Franchisers face prospect of regulation

The Green Acres franchising scam, in which dozens of new migrants from China and India were bilked of millions of dollars, has sparked a government clampdown on the sector.

It comes in the form of a discussion document that outlines the option of regulations that would have severe financial implications and extra costs.

Commerce Minister Lianne Dalziel, who released the Review of Franchise Regulation at the weekend’s Business Opportunities and Franchise Expo in Auckland, said the regulation model already applied in Australia.

"I was actively involved in meeting with franchisees at the beginning of the year who had been caught up in what is an alleged fraud and still subject to investigation by the relevant authorities including the Franchise Association of New Zealand (FANZ).

“I have initiated this review to see whether there are any issues in the franchising sector that make a case for franchise-specific regulation (as they have in Australia, for example), particularly to give more protection to franchisees," she said.

In May, the NBR reported the Green Acres Group – the country’s largest franchiser – had recovered from the $4 million fraud, which involved an individual selling a home ironing franchise to several hundred investors for more than $20,000 each.

"The brand took a big hit but fortunately the fraud broke over Christmas - that gave the mainstream media a lot to talk about but it was also a quiet sales period for us and we could pull senior management back from holidays,” managing director Andrew Chisholm said.

"That allowed us a month to fix the mess, establish the extent of the problem and see what action we should take. We rolled out a rescue package offering investors to come into Green Acres at no charge and run a legitimate ironing business or move into other areas.”

There is no specific legislation relating to franchising in New Zealand, although franchise agreements are subject to a range of generic laws such as contract law and intellectual property law. There is also voluntary self-regulation of the sector through the FANZ, which requires its members to adhere to a Code of Practice and a Code of Ethics.

The association has argued against regulation and in favour of making the codes mandatory.

The discussion paper seeks feedback on regulatory options that include information disclosure requirements, obligations to obtain professional advice, a cooling-off period, mandatory mediation processes, minimum contractual terms and obligations of “good faith” bargaining.

In here speech, Ms Dalziel said, “The key objective of the review, which will be supported by feedback from the sector, is to explore whether there is some form of franchise-specific regulation that could enhance the contractual arrangements that currently exist.  

“The particular focus is on whether those entering into franchise agreements have adequate information to make good business decisions, while ensuring that we don't impose unnecessary compliance costs on the sector that are disproportionate to the risks involved.

“The discussion document identifies three aspects of the franchising relationship that may make a case for franchise-specific regulation:

• information imbalance: franchisees need to do their due diligence before entering into a franchise contract, but may not have all the necessary information, or know the right questions to ask, in order to make a well-informed business decision.  Should franchisees be required to get independent advice before entering into an agreement or should there be a 'cooling off' period to enable advice to be sought after the fact?

• cost of resolving disputes: there are few options available, particularly to franchisees, to resolve disputes when they arise. Legal processes such as arbitration and litigation can be expensive, and can be damaging to the franchise relationship which relies on cooperation and collaboration. Should there be a requirement for mediation?

• public perception:  the public's confidence in the franchising sector may have been damaged following the cases which involve alleged fraud. It is important that there is confidence in the sector so that high quality business men and women are attracted to the sector, allowing it to continue to grow and prosper.”