Australian Small Business and Family Enterprise Ombudsman Bruce Billson interview with Leon Delaney on Radio 2CC Canberra.

Subject: Franchising Code of Conduct Review

Leon Delaney
The Small Business and Family Enterprise Ombudsman says he's pleased with the review of the Franchising Code of Conduct that has been completed for the federal government. And the Ombudsman, Bruce Bilson is on the phone now. Good afternoon. 

Bruce Billson
Leon, fab to be with you and your listeners, sir. 

Leon Delaney 
Thanks for joining us. I note in your press release today you say that you support the report and the majority of the sensible recommendations. Does that imply then that there are some recommendations that you do not support? 

Bruce Billson 
No, I think it implies there's actually more that we thought could be recommended. There's a couple of areas where we felt greater clarity could have been provided. I won't bore your listeners with all the nitty gritty, but the Franchise Code of Conduct seeks to put some bumper rails in and some guidance on what good, adult-to-adult relationships looks like within the franchise arrangement. A couple of things we thought would have been helpful, like, when does that relationship actually start? If you and I put down $150,000 as a deposit on a franchise, does that start the relationship? Are there duties and obligations that are created at that point? Or is it only when there's a formal commercial agreement signed into? And if that's the case, what happens if we decide under the Franchise Code not to proceed to purchase the franchise that we put the deposit down for? When do we get our money back? Those sorts of things, Leon, that we thought are still work to be done. Another couple of examples. When you go to fill up your fuel before a lovely weekend in the capital, that fuel outlet may well be a franchise business governed by the Oil Code in terms of how that retailer accesses the motor spirits, the petrol, the diesel. But then there's a Franchise Code that sort of relates to stuff that's inside the shop and what happens when those things are in conflict? So that's where we thought there's some good work still to be done, and we'll be feeding that information into the Treasury process as the Government and the Minister decide what to do about the review. 

Leon Delaney 
Okay, now, a little bit of history here. Franchising has been a very successful model for many, many people to get involved in running a business, and they've done so very happily and successfully over the years. However, there have been some bumps in the road. Most notably, there were a couple of examples where franchisors were setting impossible conditions for franchisees who effectively signed a contract that cost them a lot of money to enter in a business that was just not viable. And yet the franchisor was able to get away with it. 

Bruce Billson 
And that's one of the things that's alluded to in the recommendations of the review. Just to give your listeners a bit of a sense that we are almost the franchise capital of the world. There's about $1 in every $11 in the Australian economy generated through a franchise system. So, getting this right matters. There's over 1100 separate systems or brands your listeners might recognise them as, and over 70,000 outlets or customer-facing businesses operating within those systems. So, you're talking about $135 billion worth of turnover and more than half of a million Australians employed in these systems. There are some very prominent systems that are well-known, and those brands have proven the test of time. There are other systems that might have just been, frankly, an idea that someone had and they need money to grow that idea and to maybe see it develop into a real business. And they go out and say, hey, let's franchise this. And you're going, hang on, if franchising is buying the right to use others’ intellectual property and systems for a period of time within an area or a location, how can you sell intellectual property that doesn't actually exist? So that's part of the challenge. And one of the things that we liked about the franchise recommendation is, hey, don't sell franchises where there's no reasonable prospect of profit. We're also a very regulated franchise economy compared to other countries, in part because of the experience that you've pointed to, Leon. But sometimes when there is too much information, people look at it and think I'm not going to have a good hard look at that, it's obviously comprehensive, the regulators have got it right, without actually understanding what the deal is. In some of those cases, franchise opportunities only work if you, the franchisee, put 40 hours a week into the business. If you think you can buy the business, step aside from it and pay someone else to run it, in some cases, that makes it not a viable investment. That sort of stuff should be super clear up front, so you know what you're getting into. That sounds a bit like a terms sheet, doesn't it? What's the deal? So that people can go in knowing with their eyes open that this is something they want to invest their time and their energy into. 

Leon Delaney 
One of the other big issues that emerged going back a decade or more now, was the instances of wage theft that involved franchise businesses. And in some instances it wasn't so much that the individuals operating the franchise business were ripping off their employees, they were left in a position where they had no other choice by the franchisors, the headquarters. Is that sort of thing dealt with in this report? 

Bruce Billson 
No, that's been dealt with through workplace relations laws. There's a provision, and I don't want to sound too lawyerly, called accessorial liability. So, if a franchise system, a franchisor, sets up a business that has inherent in it, breaking the workplace relations laws, they're as much on the hook as the direct employer is, who happens to be the franchisee. So that's been largely addressed, and there's now a responsibility where there's some control over those business operations. The franchisor can be caught by the law in that regard as well. But what the review did highlight – and we've just talked about one example in terms of underpayment of wages – is what happens if the Franchise Code itself is being breached? What if the duty to act in good faith towards each other is not being honoured and someone's being an absolute shyster to someone else, and you're finding that that relationship's really strained. The code sort of says, here's things that should happen and if it doesn't, go to the regulator. And one of the biggest challenges we face is the regulator, the ACCC, is using taxpayers' money to investigate concerns, and of course, it's going to investigate those things that have the biggest impact on the economy, that are, in their words, systemic, recurring problems. And you and I as individuals might have our life savings on the line. We think this is the world. But when it comes to the regulator, they might think, that's one example. We'll go and deal with one that's got 15 examples. Where does that leave us Leon? And that's one of the things that we're very interested in. How does a business get access to justice without contemplating going to the Federal Court and spending a quarter of a million bucks to get your day in court? That's an area where we think more work needs to be. 

Leon Delaney 
Well, one of the things that this report does recommend is an expansion of the powers of your office. So, what would that entail? 

Bruce Billson 
Well, a couple of things. Right now, we've got an important role under the code. So, where a dispute arises and the franchisee and the franchisor, through proper processes within the franchise system, can't work it out, they can issue a notice of dispute and then come to us to see whether we can play a role in mediating that dispute to try and find a way forward. So often in business when a dispute arises, you don't want to blow up the relationship. You actually need and want to keep dealing with the other party. Nowhere is this more evident than in franchising. When the franchisor has a beef with the franchisee, if you can't work that out that makes that symbiotic, mutually supportive relationship of franchising, pretty difficult. And that's where we get brought in to see whether we can find a resolution. Problem is, the parties might turn up and go through the motions, but not really have their heart in it. Now, in other areas of commercial disputation, if that happens and I issue a notice to engage in mediation and someone doesn't behave in a way that's a problem-solving approach, I can issue a notification to the rest of the economy saying, hang on a minute, we've got this issue with this company. They've behaved like absolute peanuts as we've tried to find a resolution. Be cautious and aware if you are thinking of doing commercial dealings with this group. That's not something I can do in the franchise area. That, along with improved education and awareness of what people are signing on to, they're the sorts of things that were recommended that my office should be doing more. 

Leon Delaney 
So, in other words, the ability to name and shame. 

Bruce Billson 
It's got a slightly funkier tone to it in the legislation I operate under. I use the language internally of name and shame. But the law actually talks about notification. It's actually designed to alert others to the form, to the behaviour, of that business. 

Leon Delaney 
It’s a public service notice? 

Bruce Billson 
Pretty much. But it has that same effect that you're alluding to. That's not something I can do under the Franchise Code at the moment. But the other part of it is, Leon, in the franchise sector you've got those behemoth brands that seem to be on every corner of downtown Canberra, that are franchise businesses. And you might think that's all that happens in franchising. No, no. There's an awful long tail of very small franchise systems where the franchisor and the franchisee are both small businesses and that's where we play quite an educative role in trying to help those parties get along and hopefully succeed together. And that's something that the review recommended we should do more of. More of that educative role to try and let the good franchising approach, which is good for business, be more the rule rather than the exception. Franchising done well is an excellent model of entrepreneurship. What can we do to improve the prospects that it's done well? And that's what some of the recommendations in review point to. 

Leon Delaney 
Indeed. Bruce, thanks very much for your time today. 

Bruce Billson 
Great to be with you, Leon.