulatory and
non-regulatory measures (preferred)
What does this option involve?
4.186 Under this option, Options 2 and 3 would be implemented as a
comprehensive franchising reform package.
What are the costs and benefits of this option?
Quantitative costs and benefits
4.187 See Appendix A for the assumptions made in order to complete
the costings below.
4.188 See Appendix B and C for the full cost benefit analysis of this
option.
Table 4.3 Regulatory Burden and Cost Offset (RBCO) Estimate Table
Business Community Individual Total
costs/offsets costs/offsets costs/offsets costs/offsets
Total
$ 3.92M $ n/a $ n/a $ 3.92M
costs
Total cost
$ 3.12M $ n/a $ n/a $ 3.12M
offsets
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Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Business Community Individual Total
costs/offsets costs/offsets costs/offsets costs/offsets
Net
regulatory $ 800,000 $ n/a $ n/a $ 800,000
cost
The RBCO is calculated as the average annual equivalent cost/cost offset
over the first 10 years of the policy. For a breakdown of this estimate see
Appendix B and C.
Qualitative costs and benefits
4.189 This option will have the qualitative costs and benefits of
options 2 and 3. See above.
Consultation
4.190 Extensive consultation across the breadth of the franchising
industry has identified a range of views about the degree and direction of
regulatory reform needed to address issues in the sector. Additional
consultation by the Taskforce has reaffirmed the issues identified by the
PJC and further built the evidence base for government intervention.
Franchising Taskforce
4.191 The Franchising Taskforce consulted with relevant stakeholders
to ensure that multiple perspectives were considered. A number of
consultation channels were established in order to inform the options put
forward in this Regulation Impact Statement (RIS), including an Issues
paper, a consultation paper and stakeholder meetings and roundtables.
Issues paper
4.192 The Franchising Taskforce released an Issues Paper on 23
August 2019 to inform the consultation paper options and its advice to
Ministers. The Issues Paper invited feedback to the Franchising Taskforce
on the PJC's recommendations. The Issues Paper grouped the 71 PJC
recommendations report under seven draft policy principles. These seven
principles followed the life cycle of a franchise business from a
prospective franchisee considering a franchise agreement to their exiting
the agreement, with one principle discussing the regulatory framework
across all phases. In recognition of the large proportion of culturally and
linguistically diverse franchising stakeholders, the Issues Paper was
translated into simplified Chinese, Arabic and Korean.
4.193 Submissions to the Issues Paper could be made via a number of
channels including email, phone, and through an online Issues Paper
consultation form which allowed for anonymous responses.
51
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
4.194 Responses to the Issues Paper were received from 75
stakeholders.
Consultation paper
4.195 Submissions to the Taskforce's Issues Paper informed the
development of a consultation paper. The Taskforce's consultation paper
was released on 11 November 2019 and sought feedback on possible
problems and options for government action in the franchising sector.
4.196 Responses to the consultation paper were received from 73
stakeholders.
Stakeholder meetings and roundtables
4.197 The Franchising Taskforce and its support officers conducted 74
separate meetings prior to the Taskforce being established. These
meetings were with a range of stakeholders from across the franchising
sector and in government, including franchisees, franchisors, professional
advisors, peak bodies and other government agencies. These meetings
were held both face-to-face and via teleconference.
4.198 The Franchising Taskforce held two roundtables in Canberra in
September 2019, one for franchisees and the other for franchisors.
Future consultation
4.199 It is anticipated that industry to be involved in the final design of
key reforms, in order to minimise the likelihood of unintended
consequences and build the sector's awareness on the intent and purpose
of the proposed measures.
Conclusion and recommended option
4.200 This thorough review and consultation process resulted in the
Franchising Taskforce advising the Government on improvements to the
Franchising Code, and relevant provisions of the CCA. These suggestions
have been tested against their respective costs and benefits throughout a
comprehensive consultation process.
4.201 The package of changes put forward in Option 4, responds to
problems in a manner that ensures the costs of taking action are
outweighed by the benefits. The proposal presents an opportunity to
ensure the Franchising Code remains fit for purpose, and addresses the
problems identified by the PJC while limiting red tape and complexity for
the sector.
4.202 It is recommended that the Government reform and refine
franchising regulation in accordance with Option 4.
52
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
4.203 To summarise, if Option 4 is accepted, the Government would
take the following actions to address the identified problems in section 3.
4.204 The Government would:
• Increase the information available to prospective franchisees
before they enter the franchise agreement
• Improve prospective franchisees' access to financial and non-
financial information, including supply arrangements, rebates
and marketing and other cooperative funds, supporting their
ability to conduct due diligence
• Educate franchisees on the use of 'no agent' and 'entire
agreement' clauses, the issues of wastage and shrinkage
payments and rights in relation to cooling off and disclosure
periods through the Information Statement, ACCC
educational material, the franchising website and other
avenues
• Strengthen franchisees' rights in relation to significant capital
expenditure
• Enhance the management of the dispute resolution services
and organisations, including providing for multi-party
dispute resolution under the Franchising Code, conciliation
and arbitration
• Balance the rights of franchisors and franchisees to facilitate
and negotiate an early exit from a franchise agreement,
including by increasing disclosure on of end-of-term
arrangements for goodwill and improving awareness of
restraint of trade clauses
• Establish a more effective enforcement regime to encourage
greater compliance with the Franchising Code by doubling
pecuniary penalties for a breach, monitoring the effectiveness
of regulatory reforms, collaborating across all relevant
agencies and with the franchising sector
• Work with stakeholders to develop best practice models in
relation to unilateral variation of contracts
• Prohibit franchisors passing on the legal costs of preparing,
negotiating and executing documents to the franchisee
(except where it is already incorporated into a joining fee)
4.205 These proposals are a balanced reform package that maintains
the basic regulatory framework of the Franchising Code while introducing
new measures to strengthen the industry and protect franchisees.
53
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
4.206 While the Government recognises that some preferred options
will impose a regulatory burden across all franchisors, including
compliant businesses, the reforms as a whole will result in an overall net
benefit to the franchising industry and the Australian economy and
society.
4.207 Other measures, such as doubling the maximum civil pecuniary
penalties for breaches of the Franchising Code that carry a penalty and the
introduction of conciliation and arbitration, will encourage greater
compliance and deter misconduct in the sector, but have little or no
regulatory impact.
Implementation and evaluation
Implementation and transition
4.208 Implementation of the recommended reform would require
careful planning to keep transition costs low and ensure that compliance
remains high.
4.209 The proposed form of legislative changes to the Franchising
Code would be exposed for a period of public comment ('exposure draft').
This will be intended primarily to capture any unintended consequences
arising from implementation and provide the sector with an opportunity to
comment in a way that ensures that policy objectives of government are
met.
4.210 Legislative reform will then follow the usual government
process. Consideration will be given to the appropriateness of staging
reform.
4.211 Following passage of legislative reform and finalisation of
non-regulatory measures, awareness-raising activities and guidance
material will be developed to assist businesses to understand and comply
with the new requirements.
4.212 The ACCC would then maintain its educative work and be
prepared to undertake enforcement where appropriate to ensure
compliance with the Franchising Code.
Evaluation
4.213 The Franchising Code is prescribed by regulation. The
regulation is a sunsetting instrument, meaning it will be examined in
accordance with the review provisions of the Legislation Act 2003 (Cth).
54
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Appendix A
General assumptions and parameters
4.215 In quantifying the costs and savings associated with changes to
the Franchising Code, the following general assumptions have been
applied:
• The cost of legal advice is $500 per hour.23
• The average cost of an owner-manager's time is $39 per
hour.24
• The average cost of an employee's time is $32 per hour.25
• The average cost of a manager's time is $64 per hour.26
• Changes to the Franchising Code will only apply
prospectively.
• There are approximately 1,240 franchisors operating under
the Franchising Code.
• There are approximately 95,600 franchisees operating under
the Franchising Code.
• For 2009 - 2019, there was an average of 2,236 new
franchisees per year.
• Franchisor takes on an average of 1.8 new franchisees per
year.27
23
This figure is based on DISER's RIS Franchise relationships between car manufacturers
and new car dealer, released February 2020.
24
According to the Australian Bureau of Statistics Publication 6306.0 Employee Earning and
Hours Australia (May 2018), the average weekly cash earnings of an owner manager of an
incorporated enterprise is $1,486. Based on owners working a 38 hour week, this equates to
approximately $39 per hour. This publication was released 22 January 2019 and is available
from the Australian Bureau of Statistics website.
25
According to the Australian Bureau of Statistics Publication 6306.0 Employee Earning and
Hours Australia (May 2018), the average weekly cash earnings of a non-managerial
employee is $ 1,227.30. Based on employees working a 38 hour week, this equates to
approximately $32 per hour. This publication was released 22 January 2019 and is available
from the Australian Bureau of Statistics website.
26
According to the Australian Bureau of Statistics Publication 6306.0 Employee Earning and
Hours Australia (May 2018), the average weekly cash earnings of a managerial employee is
$2,424.50. Based on employees working a 38 hour week, this equates to approximately $64
per hour. This publication was released 22 January 2019 and is available from the Australian
Bureau of Statistics website.
55
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
• 32 per cent of systems in Australia use a master/foreign
franchisor structure. This equates to 397 franchisors.28
4.216 Costings have been prepared as the average annual equivalent
over a 10 year period from when the changes take effect.
27
Updated using data from IBISWorld September 2019 report and IBISWorld July 2020
report, based on calculations made in the 2014 franchising RIS which stated that For
2002-2012, there was an average of 1,890 new franchisees per year. Each franchisor takes
on an average of 1.6 new franchisees per year.
28
Research by Griffith University, presented in the Franchising Australia 2012 report
(page 85). An electronic copy of the report is available from the Griffith University website.
56
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Appendix B
Qualitative costs
Table 4.4 Regulatory burden estimate table
Average annual regulatory costs (from business as usual)
Government action Business Community Individual Total
Reforms to better inform franchisees and improve transparency
A public register of
See qualitative costs in section 5.2.2
franchisors
A Key Disclosure
Information Fact Sheet
containing information $ 96,72029 $ n/a $ n/a $96,720
that is taken from
disclosure documents
Electronic and hard copy
disclosure documents
Separate information
statement See total costs associated with a minor change in practice
Provision of the ACCC's
Franchisee Manual to
prospective franchisees
Financial disclosure in
disclosure document
Increased transparency
around retail leasing See total costs associated with updating the disclosure
Improved disclosure document
around supplier rebates
Extend cooling off and
parameters to trigger
start of cooling off
period See qualitative costs in section 5.2.2
Cooling off rights
extended to transfers
29
2 hours of the franchisors time annually (the fact sheet will be updated once a year, in line
with the obligation to update franchise disclosure documents annually) x $39 per hour x
1,240 franchisors x 10 years = $967,200. This equates to an average annual regulatory cost
of $96,720. Note this figure is subject to change following stakeholder consultation on the
final form of the Key Disclosure Information Fact Sheet, which will decide the final design
of the Fact Sheet and therefore the time taken by franchisors to develop this documentation.
57
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Average annual regulatory costs (from business as usual)
Government action Business Community Individual Total
Amend the relevant
clauses of the
Franchising Code to
apply recent automotive $1,605,52030 $ n/a $ n/a $1,605,520
franchising changes
relating to capital
expenditure
Require disclosure of
end-of-term See total costs associated with updating the disclosure
arrangements for document
franchisee goodwill
Require master
franchisors to meet
$18,58031 $ n/a $ n/a $18,580
requirements of
marketing funds
Franchisors would be
required to include a
statement about the See total costs associated with a minor change in practice
accuracy of financial
statements
Improvements to exit and dispute resolution
Additional requirements
where the franchisor is
See qualitative costs in section 5.2.2
terminating in special
circumstances
Other
Total costs associated
with a minor change in $96,720 $ n/a $ n/a $96,720
practice
Total costs for
updating the disclosure
$241,800 $ n/a $ n/a $241,800
document (see
calculation below)
Total transitional costs $1,860,00032 $ n/a $ n/a $1,860,000
30
See full business costs of this measure below.
31
Note that approximately 60 per cent of franchise systems have a marketing fund. Thus the
burden will be 2 hours annually x $39 per hour x (60% x 397 master franchisors) x 10 years
= $185,796. This equates to an average annual regulatory cost of $18,580.
58
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Average annual regulatory costs (from business as usual)
Government action Business Community Individual Total
associated with
obtaining legal advice
on regulatory changes
TOTAL $ 3.92M33 $ n/a $ n/a $ 3.92M
The regulatory burden estimate (RBE) is calculated as the average annual
equivalent cost over the first 10 years of the policy. For a breakdown of
this estimate see Appendix B
Total costs associated with a minor change in practice
4.218 It is expected that implementing the following minor changes to
franchisor's business practices:
• Electronic and hard copy disclosure documents
• Separate information statement
• Provision of the ACCC's Franchisee Manual to prospective
franchisees
• Financial disclosure in disclosure document
• Franchisors would be required to include a statement about
the accuracy of financial statements.
Will take franchisors 2 additional hours in document preparation time.
Franchisors are obliged to update their disclosure documents annually.
4.219 Therefore the total RBE over 10 years of these measures will
approximately be:
2 hours annually x $39 per hour x 1,240 franchisors x 10 years =
$967,200
4.220 The annual average cost of these measures equates to $96,720
Total costs associated with updating the disclosure document
4.221 It is expected that updating the disclosure document in order to
provide:
• Increased transparency around retail leasing
• Improved disclosure around supplier rebates;
32
See discussion on transitional legal costs below.
33
Approximately $3,919,340
59
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
• Amend disclosure requirements to ensure end-of-term
arrangements for franchisee goodwill
• Additional requirements where the franchisor is terminating
in special circumstances
Will take a franchisor approximately 5 hours. Franchisors are obliged to
update their disclosure documents annually.
4.222 Therefore the total RBE over 10 years of these measures will
approximately be:
5 hours annually x $39 per hour x 1,240 franchisors x 10 years =
$2,418,000.
4.223 The annual average cost of these measures equates to $241,800.
Amend the relevant clauses of the Franchising Code to apply recent
automotive franchising changes
4.224 The Government introduced significant reforms to automotive
franchising regulations which commenced on 1 June 2020. Under the
reforms, all new dealership agreements have to take into account
additional considerations regarding end of term arrangements, capital
expenditure and multi-party dispute resolution. The costings below are in
line with costings undertaken in the 2020 Franchise relationships between
car manufacturers and new car dealers RIS.
4.225 This costing assumes that:
• the average term of franchise agreements in Australia is five
years, with an option usually available for a similar term on
renewal34;
• it would take a lawyer two hours to draft the capital
expenditure disclosure part of an agreement which would be
updated upon renewal (twice over 10 year period) at a cost of
$500 per hour. It is assumed that franchisors would have a
standard form contract and that capital expenditure
requirements across systems would be consistent in order to
maintain brand consistency within the franchise; and
• the franchisee would attend a one hour meeting with a
representative of the franchisor to discuss the capital
expenditure requirements (which would occur twice over a
10 year period).
34
FranchiseED, 2018, Managing Franchise Agreements: Transfers and Renewals, accessed
online at https://www.franchise-ed.org.au/franchisor/managing-franchise-agreements-
transfers-and-renewals/
60
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
4.226 Therefore the total RBE for this measure over 10 years would
approximately be:
[($500 x 2) x 2 x 1,240] + [($39 + $32) x 2 x 95,600] = $16,055,200
4.227 The annual average cost of these measures equates to
$1,605,520
Total transitional costs associated with obtaining legal advice on
regulatory changes
4.228 There will be transitional costs associated with franchisors
obtaining legal advice on changes to the Code that are introduced through
these reforms. It is expected that it would take a lawyer 3 hours to review
and advise on the additional regulatory requirements discussed in this
appendix and section 5.2.2.
4.229 Therefore the total RBE for this one-time transitional costs
would be:
($500 x 3) x 1,240 = $1,860,000.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Appendix C
Average annual cost offset (from business as usual)
Government action Business Community Individual Total
Reforms to better inform franchisees and improve transparency
A new government
online educational
resource for the
franchising sector
Amend Information
Statement with existing See discussion on education and awareness
franchisee obligations
Raise awareness of the
use of 'no agent' and
'entire agreement'
clauses
Clarification of cooling
off period
Improve consistency
within the Franchising See discussion on clarifying and improving the
Code about the treatment Franchising Code
of marketing funds,
particularly clauses 15
and 31
Education on distribution
of unused marketing
funds
Improve awareness of
wastage and shrinkage
See discussion on education and awareness
payments
Education on best
practice financial
statements for marketing
funds
Measures to address poor conduct and improve compliance and enforcement
Introduce civil pecuniary
penalties for a breach of
clause 31
Double the civil See discussion on costs and benefits of extending
pecuniary penalties for and increasing penalties
breaches of the code
Prohibition of
franchisors passing on
the legal costs to the
62
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
Average annual cost offset (from business as usual)
Government action Business Community Individual Total
franchisee
Government to develop
See discussion on costs and benefits of
best practice models for
Government working with the sector
unilateral variations
Improvements to exit and dispute resolution
Incorporate FMA into
ASBFEO
See discussion on improving access to justice
Introduce conciliation
and voluntary arbitration
Clarify the availability of See discussion on clarifying and improving the
multi-party mediation Franchising Code
Develop amendments to
the Franchising Code to See discussion on Government working with the
facilitate negotiated early sector
exit
Clarify restraint of trade
See discussion on clarifying and improving the
clause in the Franchising
Franchising Code
Code
Amend the Information
Statement to warn
prospective franchisees
of the need to obtain See discussion on education and awareness
advice about restraints of
trade before entering the
agreement
TOTAL $3.12M $ n/a $ n/a $3.12M
The cost offset estimate is calculated as the average annual equivalent cost
offset over the first 10 years of the policy. For a breakdown of this
estimate see Appendix C.
Cost offsets developed from clarifying and improving the Franchising
Code
4.231 The non-regulatory reforms include the following measures
which aim to clarify and improve the Franchising Code:
• Clarification of cooling off period;
• Improve consistency within the Franchising Code about the
treatment of marketing funds, particularly clauses 15 and 31;
• Clarify the availability of multi-party mediation; and
• Clarify restraint of trade clause in the Franchising Code.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
4.232 It is difficult to estimate the savings created by a majority of
these measures - it is expected that the clarifications and improvements to
the Code will save franchisees and franchisors time and money they may
have spent researching or seeking legal advice on these clauses.
4.233 However, the clarification of multi-party mediation is expected
to produce $3,123,250 in savings for the sector per year. Analysis of this
saving is provided below.
• According to the Franchising Australia 2016 report, disputes
with franchisees involving an external advisor were reported
by 25 percent of franchisors with a median of two of their
franchisees over a 12 month period.
• Typically, commercial lawyers will charge between $5,000
and $7,500 for preparation and attendance at a full day
mediation.
• Mediation offered through the Office of the Franchise
Mediation Adviser is charged at a price of $300/hr + GST,
which is split by the parties involved. The Office of the
Australian Small Business and Family Enterprise
Ombudsman (ASBFEO) estimates that due to the complex
nature of many franchise disputes, mediation can span 10 and
20 hours. ASBFEO estimates that on average, mediations
cost $3000 in total (or $1500 each if split between two
parties).
• Assuming 31035 franchisors are in dispute with two
franchisees per year, this would equate to an average of
$6250 in legal fees and $1500 in mediation fees for both the
franchisee and franchisor, per dispute.
• This equates to (310 x 2 x$6250 x 2) + (310 x 2 x $1500 x 2)
= $7,750,000 + $1,860,000 = $9,610,000
• However, with multi-party mediation, if the average two
franchisees per system per year resolved dispute through one
mediation as opposed to two, this would halve costs and save
the sector a total of $4,805,000 per year.
• Although the exact take up rate of multi-party mediation is
difficult to calculate, if at least 50 to 80 per cent of
mediations in the sector are progressed as multi-party
mediations, there would be a saving of between $2,402,500
and $3,844,000 per year to the sector. The average of these
two figures is $3,123,250 per year.
35
25% of 1,240
64
Regulation impact statement - Industry code penalties under Part IVB of the Competition and
Consumer Act 2010
• A saving of $3,123,250 per year would appear to be a
reasonable estimate.
- A recent automotive franchising dispute involving
approximately 185 franchisees provides an example of the
type of mediation that would be well suited to multi party
mediation.
- Another example of such a dispute occurred in 2016,
where 190 Pizza Hut franchisees took class action against
franchisor Yum! for the introduction of a 'value strategy'
that was impacting their businesses' viability.
- If the Franchising Code was amended to explicitly allow
multi-party mediation, many more multi-party mediations
may occur under the Code.
65
Chapter 5
Extension of modification power
Outline of chapter
5.1 Schedule 4 to the Bill extends the operation of Schedule 5 of the
Coronavirus (Measures No. 2) Act to 31 March 2020. Additionally,
Schedule 4 to the Bill includes a mechanism for further extension of the
operation of Schedule 5 of the Coronavirus (Measures No. 2) Act by
enabling the designated Minister to determine, by legislative instrument, a
new date of repeal, in response to the challenges posed by the
Coronavirus.
Context of amendments
5.2 Schedule 5 of the Coronavirus (Measures No. 2) Act is a
temporary mechanism for responsible Ministers to change arrangements
for meeting information and documentary requirements under
Commonwealth legislation, including requirements to give information
and produce, witness and sign documents, in response to the challenges
posed by the Coronavirus.
5.3 Schedule 5 of the Coronavirus (Measures No. 2) Act was
implemented to address the difficulties created by the Coronavirus
restrictions in meeting information and documentary requirements under
Commonwealth legislation.
5.4 The social distancing measures and the restrictions on
movement and gathering introduced in Australia and overseas in response
to the Coronavirus pandemic are expected to continue to cause difficulties
with meeting information and documentary requirements under
Commonwealth legislation. In recognition of the importance of continued
business transactions and government service delivery during the
Coronavirus pandemic, the extension of Schedule 5 of the Coronavirus
(Measures No. 2) Act, and the mechanism for further extension, provide
continued flexibility to enable necessary temporary adjustments to legal
obligations.
5.5 With the uncertainty surrounding restrictions in response to the
Coronavirus pandemic in Australia and overseas, it is prudent to include a
mechanism to extend the operation of Schedule 5 of the Coronavirus
(Measures No. 2) Act beyond 31 March 2021, should it be required based
on challenges posed by the Coronavirus circumstances. This mechanism
allows for further extensions in response to the Coronavirus, to occur
more flexibly and in a timely manner.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Summary of new law
5.6 Item 1 of Schedule 4 to the Bill extends the operation of
Schedule 5 of the Coronavirus (Measures No. 2) Act to 31 March 2020, or
a later date as determined by the designated Minister. A determination
made under Schedule 5 of the Coronavirus (Measures No. 2) Act will
cease to have effect when Schedule 5 ceases operation.
5.7 Item 2 of Schedule 4 to the Bill allows the designated Minister,
being the Minister administering the Electronic Transactions Act, to
extend the operation of Schedule 5 of the Coronavirus (Measures No. 2)
Act by legislative instrument. Under item 2(2) of Schedule 4 to the Bill, a
determination must not be made unless the designated Minister is satisfied
that the determination is in response to circumstances relating to the
Coronavirus.
5.8 The extension of Schedule 5 of the Coronavirus (Measures
No. 2) Act and the mechanism to extend it further if required is necessary
to respond flexibly to the unpresented challenges of the Coronavirus
pandemic, particularly the challenges posed by social distancing measures
in Australia and overseas.
Comparison of key features of new law and current law
New law Current law
Extension to the current law to allow A Minister responsible for an Act or
for different arrangements to legislative instrument that requires or
information and documentary permits certain matters, relating to
requirements in response to the information and documentation, may
Coronavirus until 31 March 2021, determine that different arrangements
with the possibility of extension should apply in response to the
should this be required. Coronavirus.
Detailed explanation of new law
5.9 A determination made under Schedule 5 item 1(2) of the
Coronavirus (Measures No. 2) Act, will not operate after Schedule 5 is
repealed either at the end of 31 March 2021, or a later day as determined
by the designated Minister. [Schedule 4, item 1(7); item 3]
5.10 Schedule 5 of the Coronavirus (Measures No. 2) Act is repealed
either at the end of 31 March 2021, or a later day as determined by the
designated Minister. [Schedule 4, item 1(8)]
5.11 The designated Minister, by legislative instrument, may extend
the operation of Schedule 5 Item 1 of the Coronavirus (Measures No. 2)
Act to a determined day. [Schedule 4, item 2(1)]
68
Extension of modification power
5.12 The designated Minister must not make a determination to
extend the operation of Schedule 5 of the Coronavirus (Measures No. 2)
Act unless they are satisfied that the determination is in response to
circumstances relating to the Coronavirus. [Schedule 4, item 2(2)]
5.13 The designated Minister is the Minister administering the
Electronic Transactions Act. [Schedule 4, item 2(3)]
Consequential amendments
5.14 Nil.
Application and transitional provisions
5.15 Schedule 4 to the Bill will commence on the day after the Bill
receives Royal Assent.
69
Chapter 6
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Schedule 1 - Refund of large-scale generation shortfall charge
6.1 Schedule 1 to the Bill is compatible with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
6.2 Schedule 1 to the Bill amends the ITAA 1997 to make refunds
of large-scale generation shortfall charges NANE income for income tax
purposes.
Human rights implications
6.3 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
6.4 This Schedule is compatible with human rights as it does not
raise any human rights issues.
Schedule 2 - Transitional provisions relating to the repeal of the
Superannuation (Resolution of Complaints) Act 1993
6.5 Schedule 2 to the Bill is compatible with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
6.6 Schedule 2 to the Bill amends the AFCA Act to facilitate the
closure and any transitional arrangements associated with AFCA
replacing the SCT.
6.7 Schedule 2 to the Bill amends the AFCA Act to provide for the
transfer of records and documents from the SCT to ASIC, includes an
71
Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
express power for the Federal Court to remit cases back to AFCA instead
of the SCT, and introduces a rule-making power to allow the Minister to
prescribe matters of a transitional nature.
Human rights implications
The right to protection from arbitrary or unlawful interference with
privacy and reputation
6.8 This Schedule engages, or may engage, the right to privacy
which is contained in Article 17 of the International Covenant on Civil
and Political Rights (ICCPR).
6.9 Article 17 of the ICCPR contains the right to protection from
arbitrary or unlawful interference with privacy and reputation. The UN
Human Rights Committee has not defined 'privacy' but it is generally
understood to comprise of a freedom from unwanted and unreasonable
intrusions into activities that society recognises as falling within the
sphere of individual autonomy. The collection and sharing of information
(public or otherwise) may be considered to engage and offend the right to
privacy.
6.10 The right in Article 17 may be subject to permissible limitations,
where these limitations are authorised by law and are not arbitrary. In
order for an interference with the right to privacy to be permissible, the
interference must be authorised by law, be for a reason consistent with the
ICCPR and be reasonable in the particular circumstances. The UN Human
Rights Committee has interpreted the requirement of 'reasonableness' to
imply that any interference with privacy must be proportional to the end
sought and be necessary in the circumstances of any given case.
6.11 Where records and documents are transferred to ASIC following
the closure of the SCT, these records and documents may contain personal
or sensitive information relating to individuals who bought complaints to
the SCT. This information is received as 'protected information' under
section 127 of the Australian Securities and Investments Act 2001 which
prohibits disclosure and unauthorised use unless in specified
circumstances.
6.12 Prior to the SCT's closure, outstanding cases that are not able to
be resolved will be transferred to AFCA for resolution. Disclosure from
ASIC will generally be from a request by AFCA for any information
relating to these outstanding cases.
6.13 Under the Superannuation (Resolutions of Complaints)
Act 1993, a party may appeal to the Federal Court on questions of law
from a determination made by the SCT. Disclosure to the Federal Court
from ASIC will be in the course of this appeal process. Where the request
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Statement of Compatibility with Human Rights
for information would have previously gone to the SCT, it will now be
directed to ASIC for information relating to the original determination.
6.14 Where ASIC does disclose this information, either to AFCA or
the Federal Court, ASIC must comply with disclosure and retention
principles contained in the Privacy Act 1988 and section 127 of the
Australian Securities and Investments Act 2001. Under this section,
disclosure to AFCA and the Federal Court for the purposes of their role
and function is considered an 'authorised disclosure'.
6.15 Based on the above factors, if there is interference with the right
to privacy this is considered to be permissible as it is reasonable,
proportionate and necessary to achieve the legitimate objective of
maintaining consumer confidence in the financial services and consumer
credit industry. Therefore, to the extent that Schedule 2 engages the right
to privacy, it is consistent with Article 17 of the ICCPR as it subject to
limitations that are authorised by law and are not arbitrary.
Conclusion
6.16 This Schedule is compatible with human rights as it does not
raise any human rights issues.
Schedule 3 - Industry Code Penalties under Part IVB of the Competition
and Consumer Act 2010
6.17 Schedule 3 to the Bill is compatible with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
6.18 Schedule 3 to the Bill amends section 51AE(2) of the CCA to
increase the maximum amount of penalty units that can be included in
regulations that prescribe an industry code from 300 penalty units to 600
penalty units. This amendment applies to corporations under an applicable
industry code prescribed in regulations.
Human rights implications
6.19 This Schedule does not engage any of the applicable rights or
freedoms.
Conclusion
6.20 This Schedule is compatible with human rights as it does not
raise any human rights issues.
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Treasury Laws Amendment (2020 Measures No. 4) Bill 2020
Schedule 4 - Extension to the modification of information and other
requirements
6.21 Schedule 4 to the Bill is compatible with the human rights and
freedoms recognised or declared in the international instruments listed in
section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
6.22 Schedule 4 to the Bill extends Schedule 5 of the Coronavirus
(Measures No. 2) Act, which provides a temporary mechanism to change
arrangements for meeting information and documentary requirements
under Commonwealth legislation, in response to the ongoing
circumstances relating to the Coronavirus. In particular, social distancing
measures in Australia and overseas are expected to continue to cause
difficulties with meeting information and documentary requirements,
including signature, witnessing and production of documents.
6.23 Under Schedule 5 of the Coronavirus (Measures No. 2) Act, a
responsible Minister may determine that provisions in Commonwealth
legislation containing particular information or documentary requirements
are varied, do not apply or that another provision specified in the
determination applies, for a specified time period. It must not be exercised
by a responsible Minister unless they are satisfied that the determination is
in response to circumstances relating to the Coronavirus.
6.24 Due to the ongoing restrictions in place in Australia and
overseas due to the Coronavirus pandemic, Schedule 4 will extend the
temporary mechanism and the validity of any determination made under
the mechanism until 31 March 2021. Further, Schedule 4 includes a
measure to allow for the extension of these arrangements without
requiring primary legislation.
6.25 Schedule 4 to the Bill will be repealed at the end of 31 March
2021, a later date as determined by the designated Minister. Any
determinations made under Schedule 5 of the Coronavirus (Measures
No. 2) Act will also cease to operate when that Schedule is repealed.
Human rights implications
6.26 Schedule 4 to the Bill, which provides for a temporary
instrument-making power, does not engage any of the applicable rights or
freedoms.
6.27 Each instrument made under the power provided for in
Schedule 4 will be disallowable and will include a human rights
compatibility statement assessing the impact of the instrument on human
rights and freedoms.
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Statement of Compatibility with Human Rights
Conclusion
6.28 This Schedule is compatible with human rights as it does not
raise any human rights issues.
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