Franchise sector to get code of conduct and ombud

The Department of Trade, Industry and Competition (dtic) has published a discussion document on a proposed code of conduct for the franchise sector that will regulate behaviour in the industry and outline an alternative dispute resolution process.

The code for the Franchise Industry of South Africa (Fasa) and the Franchise Industry Ombud (FIO) is the culmination of years of extensive consultation involving Fasa members, the Consumer Protection Commission, and the public. 

In a statement, Fasa said the code would give franchisees and franchisees a platform from which to resolve disputes in a “consistent, effective and efficient manner”. 

The franchise sector accounts for 14% of the country’s GDP and is made up of a number of sectors with the largest portion being the fast food and restaurant sector at 26%, followed by direct marketing at 18%, according to Fasa. 

Stability and protection

“One of the main objectives of Fasa is to develop and support ethical franchising,” said Fasa legal advisor Eugene Honey of Adams & Adams.

Honey said the code of conduct would bring into effect a way of regulating the relationship between franchisors and franchisees that makes provision for matters that are not covered in the Consumer Protection Act. 

It also provides details on the alternative dispute resolution process through an industry ombud, a not-for-profit company that has already been established. It is envisioned that the board of the FIO will consist of four to eight members, with two appointed by Fasa and the others split between franchisors and franchisees. 

The board will be responsible for appointing the ombud, who should be a South African citizen with at least 10 years’ experience in dispute resolution. A single term in office for the ombud may not exceed five years, and they may only serve two terms. 

Fasa said the main intention of the FIO will be to ensure that “every reasonable effort shall be made to resolve all complaints informally, cost-effectively and expeditiously”.

Read: What to consider when purchasing a franchise

Franchisees and franchisors

In terms of franchisors, the code states that they should be responsible for training, supervising and assisting franchisees in running their operations. They should also ensure that they select and accept applications from franchisees with the right skills and enough resources to run the business. Should there be a breach of the franchise agreement, franchisors are responsible for notifying franchisees in writing and providing them with a “reasonable time” to correct the breach unless the franchisor is entitled to terminate the agreement.

Franchisee’s responsibilities meanwhile include keeping the franchisor’s intellectual property confidential while the franchise agreement is in place and even after it has been terminated. Franchisors will also be expected to not compete with the franchise system without obtaining written consent, and cannot appropriate the franchisor’s intellectual property. 

Both franchisors and franchisees will be required to pay levies to the FIO; this is one of the ways the structure will be funded, in addition to income from investments, deposit surpluses and other sources. 

Covid-19 disruption

Welcoming the move towards the finalisation of the code Fasa executive director Vera Valasis said the industry’s interaction with the association is essential, particularly now that many operations have been disrupted by Covid-19 restrictions – with the “stability, protection and recovery of the franchise industry” being crucial to the survival of the sector and its future growth.

Read: Franchises positive they will get through Covid-19

In a recent Fasa survey, 80% of respondents said they did not see their operations surviving beyond July unless they are allowed to trade without restrictions.

“The longer the lockdown measures are applied across the board, the deeper the loss will be,” said Valasis.

Comment on the discussion document can be emailed to [email protected] by no later than July 15.