Is franchising a friend or foe?

Most dealers make every effort to comply with both the spirit and the requirements of the law. The smartest ones seek to use their compliance behaviour as a competitive advantage.

Most dealers make every effort to comply with both the spirit and the requirements of the law. The smartest ones seek to use their compliance behaviour as a competitive advantage.

With CLERP6 and the GST, dealers probably feel their compliance cup is already full. But the sad news is that there is another issue that many larger dealers seem to have overlooked in the man-agement of their businesses.

Careful reading of the Trade Practices (Industry Codes - Franchising) Regulations 1998 suggests that any dealer who has more than one office may have to comply with the Code. The Code is ad-ministered by the Australian Consumer and Competition Commission (ACCC).

I have been interested in franchising for more than 10 years. Fellow former RetireInvest director Peter Townshend and I were the main architects of the group’s original franchise structure. Back then, compliance with the Code was a voluntary matter and many franchises decided that they would not seek registration under it. RetireInvest was one of the first complying franchises in fi-nancial services. The recent Money Management Top 100 dealer group survey suggests there are still only six dealer groups who claim to be franchises.

After problems with both administration and compliance with the voluntary code, the Government brought down the current mandatory code in 1998. Any business that fits the definition of a fran-chise must comply with this code.

The problem is that most dealers and advisers don’t understand the exact nature of the relationship between the proper authority holder and the dealer principal. In other words, most dealer groups in Australia are operating as franchisors but are not aware of it which means they are unlikely to ber conforming to regulations in by the Franchising Code.

This Code requires that a dealer’s agreement with a proper authority holder (ie your franchisee) meets certain standards and contains certain protections for the franchisee. A dealer is also required to ensure that he does not enter such an agreement until he has met all the Code's disclosure obliga-tions. Previous agreements are also caught under the Code. These obligations are not unduly oner-ous but it is likely that few dealers currently comply with them.

The dealer is also required to maintain a specified level of disclosure about the dealer’s business to both new and existing franchisees.

If you are obliged to comply with the Code and do not do so, you are exposed to the risk of action by the ACCC. It is worth noting that the ACCC developed the principle of an "enforcible under-taking" which is now also coming into vogue as a means of encouraging compliance by ASIC. We do not know whether the ACCC will use this approach, but we know that a significant impact of this process comes from naming publicly the offending business via media releases.

While this would be a concern, a potentially more explosive problem is that proper authority hold-ers may already have a basis for setting aside their existing agreement with the dealer, including some important aspects of it such as limitations on acting for clients, confidentiality, trail commis-sions and the like. At a time when proper authority holders are increasingly seeking to maximise the value in their client base by talking to other “bidders", some larger dealers in particular could be exposed to a much greater business risk than they realise.

The financial planning industry, amongst other industries, is largely non-complying with the Fra-chising Code. However, some good will come of this. The purpose of the Code is to rectify the im-balance of power that exists between franchisors and franchisees (read dealers and proper authority holders) by - wait for it - Adequate Disclosure.

Those of us who have fought for this as a requirement of professional advisers will know the posi-tive marketing impact of full and frank disclosure on building trust with your clients. In the same way, we believe compliance with both the spirit and requirements of the Franchising Code will sig-nificantly improve relationships between dealers and proper authority holders and increase both the stability and value of a planning network. Those who comply also stand a much better chance of attracting the new advisers the industry needs.

David Williams