Understanding the Impact of The Franchise (Amendment) Act 2020 on Franchising in Malaysia

Introduction

Franchising plays a vital role in the Malaysian economy, offering opportunities for entrepreneurship, job creation, and economic growth. The franchise industry in Malaysia is governed by the Franchise Act 1998 (“the Franchise Act”). The Franchise (Amendment) Act 2020 (“the Amendment Act”) represents the latest effort to modernise and strengthen the regulatory framework governing franchising in Malaysia. The Amendment Act came into force on 28 April 2022, imposing more stringent requirements on both franchisors and franchisees.

The implications of the amendments introduced by the Amendment Act affect franchisors, franchisees, investors, and the broader franchising ecosystem in Malaysia. By providing a comprehensive analysis of the changes brought about by the Amendment Act, this article aims to enhance understanding and facilitate informed decision-making among stakeholders in the Malaysian franchising industry.

What are the key provisions implemented by the Amendment Act?

The Amendment Act introduced several key changes aimed at updating and improving the regulatory framework for franchising in Malaysia, including the:

• Introduction of a new registration system, MyFEX 2.0, which impacts both new and existing franchises.
• Alignment of the franchise registration process for both local and foreign franchisors, which effectively introduces a more stringent registration process for foreign franchisors.
• Implementation of a renewal term for franchise registration, which must now be renewed every five years.
• Amendment of penalties for offences committed under the Franchise Act.
• Requirement for franchisors and franchisees to publicly display their franchise registration.

Why is it important to comply with the Amendment Act?

The Amendment Act has introduced significant changes to the franchise ecosystem, including introduction of a new registration system and processes. Compliance is crucial for franchisors and franchisees in order to avoid committing an offence under the Franchise Act, which may include fines or imprisonment. Further, non-compliance could lead a franchise registration to be suspended, terminated and cancelled, which will negatively impact business operations.

Key Amendments Introduced by The Franchise (Amendment) Act 2020

The Amendment Act has introduced significant revisions to the Franchise Act, addressing ambiguities in the original legislation. Franchisors and franchisees now face stricter requirements due to the new changes under the Amendment Act. Non-compliance can result in criminal sanctions, indicating a strong directive for franchisors and franchisees to adhere strictly to their obligations.

1.  The requirement for franchise re-registration in Malaysia (MyFEX 2.0)

A new software system called MyFEX 2.0 was unveiled by the the Ministry of Domestic Trade and Consumer Affairs (“KPDN”) to meet the requirements of the Amendment Act. Moving forward, franchise applications are to be submitted via MyFEX 2.0 which streamlines the registration process of both franchisors and franchisees (including master and unit franchisees).

Impact on existing franchise registrations on MyFEX 1.0

Pursuant to the Amendment Act, all franchises registered before 28 April 2022 must re-register their franchises under MyFEX 2.0. Franchises registered under MyFEX 1.0 are given a grace period under the Amendment Act and must be completed by 31 July 2025. The failure to re-register any franchise registrations under MyFEX 2.0 may result in a notice of suspension, termination, and cancellation being issued by the Registrar.

The re-registration process under MyFEX 2.0 is not automatic and involves a new examination. This means that up-to-date information and documents must be re-submitted under MyFEX 2.0. Previous documentation lodged under MyFEX 1.0 thus need to be reviewed to ensure they remain current and updated if necessary.

Registration requirements for franchisees under MyFEX 2.0

Sections 6A and 6B of the Franchise Act has always required franchisees, whether foreign or local, to be registered. The Amendment Act now makes it an offence if a franchisee fails to obtain registration. As a result, all franchisees must meet the stricter registration requirements under MyFEX 2.0.

It is important to note that a franchisee who has been granted a franchise from a franchisor or master franchisee must register the franchise within 14 days from the date of signing of the franchise agreement.

Reallocation of franchise registration fromKPDN to the Ministry of Entrepreneur Development and Cooperatives (“KUSKOP”)

As of 12 December 2023, the franchise portfolio has been transferred from KPDN to KUSKOP. During the transition. It remains uncertain whether KUSKOP will introduce significant changes to the franchise registration process or to franchising in general. However, all pending franchise registration applications are temporarily postponed until the transition process is completed.

2.  Impact of registration requirements on foreign franchise

One of the most notable changes is the alignment of the franchise registration process and requirements for foreign franchisors with local franchisors. This now requires foreign franchisors to register under MyFEX 2.0, effectively imposing more stringent requirements for foreign franchisors. Documents and information not previously required under MyFEX 1.0 such as financial forecast details and submission of training and operation manuals are now required to be submitted. This is in addition to documents and information previously not required for submission such as information on shareholding types and number for franchisees under the franchise.

3.  Term of franchise registration

The other significant alternation under the Amendment Act is that a franchise registration will now only be effective for a prescribed period of five years from the date of the written notice given by the Registrar. The franchisor may apply for renewal of the registration within 30 days from the expiration of such registration.

Previously, the registration of a franchise will continue to be effective unless suspended, terminated, or cancelled by the Registrar.

4.  Mandatory requirements of franchise agreement

Section 18 of the Franchise Act outlines mandatory elements that are required to be included in a franchise agreement. This includes the requirement for a franchise agreement to be in writing and the prescribed minimum terms that must be incorporated.

The Amendment Act removes the provision that renders a franchise agreement null and void should a franchise agreement fail to comply with section 18 of the Franchise Act. This suggests that a franchise agreement may still be enforceable notwithstanding that it is non-compliant. However, non-compliance is still an offence under section 18(6) of the Franchise Act and the general penalties will apply. Consequently, the court retains the discretion to declare such franchise agreement to be null and void, order the franchisor to refund any form of payment obtained from the franchisee and prohibit the franchisor from entering into new franchise agreements or appointing new franchisees.

It is therefore important to ensure that the terms of the franchise agreement strictly comply with the requirements under the Franchise Act.

5.  Public display of franchise registration

Franchisors and franchisees are now required to display the registration of the franchise in a conspicuous position at their place of business under the Amendment Act. The failure to comply with this requirement is an offence under the Act.

Conclusion

The Amendment Act marks a significant milestone in the evolution of franchising regulations in Malaysia. With its introduction, the regulatory framework governing franchising has been modernised and strengthened to adapt to the changing dynamics of the business landscape.

The key provisions implemented by the Amendment Act, such as the introduction of MyFEX 2.0 registration system, alignment of registration processes for local and foreign franchisors, and the imposition of stricter requirements, underscore the government's commitment to fostering a transparent and conducive environment for franchising activities.

Furthermore, the Amendment Act emphasises the importance of compliance for both franchisors and franchisees to avoid legal repercussions and ensure the sustainability of their business operations. The reallocation of franchise registration responsibilities to the Ministry of Entrepreneur Development and Cooperatives signals a potential shift in focus towards further enhancing support for entrepreneurial ventures.

Overall, while the Amendment Act brings about changes that may pose initial challenges, it also presents opportunities for growth and development within the Malaysian franchising industry. By adhering to the amended regulations and embracing the spirit of innovation, stakeholders can navigate these changes effectively and contribute to the continued success of franchising as a driver of economic prosperity in Malaysia.

Implications for Stakeholders

The amendments introduced by the Amendment Act have significant implications for various stakeholders in the Malaysian franchising landscape:

Franchisors

The updated registration requirements and heightened standards of conduct necessitate adaptation in franchise development and management strategies. Franchisors must also review and potentially revise their current franchise agreements to ensure compliance with the Amendment Act.

Foreign franchisors

The streamlined registration process for foreign franchisors fosters greater transparency and structure, potentially enticing more international brands to enter the Malaysian market, thereby enriching the franchise landscape and providing consumers with diverse options.

Franchisees

With the introduction of penalties for non-registration under the new MyFEX 2.0 system, franchisees are urged to promptly adhere to the new system's requirements to ensure the sustainability of their business operations and to avoid legal repercussions

Investors

The amendments signal a commitment to transparency, fairness, and accountability within the Malaysian franchising sector, potentially bolstering investor confidence. Enhanced regulatory oversight may attract greater investment, driving economic growth and development in the franchising industry.

Regulators

Regulatory authorities are tasked with enforcing compliance with the amended regulations, safeguarding the integrity of franchise relationships and ensuring adherence to prescribed standards of conduct. Their vigilance is crucial in upholding the objectives of the Amendment Act and fostering a thriving franchising ecosystem in Malaysia.

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‍This article is written by  Raja Nadhil Aqran (Partner) and Keefe Ong Kin Fye. It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

If you would like more information on how to set up or register a franchise, improve your contracts, or require assistance in claiming for outstanding debts or defending against any claim for outstanding debts against your franchisees, or have any general query on the subject, contact us at info@aqranvijandran.com.

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