Manufacturers could be hit with $10 million fines for breaching Franchising Code

The Federal Government is introducing tougher penalties for breaching the Franchising Code of Conduct, with corporations facing fines of up to $10 million.

The changes are in response to the recent trend of car companies changing the traditional way of selling cars in favour of the ‘agency model’, as well as to protect dealerships if a manufacturer choses to leave the Australian market – as was the case with Holden's departure in 2020.

As part of the increased penalties, carmakers could be hit with a fine of as much as $10m, an amount equal to three times whatever the financial benefit has been as a result of their actions, or 10 per cent of their annual turnover – whichever is greatest.

“We will continue to protect hard-working Australian franchisees from being taken advantage of by poor practices and conduct,’ Minister for Employment, Workforce, Skills, Small and Family Business, Stuart Robert, said at the announcement.

“These multinational franchises need to know that we stand up for our small and family businesses.”

Though the changes were first touted last year, they have only now come into effect and are part of a raft of reforms which involve making it easier for buyers to get help if their car is faulty by shifting repair or replacement costs from the dealer to the manufacturer, and plans to introduce a standalone code and mandatory binding arbitration.

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Honda Australia was the first manufacturer to implement the agency model in Australia in July last year, reducing the number of its dealerships and introducing the fixed Honda's Price Promise, though the brand has been experiencing a decline in sales during a boom time for the industry in the months since.

Mercedes-Benz also switched to an agency model in Australia from January 1 this year, but a group of 38 franchise dealerships have taken the German car giant to court over the changes, with a trial to begin in August 2022.

Though agency models differ between firms, it largely involves manufacturers owning the vehicle stock rather than the franchises, and setting one national drive-away price instead of allowing customers to haggle for a better deal.

The issue has divided the automotive industry with some claiming it's a good thing for buyers, while others say it allows multinational corporations to take advantage of small businesses.

“Stronger penalties in conjunction with recently-introduced reforms to the Franchising Code of Conduct are good for small businesses and they are good for franchised new-car dealers,” said James Voortman, CEO of the Australian Automotive Dealer Association.

“The penalties come after a series of franchising disputes between automotive dealers and vehicle manufacturers and they provide a greater deterrent for those franchisors which breach the Franchising Code of Conduct,” he said.

“The Government’s reforms are not aimed at stopping change, but rather ensuring it is conducted in a fair and reasonable manner.”

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Tony Weber, chief executive of the Federal Chamber of Automotive Industries – the body representing manufacturers – however, argues the agency model introduces innovation which benefits buyers.

“The agency model is one example that enables innovation and evolution and provides choice and competition to today’s consumers, regardless of where they live, who do not want the same car buying methods and experience their parents and grandparents had,” Weber said in October 2021.

“Even the Federal Government acknowledged the importance of the agency model as an option by including it in the Franchising Code, which was implemented in July 2021,” he said.

“This model will for the first time enable regional car buyers to buy any model through their local dealership and not have their choice limited by their location.”