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A CODE of conduct for auto franchising has received a limp response from the federal government that shows no substantive reforms and no acknowledgement of the plight of retailers despite the contentious Holden franchise issue.

After 16 months of investigation, the federal government has released its long-awaited response to an inquiry into the operation and effectiveness of the Franchising Code of Conduct.

In its summation, the government concluded instances of unconscionable conduct were not widespread and that it said changes had already been made to the code.

The Australian Automotive Dealers Association (AADA) said the government response to the inquiry was “very disappointing”.

In answer to the government reply to the “joint committee on corporations and financial services inquiry”, AADA CEO James Voortman said “this response has fallen short of delivering much needed protections for franchisees”.

“We believe the parliamentary inquiry made some strong recommendations and provided a good opportunity for reform.

“There is nothing in this response or in the automotive-specific regulations which took effect in July, that would prevent behaviour similar to that of General Motors in its dispute with its dealers.

“It really is concerning, because other manufacturers looking at GM’s behaviour will be looking at the precedent that has been created.”

Mr Voortman said the AADA will be working closely with both ministers Michaelia Cash and Karen Andrews to demonstrate to them how urgent these reforms are.

“In particular, we would like to discuss if there are ways we can strengthen the dispute resolution process, because providing big multinational corporations with the choice to attend arbitration is not a viable option.”

James Voortman

In a commentary on the government response, legal firm HWL Ebsworth said the government also stated that it will continue to work with the automotive franchising sector on the development of an industry-led, principles-based voluntary guide to improve the transparency and fairness of agreements.

Disturbingly, HWL Ebsworth’s lead partner of its automotive industry group, Evan Stents, said: “Many of the recommendations made in the report will not be adopted by the government.”

“Some of the proposed actions that the government has indicated they will adopt will have practical and commercial implications that will need to be worked through by industry participants,” he said in his report.

“Ultimately until the changes are finally drafted it is difficult to say with certainty whether all of these proposed reforms will be made and what practical impact they will have on the franchise sector.”

The firm said the federal government has already made changes to the franchising code specifically for the automotive sector which started on June 1, 2020.

These changes were to:

  1. Require franchisors to give franchisees 12 month’s notice of a decision not to renew an agreement, if the agreement is for 12 months or longer, including a requirement for the franchisor to provide a statement outlining why an agreement is not renewed;
  2. Strengthen conditions that prohibit franchisors requiring significant capital expenditure from franchisees, including the introduction of an obligation to discuss expenditure prior to entering an agreement, disclosure of the circumstances under which the franchisee is likely to recoup the expenditure and specifying, as far as practical, the amount, timing and nature of the expenditure to be provided;
  3. Include a requirement to discuss, plan and agree end of term arrangements if an agreement is not renewed including for the handling of capital intensive stock; and
  4. Expressly allow multi-franchise dispute resolution.

In its report, Mr Stents said the federal government had also recognised that the automotive sector would benefit from broader reforms to the code, including the introduction of voluntary binding arbitration and increased civil pecuniary penalties for a breach of the code.

“The government also stated that it will continue to work with the automotive franchising sector on the development of an industry-led, principles based voluntary guide to improve the transparency and fairness of agreements,” he wrote.

Mr Stents said that the government would not adopt a number of recommendations made in the report “which is not surprising given the existing economic climate and effects of COVID-19 on small business generally.”

“Despite that, there are a number of flagged changes to the franchising code which will have a profound effect on the obligations of a franchisor under the code, particularly the fines associated with contravention and early exit arrangements.

“There is likely to be only a short time for further consultation with the government before draft legislation is prepared.

“The timing of this release is interesting as it now means there is the potential for changes to the franchising code to be made prior to the end of the calendar year,” he said.

By Neil Dowling

Branded Financial