The Parliamentary Joint Committee on Corporations and Financial Services has released its report on The operation and effectiveness of the Franchising Code of Conduct.

In respect of financing and lending, the Report identifies misconduct related to small business lending, including in franchising. The committee draws attention to the detrimental consequences of irresponsible lending and borrowing in the franchise sector. The committee also questioned franchisor-assisted lending, and whether it risks artificially inflating the value of franchise outlets.

The committee examined allegations that banks had not conducted comprehensive assessments before approving business loans for franchised businesses.

The Report discusses:

• valuation processes for prospective franchisees’ businesses;
• the extent to which banks examine the exit arrangements in franchise and lease agreements when deciding whether to grant loans to prospective franchisees;
• the accuracy and reliability of financial information provided in disclosure documents and agreements related to the purchase of a franchise;
• lenders accreditation to franchise systems;
• how the banks deal with any potential conflicts that may arise, given that the bank may be providing loans to both the franchisor and its franchisees.

The Financial Services Royal Commission looked at three case studies concerning loans made to assist the borrower to buy a franchise: an ANZ loan to buy a gelato franchise, a Westpac loan to buy a Pie Face franchise, and a Bank of Queensland (BOQ) loan to buy two Wendy’s franchises. All three ventures failed. In each case, the borrower complained that the bank had not exercised the care and skill of a diligent and prudent banker. In each case, FOS upheld the borrower’s complaint.

Overview

The inquiry identified systematic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against such practices.

It concluded that disclosure and transparency are insufficient to protect franchisees operating small businesses against the abuse of contractual power by some franchisors.

Recommended regulatory changes address: disclosure, franchise registration, supplier rebates, whistleblower protections, unfair contract terms, cooling off periods, exit rights, collective action, dispute resolution, binding commercial arbitration, alignment of industry codes, churning, education, and leasing arrangements.