5.1
This chapter first outlines the current regulatory framework governing the relationship between car manufacturers and dealers. It then explores options to strengthen the regulatory framework to allow car dealers to better exercise their rights within this relationship.
Recent changes to regulatory arrangements for new car dealerships
5.2
The regulation of the relationship between car manufacturers and dealers, including the terms and conditions contained in dealership agreements, are primarily governed by the Competition and Consumer Act 2010 (CCA) through the Franchising Code of Conduct (the Franchising Code) and the Australian Consumer Law (ACL). Best practice principles for new car dealership agreements have also been developed to address areas of concern not covered by the automotive-specific amendments to the Franchising Code.
Amendments to the Franchising Code
5.3
Following the Australian Competition and Consumer Commission (ACCC) market study in 2017, and the release of the Parliamentary Joint Committee on Corporations and Financial Services' Fairness in Franchising report, the Australian Government (the government) introduced amendments to the Franchising Code, to address the effects on commercial arrangements arising from the power imbalance between car manufacturers and car dealers.
These changes came into force on 1 June 2020 and included:
a requirement for franchisors to give franchisees 12 months' 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;
strengthening 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; and
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
expressly allowing for multi-franchisee dispute resolution.
5.4
The government also indicated that 'the automotive sector will further benefit from broader reforms to the Franchising Code, including the introduction of voluntary binding arbitration and increased civil pecuniary penalties for a breach of the Code'.
5.5
Recently announced proposals to further strengthen the Franchising Code for new car dealers are outlined later in the chapter.
Development of best practice principles for dealership agreements
5.6
In its supplementary submission, the Department of Industry, Science, Energy and Resources (the department) advised that it was working with the franchising sector to develop principles-based guidance in relation to compensation and tenure, which it hopes will 'assist franchisees and franchisors when developing new automotive franchise agreements'.
The department argued that:
An industry-driven approach, based on shared expectations developed using the expertise and experience of franchisees and franchisors, has potential to be more efficient and effective than uniform standards at a time where business models are responding to changing commercial pressures, and where the circumstances between and across brands and dealers can vary considerably.
5.7
On 11 December 2020, the government released six voluntary best practice principles for new car dealership agreements for the automotive retailing industry to improve fairness and transparency in dealership arrangements. Details of the six principles are provided in Box 5.1.
5.8
The government's recently announced proposal to make the best practice principles mandatory is considered later in the chapter.
Box 5.1: Best practice principles for new car dealership agreements
Franchisors should include provisions in new dealership agreements that provide for fair and reasonable compensation for franchisees in the event of early termination resulting from:
withdrawal from the Australian market;
rationalisation of their networks; or
changes to their distribution models.
Franchisors should not include provisions that exclude compensation in new dealership agreements.
The 'fair and reasonable compensation' as referred to in Principle 1 should include appropriate allowances for the loss a franchisee may incur, which can include:
lost profit from direct and indirect revenue;
unrecovered expenditure and unamortised capital expenditure where requested by the franchisor;
loss of opportunity in selling established goodwill; and
When an agreement is entered into it should provide franchisees a fair and reasonable time to secure a return on investments that have been required by franchisors as part of the agreement.
Agreements should include reasonable provisions for franchisors to compensate or buy back new vehicle inventory, parts and special tools, in the event of:
withdrawal from the Australian market;
rationalisation of their networks; or
changes to their distribution models.
Agreements should include provision for timely commercial settlement and dispute resolution.
Need for further reform
5.9
This section presents the views of stakeholders in relation to the current regulatory regime and suggestions for further protections to ensure that the conduct of manufacturers does not disadvantage dealers and consumers.
Overall level of current regulation
5.10
Stakeholders expressed differing views on whether the current level of regulation governing the relationship between car manufacturers and dealers was adequate.
5.11
Many manufacturers informed the committee that the current regulatory arrangements struck the right balance between car manufacturers and dealers in Australia, and included clear and appropriate checks and balances that supported fair and sustainable relationships. The Federal Chamber of Automotive Industries (FCAI) argued that:
…the Franchising Code and all other existing legislation relevant to the relationship between dealers and distributors, provides appropriate mechanisms for the regulation of arrangements between distributors and dealers, and that any further regulation governing these arrangements risks over-regulation of the sector.
5.12
Toyota Motor Corporation Australia (TMCA) argued that many of the concerns raised in relation to the relationship between manufacturers and dealers had already been addressed by recent government reforms.
TMCA also indicated:
Toyota's position has always been that enforcement of the current regulations should be the priority, rather than the introduction of new and over burdensome regulation that will stifle changes determined via market and consumer behaviour. In the event that reform is truly necessary, it should be the result of a coordinated, informed and measured approach in consultation with all relevant stakeholders.
5.13
Mercedes-Benz Australia/Pacific (MBAuP) also submitted that it did not consider any further regulatory change was needed to Australia's franchising laws and regulations and indicated that it would:
…have significant concerns if regulatory changes were proposed that undermine or restrict (beyond what is currently imposed by the Code) a manufacturer/wholesaler's ability to negotiate commercially sensible and sustainable agreements with its dealers (for example, by requiring manufacturers/wholesalers to underwrite the success of dealers). If regulations became excessively prescribed and prohibitive, there is a risk that dealership arrangements may no longer be commercially viable and which has the potential to negatively impact all parties.
5.14
In contrast, organisations representing dealers and dealers themselves did not believe the current regulatory regime was adequate.
5.15
For example, the Australian Automotive Dealer Association (AADA) argued that the automotive-specific protections that were introduced by the government on 1 June 2020 fell 'well short of what is required to remedy the power imbalance that exists between offshore manufacturers and Australian franchised new car dealers'. It also submitted:
The AADA considers it imperative that appropriate safeguards be introduced into the automotive franchising regulations to ensure that future withdrawals do not disadvantage dealers, staff and their communities. Further, that basic conditions and calculations for compensation are enshrined in regulation so that they can become a minimum standard for negotiations going forward.
5.16
Similarly, while the Motor Trades Association of Australia (MTAA) acknowledged the significant reforms that had been implemented in 2020, it argued that 'this does not mean that together industry and government should not continue to seek and implement additional enhancements as quickly as possible while there is the current concentrated focus on the sector'.
5.17
Acknowledging the recent reforms, some stakeholders encouraged the government to review their effectiveness. For example, the Motor Trade Association SA/NT argued that 'the Federal Government should commit to a review of the effectiveness of the code at 12 months of operation, with a view to expand provisions as needed'.
Appropriateness of the Franchising Code
5.18
Many stakeholders, representing both manufacturers and dealers, argued that the Franchising Code was not the most appropriate mechanism for regulating the relationship between car manufacturers and dealers.
5.19
The AADA argued that the Franchising Code had 'been very disappointing and is widely considered to have failed in addressing the power imbalance that exists between Australian car dealers and the multinational car manufacturers'. It also submitted that it:
…has long called for protections separate to the Franchising Code due to the many unique features in our industry. The Code is more suited to traditional franchising businesses such as take away and restaurants rather than automotive dealerships, which are complex businesses which require large investments.
5.20
Similarly, the MTAA observed that 'arguments have long been that automotive franchising is a vastly different franchising and competition consideration due to the nature of relationships, the products involved, and the incomparable level of investments and after-sale interactions required'.
5.21
The FCAI highlighted that the relationship between manufacturers
(through their local distributors) and dealers was not what would normally be considered as a franchise. It argued:
Unlike traditional franchises, dealers do not pay anything in the way of franchise fees, nor do they pay anything to the distributor when they sell their business. Most typically, all that dealers pay the distributor for are the vehicles, parts and accessories they purchase from the distributor, as well as special tools for servicing/repairs.
5.22
The FCAI further argued that:
The relationship is captured by the Franchising Code because of a specific provision in the definition of 'franchise agreement' that deems a motor vehicle dealership agreement as being a franchise agreement...
The effectiveness of the Franchising Code
5.23
Stakeholders identified a number of issues in relation to the effectiveness of the Franchising Code. These related to the dispute resolution processes, penalties and enforcement mechanisms, as well as some of the new automotive-specific amendments.
Dispute resolution processes
5.24
One of the significant issues raised by submitters in relation to the Franchising Code was the weakness of the dispute resolution process.
5.25
The AADA argued that the Franchising Code 'is meant to address a power imbalance between franchisors and franchisees, but it fails when these relationships break down and franchisees are in need of a cost-effective, timely and determinative outcome'. It noted that:
The limits of dispute resolution were laid bare in the dispute between
GM Holden and its dealers when after mediation failed, the Minister for Small Business, Michaelia Cash, wrote to both parties requesting they agree to settle their dispute via arbitration. While the dealers agreed to participate GM bluntly refused, calling the Minister's request inappropriate and unhelpful.
5.26
Mr James Voortman, Chief Executive Officer of the AADA, further noted that:
Mediation under the franchising code seldom results in resolution of disputes, and manufacturers are only too happy to invite dealers to take their disputes to the courts, where an expensive, long battle awaits'.
5.27
He also argued that the automotive 'industry more than most is in need of dispute resolution which is cost-effective, is timely and provides a determinative outcome. We believe compulsory binding arbitration should be introduced'.
5.28
Similarly, the MTAA argued that:
Even established processes for raising and attempting to resolve disputes are complicated, time-consuming and rarely settled, if at all, within time frames set by the action taken, or deadlines for decisions. MTAA suggests an example of this conduct was GMH refusal to budge on original deadlines for a decision to accept or reject compensation arrangements and then when essentially forced to provide additional time, after eternal pressure, final deadlines were not negotiable.
5.29
The importance of better dispute resolution mechanisms was also highlighted by the ACCC:
Increased compliance and enforcement action by the ACCC will not address the multitude of issues raised by franchisees. The concerns of many franchisees are not associated with a breach of the CCA or Franchising Code, and are better addressed through more effective alternative dispute resolution processes. However, the current regulatory framework that governs the franchising sector prevents the establishment of an effective dispute resolution or arbitration mechanism scheme. As such, the ACCC believes that serious consideration needs to be given to an ex-ante regulatory model that would allow effective and binding dispute resolution.
5.30
Indeed, Mr Nick Heys, Deputy General Manager, Enforcement Coordination and Strategy, Enforcement Division at the ACCC, noted that 'what we've seen with the franchising code in general, a lot of small disputes turn into very significant and large disputes'. Mr Heys argued:
We need to address or have a mechanism to enable franchisees and franchisors to resolve those issues quickly along the way, whether that's through dispute resolution mechanisms or, as you discussed earlier, arbitration. I think that's one of our observations with the franchising code more generally—preventing those smaller disputes from really escalating and turning to significant, full-blown disputes that result in mediation, arbitration or even court cases.
5.31
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) also considered that dispute resolution was one area of the Franchising Code that could be improved. For example, it argued that 'the adoption of dispute resolution processes similar to those allowed for under the Dairy Code of Conduct, including arbitration processes, will provide much needed certainty for small businesses'.
5.32
However, the introduction of provisions to impose compulsory arbitration in codes of conduct can be problematic (see Box 5.2).
5.33
The ASBFEO argued for access to effective and low cost dispute resolution coupled with fair exit and termination options with the option for arbitration should mediation not be successful.
5.34
The MTAA supported this view and advocated for the creation of an Automotive Ombudsman within the ASBFEO to investigate, coordinate and facilitate complaints handling, mediation and dispute resolution. In particular, the MTAA considered that this approach could improve timeliness and streamline dispute resolution, particularly in relation to warranty repairs and compensation.
Box 5.2: Issues relating to the introduction of compulsory arbitration
Mr Tom Dickson, Assistant Secretary, The Treasury, summarised the conditions that trigger compulsory arbitration in other industry codes:
…there are other codes that provide compulsory arbitration but only when certain conditions are met. The first condition that needs to be met, for instance, is whether or not the code is voluntary. In the case of the Food and Grocery Code you would have seen that arbitration is a part of that. The reason that is a provision that exists in that code is that that code is voluntary.
The second condition is that if the code is mandatory then the provisions that trigger arbitration need to be voluntary or optional. When you look at the dairy code—I imagine that that's an example that may have been raised—you see that that code is a mandatory code but the parties are not bound to take on board a requirement to undertake arbitration. That's a voluntary element that exists within that mandatory code.
The final condition is that if the code is mandatory and the provision that trigger arbitration are also mandatory then the arbitration cannot apply to past contractual rights and obligations. It can only be applied to future obligations. So, to answer your question around why that takes place in the News Media Bargaining Code: the News Media Bargaining Code doesn't look backwards and seek to amend previous contractual arrangements. It only looks forward.
Penalties and enforcement
5.35
Various stakeholders were concerned about the relatively small penalties associated with the Franchising Code and the relatively few cases where enforcement action had been taken.
5.36
The AADA submitted that the 'penalties for breaches of the Franchising Code of Conduct have never been fit for purpose for multinational car Manufacturers'. The AADA argued:
Even, the Government's recent proposal to increase penalties to just over $130,000 for a breach will do little to deter bad behaviour by automotive Manufacturers. General Motors for example is a $200 billion revenue a year company and will not be deterred by a fine of this magnitude.
5.37
Similarly, the MTAA noted its submission that:
The doubling of existing penalties, as announced by the Government in its response to the' Fairness in Franchising' final report pales against the penalty increases called for by the ACCC. Some manufacturers and their representative body suggest such changes along with other reforms to franchising may negatively influence whether a brand continues to participate in the Australian market. MTAA suggests that compliance with a nation's regulatory environment is a cost of doing business and is only a concern if non-compliance is a factor.
5.38
That said, TMCA argued that:
This is not surprising given the ACCC's scrutiny into the franchising sector, coupled by the decision in Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd [2019] FCA 12 (the Ultra Tune case), which was the first case in which the ACCC seriously tested the Franchising Code penalty resulting in a penalty of $2.6millon.
The increase in penalties will further deter manufactures from breaching the Franchising Code. If the Inquiry were to accept that there was a theoretical power imbalance in favour of the manufacturers, any attempt to exploit this to the detriment of dealers would be unlawful under a range of other laws coupled by the hefty penalty regimes already existing in Australia (for example under the ACL which was the basis for the above-mentioned Ultra Tune case penalty).
5.39
While the ACCC pointed out that it had 'consistently made compliance with, and enforcement of, the Franchising Code a priority', it noted that the ACCC's 'compliance and enforcement model has limitations in addressing all issues in franchising'.
5.40
The ACCC also highlighted the difficulties in successfully undertaking enforcement action for franchising contraventions:
ACCC investigations into franchising allegations rely on direct evidence from franchisees and often also ex-franchisees. Ex-franchisees that have been involved in disputes with the franchisor can raise credibility issues. The allegations involved might relate to conduct that is a number of years old and/or verbal representations, which can mean that it is difficult for franchisees and ex-franchisees to provide clear, persuasive evidence of the conduct. For example, allegations of a failure to provide certain information, or the provision of misleading information, at the start of the franchise agreement. It is also our experience that existing franchisees are often unwilling to either make a complaint or provide evidence of misconduct, due to fear of reprisal and the need to maintain an ongoing relationship with the franchisor for the viability of their franchise business.
5.41
Further, the ACCC indicated that:
The legislative bar that's determined by the court for unconscionable conduct is quite high and, as a result of that, the ACCC believes there needs to be an unfair practices standard that may assist in bringing about outcomes for consumers and businesses that doesn't require the high bar that unconscionability has been held to.
Automotive-specific amendments
5.42
Concerns were raised by submitters about the specific amendments to the Franchising Code relating to new car dealerships. These included changes to end of term obligations, capital expenditure, disclosure requirements, and minimum tenure, as well as multi-franchisee dispute resolution processes.
End of term obligations
5.43
Some submitters raised concerns that the 12-month requirement for
non-renewal would potentially result in manufacturers offering shorter terms for dealers. For example, the AADA commented:
Unfortunately, the regulations allow the 12-month requirement to be waived if the agreement is for a period of less than 12-months, in which case the notice period is six months. It also reduces the notice period to one month if the agreement is six months or less. There is a real risk that this element of the regulations will result in OEMs offering shorter terms so that they can provide the shortest notice period possible.
5.44
Mr John Crennan, reflecting on his 50 years of experience in the automotive industry, suggested to the committee that every car company should have to provide 18 months prior notice of quitting the country and that there should be a set working formula in the sales and service agreement or franchise agreement that provides a formula for compensation.
5.45
The AADA also expressed its concern that:
…the requirements for the franchisor and franchisee to agree to a 'winding down plan' can be easily frustrated by the franchisor deploying obstructive or delaying tactics to 'run down the clock' in the period leading up to the expiration of a Dealership Agreement.
5.46
In addition, the AADA argued that:
A major concern for dealers is that the requirement to develop an agreement to reduce stock will encourage those manufacturers that do commit to buying back stock in their Dealer Agreements to revert to the less stringent requirement contained in these draft regulations.
Capital expenditure, disclosure requirements and minimum tenure
5.47
While the AADA welcomed the requirement for discussing how expenses would be recovered under the recent changes, it argued:
…we would contend that a mandatory linkage between the level of demanded capital expenditure and the term offered for the new Dealership Agreement is a superior approach, and one that can be coupled with easily understood, industry standard calculations to ensure that the new car dealer has a realistic opportunity to recoup the expected capital expenditure. Similarly, the regulations require 'discussions about under what circumstances the dealer is likely to recoup the costs of their investment'. Once again, AADA is supportive of the principle that Dealership Agreements should enable dealers to recoup the costs of any capital expenditure.
5.48
The MTAA also called for greater clarity around what should be included:
Unparalleled capital investments, financial exposure of other financial arrangements including the purchase, bailment, sale and constant turnover of stock, training, equipment, tools, refurbishment, marketing and branding, must be better recognised and reflected in agreement terms and conditions, specifically tenure.
5.49
In addition, the AADA argued that 'any significant capital expenditure needs to be the subject of formal agreement by both parties, much like the end of term plan'.
5.50
Manufacturers did not support proposals for minimum tenure in dealer agreements. For example, Ford Australia submitted that:
We would not support any increase to the minimum tenure driven as a result of the need for dealers to obtain a return on capital investment. Any extension would restrict Ford Australia's ability to manage underperforming dealers within our dealer network. A strong performing dealer network is essential. It allows us to strengthen the Ford brand and create new and loyal customers, which benefits all our dealers. It also allows us to achieve an acceptable return on the significant investment we make in the Australian market.
5.51
Mitsubishi Motors Australia Limited (MMAL) indicated that it does 'does not consider that it is appropriate to legislate any minimum tenure or term requirements for dealer agreements'. MMAL also argued:
OEMs require flexibility to best address market and customer needs, and the term offered to a dealer might be adjusted according to the quality of the dealer's facilities (so for example, an OEM may be willing to offer a shorter-term agreement where the dealer has not, and is not expected to, undertake significant expenditure on a site). The use of shorter-term dealer agreements may be appropriate to address issues such as temporarily open points in a network, for example where created by a dealer's departure.
5.52
The FCAI also noted that the impact of the new disclosure requirements for new vehicle dealership agreements as part of the recent changes to the Franchising Code were unknown:
These changes have not yet filtered all the way through dealer agreement lifecycles, but as it does will result in a more transparent process regarding significant capex/investment requirements. There is no reason why the issue of tenure, in the context of the required capex, would not form part of the discussions the Franchising Code now requires.
Multi-franchisee dispute resolution processes
5.53
While noting the recent reforms to the Franchising Code, the AADA argued that:
…the regulations contain no obligation for the franchisor to accede to the franchisees' request. In essence this proposal simply formalises what is currently in place and we hear many reports of dealers requesting multi-party dispute resolution only to be denied by the manufacturer.
5.54
The MTAA welcomed the ACCC's announcement to allow franchisees to collectively negotiate with their franchisors without first having to seek
ACCC approval. However, it noted:
…there are still weaknesses. The first is that the class exemption does not include an ability to collectively refuse to contract with the target business (manufacturer/distributor). The second is there is no requirement that a car manufacturer/distributor franchisor must collectively bargain if it receives a request to do so.
5.55
TMCA pointed out that 'disputes and issues are usually raised individually by dealers, or collectively through the NTDA [National Toyota Dealer Association] and its various sub-committees'. TMCA argued:
Multiple dealer disputes can be raised in this forum and communicated back to Toyota via the NTDA. Alternatively, Toyota maintains the presence of regional offices who are available to assist with specific dealer concerns. As a result of the many avenues Toyota provides dealers to raise and resolve concerns informally and quickly described above, Toyota’s dispute resolution provisions in our dealer agreement have only been used 3 times in the past 10 years.
5.56
Similarly, the FCAI noted:
Dealer Councils create a strong and highly engaged forum for distributors and dealers to work together to resolve potentially contentious issues before they arise.
Strengthening the best practice principles
5.57
Stakeholders were generally supportive of the best practice principles but argued that they needed to be made mandatory and enforceable to drive change and be effective.
5.58
The MTAA noted in its submission:
MTAA has significant reservations that without oversight, regulation or enforcement, there is nothing to deter poor conduct and compel compliance. In short, all can simply agree to any principle, but without compliance and enforcement, then parties can simply walk away from it, irrespective of commitments given.
5.59
At the hearing on 19 November 2020, Mr Voortman indicated that the
AADA was generally supportive of their content, but noted that he would prefer it 'to be more specific on what "timely commercial settlement dispute resolution" is so the mechanism is a binding arbitration'. He also emphasised that 'the most important thing is the application of these principles, and that's where we have a very strong view that we need to make these mandatory'.
5.60
Following the government's release of the voluntary principles on
11 December 2020, the AADA submitted that:
The AADA has already engaged with our members who are dealers for every major brand in Australia to understand to what extent existing Dealer Agreements comply with the Government's best practice principles for new car dealership agreements. We have not been able to find an agreement which does comply with these principles.
We have also reached out to our members which are in the process of concluding new Dealer Agreements or are dealing with renewal of existing agreements. Disappointingly, these agreements have not been structured to comply with the voluntary principles and a number of manufacturers have refused to comply telling their dealers that they have no legal obligation to do so.
5.61
Ms Kate Carnell, Ombudsman, ASBFEO, expressed similar concerns at the hearing on 24 November 2020:
…our experience is in this space that the large operators, or the people with the power, choose not to, shall we say, play or not to comply if it doesn't suit their business requirements. They simply won't comply unless it's mandatory. In fact, we get told that regularly by multinationals—that, if it's not legislation, decisions will be taken in the head office in the US, Europe or whatever. That's what they tell us.
5.62
The NTDA indicated that it was 'generally supportive of measures aimed at levelling the playing field and increasing legislative protections for dealers and franchisees generally'. It also observed that:
Proposals in relation to additional protections or Codes of Conduct do require legislative teeth in the form of mandatory compliance rather than voluntary compliance'.
5.63
In addition, Mr Rami Greiss, Executive General Manager, Enforcement Division, ACCC, told the committee:
…one issue that I would have with them is that you would have to say the devil's in the detail. It would be great to have compensation provisions baked into all agreements, but then it's how they would operate and how they would take into account different circumstances that I think would need some further consideration. In their current form, I think they are a good start, but they perhaps lack some of the precision needed to ensure that the same problems that we've seen previously don't continue to arise.
Proposed changes to the regulatory regime
5.64
During the course of the inquiry, a number of policy and regulatory changes were announced, including changes to unfair contract term (UCT) protections and the strengthening of the recently announced best practice principles for new car dealership agreements.
Enhancements to unfair contract term protections
5.65
On 6 November 2020, the Commonwealth and state and territory consumer affairs ministers agreed to strengthen the existing protections in the ACL. The key reforms announced included:
making unfair contract terms unlawful and giving courts the power to impose a civil penalty;
increasing eligibility for the protections by expanding the definition of small business and removing the requirement for a contract to be below a certain threshold; and
improving clarity on when the protections apply, including on what is a 'standard form contract'.
5.66
These reforms will help reduce the prevalence of unfair contract terms in standard form contracts, and improve consumer and small business confidence when entering into contracts.
5.67
The Treasury will develop exposure draft legislation, which it says will provide a further opportunity for stakeholders to comment on the detail of the reforms but provided no indication of a timeframe for implementation.
5.68
While welcoming the changes for some new car dealerships, the AADA noted that the increased eligibility criteria for UCT protections would not be available to all dealers.
Penalties and mandatory best practice principles
5.69
Following the committee's call for submissions and final public hearing, the Prime Minister announced on 12 March 2021 a new set of reforms to 'protect Australia's family-owned automotive businesses and their employees from the growing power imbalance with multi-national car companies'.
5.70
The new measures announced would:
increase available penalties under the Franchising Code to up to $10 million;
transform the voluntary principles into mandatory obligations under the Franchising Code; and
explicitly recognise that dealers operating as a manufacturer's agent are protected by the Franchising Code.
5.71
The government also committed to working further with the automotive franchising sector and it would consult on:
appropriate protections for automotive dealerships from unfair contract terms;
options to achieve mandatory binding arbitration for automotive franchisees to address power imbalance where there is a dispute; and
the merits of a standalone automotive franchising code.
5.72
No timeframe was set for the implementation of the new measures or the consultation process.
5.73
In response to this announcement, the AADA welcomed the reforms and emphasised that:
These changes will bring a degree of balance to the relationships between new car dealers and the manufacturers to which they are franchised. The reforms are sensible and fair and will bring all manufacturers up to the standard already being employed by ethically-minded car brands operating in Australia.
5.74
The AADA went on to add:
Only manufacturers who ride roughshod over Australian dealers will have anything to fear from what has been announced today.
Committee view
5.75
The committee is heartened that the government has stepped up and released a dedicated proposal to properly address the power imbalance between car manufacturers and dealers. Indeed, many of the proposals announced on 12 March 2021 would have been recommended by the committee in the absence of the Prime Minister's announcement. That said, the committee is disappointed that the government has not placed a timeframe on the implementation of these reforms and recommends that these reforms are progressed as a matter of priority and are operational by 1 July 2021.
5.76
While the committee welcomes the government's commitment to make the best practice principles mandatory, it considers that significant consultation will be required to provide greater detail and clarity on how the principles will work in practice. For example, dealers would benefit from greater clarification of what constitutes 'fair and reasonable compensation' and a better understanding of the metrics underlying this concept.
5.77
The committee also considers that the best practice principles should include a provision for reimbursement for all reasonable expenses incurred in relation to warranty and recall work, including expenses associated with diagnosis, administration of claims and claim audits.
5.78
Further, the committee is not convinced that new car dealers should be covered by the Franchising Code and urges the government to comprehensively assess whether a stand-alone automotive code of conduct would be a more appropriate approach for regulating the relationship between car manufacturer and dealers.
5.79
Another concern of the committee is the lack of a commitment by the government to deliver a timely solution to address dispute resolution issues in the first tranche of reforms. Evidence to the committee has outlined many circumstances where a clear and binding dispute resolution mechanism would readily benefit dealers and consumers, particularly in relation to GM Holden's withdrawal. To this end, the committee sees merit in the ASBFEO being given a role in investigating and resolving disputes, particularly where they involve warranty claims, between manufacturers and dealers. Such a mechanism would not limit the ability of the ACCC to undertaken enforcement action in relation to alleged contraventions of the Franchising Code and ACL.
5.80
The committee also considers that there appears to be a strong case for the introduction of mandatory binding arbitration when other dispute resolution mechanisms fail to produce an outcome. The recently enacted News Media and Digital Platforms Mandatory Bargaining Code shows that the government can deliver mandatory binding arbitration during contract negotiations and the committee sees no reason why a similar solution could not be implemented for the automotive industry to address the significant power imbalance.
5.81
While the committee welcomes the commitment to increase the available penalties under the Franchising Code, it is concerned by the ACCC's own admission that it is difficult to prosecute matters relating to the Franchising Code and more broadly under the Competition and Consumer Act 2010 (for example, unconscionable conduct). To this end, the committee recommends that the government should instigate a review, possibly by the Australian Law Reform Commission, into the current limitations to effectively enforcing alleged contraventions of the Franchising Code and the
Competition and Consumer Act 2010 more broadly.
5.82
The committee recommends that the Australian Government prioritise the new automotive reforms announced on 12 March 2021 and implement the increased fines, mandatory principles and protection of dealers operating as a manufacturer's agent by 1 July 2021.
5.83
The committee recommends that the mandatory best practice principles include a provision for the reimbursement for all reasonable expenses incurred in relation to warranty and recall work, including expenses associated with diagnosis, administration of claims and claim audits.
5.84
The committee recommends that the Australian Government introduce mandatory binding arbitration to resolve disputes during contracted negotiation in the automotive industry which are not able to be resolved by other dispute resolution mechanisms.
5.85
The committee recommends that the Australian Government appoint a senior officer in the Office of the Australian Small Business and Family Enterprise Ombudsman to investigate and coordinate dispute resolution investigations and facilitate mediation and arbitration arising from the transformation of the voluntary best practice principles into mandatory obligations.
5.86
The committee recommends that the Australian Government undertake a review into effectively enforcing alleged contraventions of the Competition and Consumer Act 2010 as it relates to the regulation of the relationship between car manufacturers and car dealers.
Senator Louise Pratt
Chair
Senator the Hon James McGrath
Deputy Chair
Senator Deborah O'Neill
Member
Senator the Hon Don Farrell
Member
Senator Matt O'Sullivan
Member