House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 2 - Industry code penalties under Part IVB of the Competition and Consumer Act 2010

Outline of chapter

2.1 Schedule 2 to the Bill amends the CCA by increasing the maximum amount of penalty units that can be included in regulations that prescribe an industry code, with specific amendments for industry codes relating to the industry of franchising.

Context of amendments

2.2 Part IVB of the CCA allows for industry codes to be prescribed in regulations. Industry codes may prescribe pecuniary penalties for breaches of civil penalty provisions of the industry code. The existing law allows for civil penalties up to 300 penalty units.

2.3 On 22 March 2018 the Senate referred an inquiry to the Parliamentary Joint Committee on Corporations and Financial Services into the operation and effectiveness of the Franchising Code.

2.4 The Committee's report noted that where penalties are insufficient, franchisors are likely to factor the risk of a penalty into the cost of doing business. The Committee's report recommended the quantum of penalties available for a breach of the Franchising Code be significantly increased to ensure the penalties are a meaningful deterrent from non-compliance.

2.5 The Committee recommended the civil penalties should be increased to at least reflect the penalties in the Australian Consumer Law which, for a corporation, are the greater of:

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$10 million; or

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three times the value of the benefit obtained from the offence (if the court can determine this value); or

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10 per cent of the annual turnover of the body corporate during the 12-month period in which the act or omission occurred or started to occur.

2.6 As per the Attorney General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, serious pecuniary penalties are most appropriately placed in primary Acts of Parliament rather than subordinate legislation. The penalties in industry codes are prescribed in regulations, however, the maximum penalty that can be given as a penalty to a breach of the code of conduct has been placed in primary law. As such, the increase of penalty units balances the recommendations in the Committee's report to significantly increase penalties in industry codes to ensure they are a meaningful deterrent, with the principles set out in the Attorney General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

2.7 The Regulatory Impact Statement found that the consequences of poor franchisor conduct have been devastating for some franchisees and has undermined confidence in the franchising business model. Increasing the maximum penalty amount is intended to provide a balanced deterrent from such conduct.

2.8 The courts will continue to have discretion to apply an appropriate penalty up to the maximum amount. The court would consider the relevant facts of any given case, and impose a penalty that is proportionate to that conduct, making it unlikely that the maximum penalty would be imposed in every instance. In practice, the maximum amount would only be applied in the most egregious instances of non-compliance.

Detailed explanation of new law

2.9 Schedule 2 to the Bill amends section 51AE(2) of the CCA to increase the maximum amount of penalty units that can be included in regulations that prescribe an industry code (other than a code relating to the industry of franchising) from 300 penalty units to 600 penalty units. [Schedule 2, item 1, subsection 51AE(2) of the CCA]

2.10 Schedule 2 also amends section 51AE(2) to provide that a code of conduct relating to the industry of franchising, a breach of a civil penalty provision may prescribe a pecuniary penalty for a body corporate to be the greatest of:

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$10 million; or

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if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, has obtained directly or indirectly and that is reasonably attributable to the contravention-multiplied by three; or

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if the Court cannot determine the value of that benefit- 10 per cent of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred. [Schedule 2, item 1, subsection 51AE(2A)(a) of the CCA]

2.11 This carries the same meaning as section 76(1A)(b) of the CCA. [Schedule 2, item 1, subsection 51AE(2B) of the CCA]

2.12 Schedule 2 also provides that for a person (other than a body corporate), a penalty of $500,000 may be prescribed in an industry code of conduct relating to franchising. [Schedule 2, item 1, subsection 51AE(2A)(b) of the CCA]

2.13 Otherwise, a penalty of up to 600 penalty units may be prescribed. This is consistent with other industry codes of conduct made under the CCA. [Schedule 2, item 1, subsection 51AE(2A)(c) of the CCA]

2.14 Current section 76(1A)(ca) of the CCA makes clear that a pecuniary penalty payable by a body corporate must not exceed the amount prescribed in an industry code. Likewise, current section 76(1B)(aaa) of the CCA makes clear that a pecuniary penalty payable by a person other than a body corporate must not exceed the amount prescribed in an industry code. As such, the prescribed amounts in an industry code are maximum penalty amounts.

2.15 The penalties in Schedule 2 act as a deterrent for businesses who are subject to a code of conduct relating to the franchising industry, instead of merely being seen as a cost of doing business. This encourages compliance with the code of conduct which is crucial to achieve its objectives of a fair and competitive market.

2.16 The Regulatory Impact Statement in Chapter 3 highlights the devastating impacts of poor franchisor conduct, including undermining the confidence in the franchising business model.

2.17 In addition, a pecuniary penalty that deters conduct is an important sanction as a breach of the code of conduct could result in commercial gains. Therefore, where a participant in the franchising industry has made a monetary gain by breaching a code, it is in the public interest that the gain not be retained. It also serves as an effective deterrent to eliminate the gain or benefit resulting from non-compliance.

2.18 Additionally, civil courts are experienced in making civil penalty orders at levels within the maximum amount specified in legislation to reflect the individual circumstances of a case.

2.19 In a proceeding under section 76 of the CCA, a court will consider all relevant matters, including:

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the nature and extent of the conduct (either the act or omission) which led to the contraventions;

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the nature and extent of any loss or damage suffered;

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the relevant circumstances in which the act or omission took place; and

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whether the person in the proceedings been found by a court to have engaged in any similar conduct prohibited under the CCA.

2.20 Therefore, while the penalties have increased, the maximum penalty will not be applied in every case. Instead, the penalty amount applied will be proportionate to the conduct. This leaves the maximum penalty for the most egregious conduct.

Application and transitional provisions

2.21 Schedule 2 to the Bill contains necessary application provisions ensuring the amendments apply to regulations, including regulations that amend regulations, made on or after commencement of the Schedule. The application provisions also make clear that the amendments do not affect the validity of regulations made under the CCA before the commencement of Schedule 2. [Schedule 2, item 2]