31/03/2011

To most people a franchise is like a camel – they wouldn’t like to have to describe it but they’d know one if they saw it.  Indeed most people describe franchises in terms of the most well known exponents of the structure – McDonalds, KFC etc.

In fact it is very simple to define a franchise – and therefore very simple to unwittingly be one.  So I was not overly surprised when long time financial planning guru David Williams (ex – RetireInvest and Bridges and now CEO of My Longevity) pointed out that the FPA’s new Professional Practice offering looked suspiciously like a franchise.

David should know.  He was instrumental in making RetireInvest Australia’s first financial planning franchise.

The FPA’s Professional Practice designation (which apparently is still subject to an EGM scheduled for April 2011) appears to be a branding tool that offers holders the right to use FPA branding to distinguish their business as being of a certain quality because of adherence to FPA requirements. It is open to small principals under their own AFSL, practices under a dealer group AFSL and even local branches of employed planners.

But the way that it operates appears to satisfy all the requirements of a franchise. Was that intended and will the FPA be complying with all the obligations of the Franchising Code as a result?

What is a franchise? Franchising is regulated in Australia by The Competition and Consumer Act (called until recently the Trade Practices Act).  Under that Act an industry code was established for franchising: “The Industry Codes (Franchising) Regulations 1998”, known more commonly as simply the Franchising Code.  The behaviour prescribed in the Code is mandatory.

For the purposes of its definitions the Code focuses not so much on the term ‘franchise’ as ‘franchise agreement’.  There are four elements to a franchise agreement.  If all four of these things are present then the agreement is a franchise agreement regardless of what the parties think, or intended, or call the arrangement.

Firstly there must in fact be an agreement between the parties – regardless of whether it is written, oral or can simply be implied from the conduct of the parties.

This requirement is met by the Professional Practice offer because successful applicants will be required to sign a ‘three year licensing contract’.  Don’t get too hung up on what these documents are called. An agreement will be a franchise agreement regardless of what it is called.  What is important is that it has the elements set out in the Franchising Code.

The second of those elements is that a “person (or company) (the franchisor) grants to another person (or company) (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor”.

Focus here on how broad this element is.  Under the Professional Practice offering the FPA (the franchisor) is granting to another (the franchisee) the right to carry on the franchisee’s business as a financial planner (ie offering and supplying financial planning services in Australia) under a system or marketing plan prescribed by the franchisor, the FPA.

On that latter point of the system or marketing plan determined, controlled or even only suggested by the FPA, it is worthwhile reviewing what is required of the holder of the Professional Practice status.  The FPA’s requirements include that the practice uphold the FPA’s Code of Professional Practice and engage in all of the FPA’s six steps of Financial Planning.  This would seem to be enough of a system to qualify.

Even if it weren’t, a franchise agreement could still exist if the planner conducts their practice under a marketing plan suggested by the FPA.  This requirement seems to be met by the fact that the whole purpose of the Professional Practice designation seems to be to provide such a marketing plan. The brochure says things like “You’ll get higher community recognition” (from the use of the brand), “you’ll represent higher professional standards”, “your practice will become an employer of choice”, and “you’ll be able to use the FPA Professional Practice logo in conjunction with your practice name”.

And then of course there is the national consumer advertising and public relations campaign that the FPA will be running to support the designation.  Sounds like a marketing plan.

The third requirement for the existence of a franchise agreement is that the “operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used or licensed by the franchisor or an associate of the franchisor or specified by the franchisor or an associate or the franchisor”.  This would seem to be met given that the Professional Practice brochure states: “FPA Professional Practices may soon be the only businesses entitled to use FPA branding to promote their business”. These practices will use the FPA trade mark and brand in promoting their business.

The fourth and final requirement is that before starting the business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount.  This requirement is met by the annual fee that the planning business must pay to the FPA of $800 plus $100 for each practitioner in the office.

The FPA’s Professional Practice designation would seem to tick all the boxes and appears to be a franchise agreement as defined by the Franchising Code.  If this is in fact so the FPA will have to seek exemption from the ACCC for the designation to operate without complying with the Code or alternatively meet all the obligations of a franchisor. 

Those obligations are considerable and probably too onerous for both the FPA and potential applicants.  They require the preparation of a very detailed disclosure document by the FPA which must be given to applicants in advance of the agreement being signed.  They also require that the agreement contain certain prescribed contents that it would probably be impractical for the FPA to countenance.

It will be instructive to watch how the Professional Practice offering is rolled out to planners without breaching the Code.

If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.