Mortgage Choice to review structures as franchisees claim distress: Is momentum building for change?

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Mortgage Choice has told the Australian Securities Exchange it will review its remuneration structures for franchisees in the wake of a Fairfax and 7:30 investigation into the company’s franchise model, with experts saying momentum is growing for franchisees to band together and force the hands of head offices during disputes.

On Monday, Fairfax published the first part of a joint investigation into the mortgage brokerage business, claiming “scores” of Mortgage Choice franchisees had been pushed to the financial brink after signing up with the brand.

The report outlines how the business previously employed an up-front commission model and changed this to a performance-based model based on loan targets in the wake of the Global Financial Crisis. But it never changing back to the original structure once the crisis had passed.

Failure to meet loan targets would result in brokers being placed on lower tiers for their up-front and trailing commissions, meaning they take a revenue hit, according to Fairfax.

One franchisee said he is in a “constant state of anxiety” about his monthly income and has experienced mental health issues, which he attributed to operating the Mortgage Choice franchise.

Recently appointed Mortgage Choice chief executive Susan Mitchell has admitted the model was “outdated”, while the company announced to the ASX on Monday it has been consulting with franchisees to develop “a more competitive remuneration model”.

“The purpose of an updated remuneration model is to increase franchisee remuneration and reduce franchisee income volatility to allow them to grow their businesses and assist more customers with their home loan needs,” said the company.

With the final terms still to be ironed out, it’s not clear whether the new model will satisfy franchisee concerns, but it does come off the back of 173 franchisees banding together to bring their concerns to head office. The group considered the possibility of a class action last year, according to reports.

High profile franchise disputes, such as those involving Retail Food Group and even 7-Eleven, have highlighted concerns about franchise models run beyond the food and cafe sectors, as have submissions to the Senate inquiry into the operation of the franchising code.

Principal at Legalite, Marianne Marchesi, says submissions to the inquiry have shown the breadth of concerns and also helped to build momentum when franchisees go public with their disputes, having often banded together into collectives.

I think franchisees are starting to realise that that is the best way for them to have some kind of negotiating power,” she says. 

Collective voice grows

Australians are well aware that franchisees face a power imbalance when it comes to negotiating, says Ashlea Kellner, a research fellow at Griffith University’s Centre for Work, Organisation and Wellbeing.

“There is going to be an increase in franchisee voice just as there has been an increase in the level of conversation about franchisor conduct in the media,” she tells SmartCompany.

“The only way for them to be heard and for change to happen is for them to come together with a united voice.”

Stories like the Mortgage Choice scenario show momentum is growing for franchisees to work together to fight issues with head office, a task Kellner says can be complicated given some franchise networks in Australia have a large number of franchisees who were born overseas, which means some may be more unsure of their rights or reluctant to raise issues in the past.

“These franchisees are probably less sure about their rights and the legislation that surrounds the franchisor’s actions,” she says.

Marchesi says while franchisees may have been more reluctant to band together in the past, it’s now accepted that they have the right to do this and start conversations with franchisors.

“Under the code, franchisors can’t prevent franchisees coming together for a lawful purpose,” she says.  

Review processes critical

Marchesi suggests stories like the Mortgage Choice investigation also drive home how critical it is for franchisors to review their structures and agreements over the longer term.

Just like any other business, franchise networks operate in the face of changing market conditions and the agreements they set up with franchisees at the outset might not be appropriate years down the track. With the sector in the spotlight, franchisors are increasingly expected to make changes when their agreements are outdated.

“If franchisors were just thinking of sitting back at this point, it does make it a bit difficult,” she says.

“They should be reviewing their agreements when franchisees are raising issues with the system. That can be a huge alarm bell that something is wrong and needs to be fixed. Times change, the economy changes, and it’s important to constantly review the model.”

NOW READ: “Franchising is like a marriage”: As parliament launches its inquiry into franchising, here are the questions that must be asked


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