Where Franchising Fits in New Zealand’s Regulatory Framework

Speech to Franchise Law Symposium, Auckland University

Thank you for inviting me here to this important forum to speak on an issue that has attracted some attention recently: how we regulate franchising in New Zealand. 

As you will no doubt be aware, the Government has been undertaking a Review of Franchising Regulation. I would like to talk today about some of the outcomes of that review and where franchising fits in our regulatory framework.

Let me start by saying that I recognise the franchising sector as an important part of the New Zealand economy. 

The Franchise Association estimates the sector to be worth $14 billion, with 350 franchise systems employing over 100,000 people. That is a substantial contribution to the economy.

The benefits of the franchise model for both franchisors and franchisees are clear. 

It can be a great growth strategy for franchisors.

It can also provide a good path to becoming a business owner, especially for people looking to become first-time business owners, people new to New Zealand, or those looking to re-enter the workforce by buying their own business. 

This business method enables franchisors and franchisees to work collaboratively for mutual benefit, providing both parties with enduring competitive advantages.

The diverse range of industries that employ the franchise model is testament to its widespread appeal.

Franchising is used as a way of doing business by both small and large businesses alike, and can be found in a whole host of industries - from motor vehicle retailing to convenience stores, real estate to home services. 

And though the array of industries using franchising can make it difficult to make generalisations about the sector, it also shows the adaptability of this business method.

In the current economic climate, these benefits help position franchising where it could become an even more popular business model.

In this respect, it's important we have the right regulatory framework to allow franchising to continue its strong contribution to our economy, and I welcome the debate here today to discuss exactly that.

Before I turn to the outcomes of the review of franchising regulation, I would like to put it in a wider context by talking a little about this Government's approach to regulatory reform more generally.

This Government is committed to a regulatory reform programme that ensures new and existing regulations do not impose unnecessary costs on businesses.

We want to improve the business environment and remove regulatory road-blocks so business can grow, new jobs are created, and investment is encouraged.

However, as the recession puts a lot of pressure on the Government's fiscal position, the pressure can then go on to regulate to achieve policy objectives because funding options might not be available. 

But regulation is not a cost-free solution. And, given the current economic situation and the challenges businesses are facing during the recession, our goal to minimise compliance costs is arguably more important than ever. 

This came through loud and clear at the Jobs Summit in February where employers, businesses, and unions said that now is not the time to be creating additional compliance costs. 

Instead, they told us there needs to be a high threshold for introducing new regulation and we need to be thinking about how we can improve the business environment by refining or removing existing regulations.

It is against this background that the Review of Franchising Regulation has been carried out. The Government wants to lighten the load on businesses to help them cope during the current economic climate while having a broader, long-term commitment to improving our business environment to encourage productivity growth.

Many of you will be aware of the recent announcements on the Review of Franchising Regulation. 

The review found that the current business law frameworks around franchising are robust and that there is not a case for franchise-specific regulation.

These findings are the result of a comprehensive review process. A discussion document was released in August last year and attracted interest from a large number of groups. 

Some 33 submissions were received on the discussion paper from a variety of stakeholders - industry associations, individual businesses, franchisees, law firms, and academics from both New Zealand and Australia. 

Thank you to all those who made a submission. In any review process, it is important to get contributions from those involved and who know the sector best so the Government has high-quality information about the issues you may face in order to make good decisions.

The diverse range of submitters meant that naturally a diverse range of views on the need for a new regulatory framework for franchising was presented. 

On one hand, some argued there were information and power imbalances between franchisors and franchisees and that regulation was needed to provide further protection to franchisees.

On the other hand, others said there weren't widespread problems in the franchising sector and government intervention would be a disproportionate reaction to isolated incidents of apparent fraud which occurred last year. 

The compliance costs that regulation would bring were highlighted as a concern, and many said our current regulatory frameworks are working well.

It was clear from the outset of the review that there were strong links between the franchise sector and the small business sector. 

For each issue that was raised, the review asked: "Is this issue unique to franchising, or is it something that is common to the small business sector in general?" 

Often, the answer was that these issues were faced by small businesses more generally. 

The Government has a number of initiatives in place to help small businesses.

For example, in February the Government announced a small-business relief package aimed at improving the business environment by reducing the impact of taxes on companies' cash flows, improving access to credit, and reducing compliance costs. 

It included an increase in the threshold of claims that can go to the Disputes Tribunal, from $7,500 -- or $12,000 with the consent of both parties -- to $15,000 and $20,000 respectively.

In another initiative, the Government recently set up a toll-free helpline and is offering a free business health check to identify areas where businesses may be able to improve their operations.

The Government is also offering free mentoring advice to businesses that undertake the health check and are found to be likely to benefit from the mentoring service. Franchised businesses can benefit from these initiatives, too.

But going back to the review - the diverse viewpoints presented to us were carefully considered and, on balance, the review found it was unlikely that any potential benefits of regulation would outweigh the compliance costs that would come with it.

Furthermore, the review showed that these generic frameworks are working well.

It showed that the current arrangement of generic business law - including contract, intellectual property, fair trading and competition laws - and the voluntary self-regulation of the sector by the Franchise Association is the most appropriate for the New Zealand environment.

The review also found that the importance of due diligence being carried out by franchisees cannot be underestimated. 

Entering into any business venture can carry risks, but it is impossible to regulate these all away. What can help, as with any business contract, is researching a franchise opportunity thoroughly and seeking advice from qualified professionals to fully understand the contract that is being entered into.

Another theme that came through strongly in the review was what Australia has been doing in the franchising sector and whether New Zealand should follow. 

Some of you said there would be benefits in harmonising our laws in this area because many franchises operate on both sides of the Tasman and that could be a way to further the Single Economic Market agenda. 

Others said the approach adopted by Australia wouldn't be appropriate in the New Zealand setting.

I don't want to talk too much about the Australian regime itself as I know you have Professor Terry speaking to you later, and I believe he will be looking at this in detail. 

However, I think this points to another issue and that's how we approach trans-Tasman harmonisation.

I am a strong proponent of the Single Economic Market with Australia, and harmonisation of our business laws is a key aspect of the SEM agenda.

The Australian regime was looked at closely during the review, and officials from the Ministry of Economic Development had several discussions with Australian officials to find out how their regime was working.

We considered that the costs of implementing a regime similar to Australia's would impact negatively on the franchise sector which, being smaller than the Australian sector, may find it more difficult to recover. 

Therefore, the current arrangements of generic business laws and self-regulation provided by the Franchise Association were considered the most appropriate for the New Zealand setting.

The Review of Franchise Regulation recognises the harm that compliance costs would have on the growth of the sector - costs that may have been felt even more keenly by businesses during the current economic climate. 

It also recognises that, in a sector where such varied industries and businesses are represented, a ‘one size fits all' approach would be unnecessary and inappropriate.

And, it confirms that we have sound regulatory frameworks in place already.

I hope you agree that it will bring some certainty to a sector that may have suffered from the reports of alleged fraud last year.

Thank you again to everyone who contributed to the review process, whether at the early stages by consulting with the Ministry of Economic Development on the development of the discussion paper, or by making a submission on the review. 

Your input has been invaluable in making sure the Government understands the issues and has delivered an outcome which meets today's demands of the sector.