Major revamp to the Franchise System in Malaysia
Recent amendments to the Franchise Act 1998 (“FA”) have introduced significant changes to the franchise industry. The Franchise (Amendment) Act 2020 (“Amending Act”), gazetted on 6 March 2020 and which came into force on 28 April 2022, introduces more stringent requirements and provides a leveling field between local and foreign franchisors. In this article, we will discuss three major updates to the franchise system in Malaysia.
Launch of the MyFex 2.0 system
In line with the coming into force of the Amending Act, the Franchise Registry, under the Ministry of Domestic Trade and Costs of Living (“KPDN”), launched a new online portal known as MyFex 2.0 (https://myfexv2.kpdn.gov.my/) on 29 July 2022. The portal replaces the previous MyFex 1.0 system and provides for the registration, maintenance and renewal of franchises in Malaysia. According to the KPDN, the MyFex 2.0 system was introduced so that the various requirements of the Amending Act can be met accordingly, in line with the enforcement of the FA.
It is important to note that the launch of MyFex 2.0 system has also resulted in the expiry of all existing franchise registrations in Malaysia. All existing franchisors (foreign and local) are required to re-register their franchises under the MyFex 2.0 system, with a grace period of three years (starting from 1 August 2022) granted to all existing franchisors to complete the re-registration process.
Key amendments to the Franchise Act 1998
There are a number of key amendments made by the Amending Act to the FA which existing and potential franchisors and franchisees in Malaysia should be aware of. They include the following:
Franchise registration requirement under section 6 of the FA is now applicable to a foreign franchisor
Prior to the Amending Act, a foreign franchisor is only required to obtain the Franchise Registrar’s approval pursuant to section 54 of the FA before it can proceed to execute a franchise agreement with its franchisee in Malaysia. In contrast, a local franchisor is required to register its franchise pursuant to section 6 of the FA before executing a franchise agreement. It is now compulsory for all foreign franchisors to comply with both sections 6 and 54 of the FA. This legislative amendment reinforces the Court of Appeal’s judgment in Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2021] 1 MLJ 549 which affirmed the High Court’s finding that the registration requirement undersection 6 of the FA is applicable to a foreign franchisor and is not limited to a local franchisor only.
There were initial concerns that a foreign franchisor would need to submit two separate applications to comply with the requirements of sections 6 and 54 of the FA. However, in practice, there is no longer any distinction in the online application form for franchise registration in MyFex 2.0 system, unlike the previous MyFex1.0 system where there are different requirements in the online application form that is required to be submitted by a local franchisor and a foreign franchisor. Both local and foreign franchisors are currently required to complete the same online application form and submit the same Franchise Disclosure Document and other documents as required in section 7 of the FA for franchise registration. Other documents to be submitted include the operation manual, training manual, copy of the latest audited accounts and any other additional documents as required by the Franchise Registrar.
It is anticipated that this legislative amendment would result in a level playing field between local and foreign franchisors, considering that in the past, foreign franchisors have an advantage over local franchisors since they are not subjected to the more onerous requirements under section 6 of the FA.
Effective Period of Franchise Registration
The pre-amended section 10 of the FA provides that the registration of a franchise shall continue to be effective unless the Franchise Registrar issues a written order to the franchisor to suspend, terminate or cancel the registration of the franchise. This meant that a franchise registration will last indefinitely with no specified term unless it is suspended, terminated or cancelled by the Franchise Registrar.
The amended section 10 now stipulates that a franchise registration shall continue for a period as may be prescribed by the regulations under the FA. Under the Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022, the period of effectiveness of a franchise registration is now limited to five years and it has to be renewed periodically every five years. The Amending Act also introduces the new provision, section 10A, which governs the renewal of franchise registration. An application to renew a franchise registration must be submitted together with prescribed fees within 30 days from the expiration date of the franchise registration.
Registration of Franchisees
Before commencing business, a franchisee is required to be registered pursuant to sections 6A and 6B of the FA (depending on whether the franchisor is local or foreign). In the past, there is no consequence prescribed in the FA if the franchisee fails to obtain registration.
The Amending Act has inserted new provisions into sections 6A and 6B of the FA which makes it a criminal offence if a franchisee fails to obtain registration. The registration of franchisees is no longer a formality. The general penalty provision in section 39 of the FA [1] now applies to franchisees that fail to register with the Franchise Registry. The latest amendments show that there is a strong intention on the part of KPDN to strengthen enforcement efforts against unregistered franchisees that operate in Malaysia.
It is pertinent to note that the Franchise Registry has imposed an obligation on all franchisors to submit the online application form on behalf of their franchisees in the MyFex 2.0 system. This is a departure from the previous practice in MyFex 1.0 system where each franchisee is responsible to handle its own registration. Moving forward, franchisees will need to rely on their respective franchisors to obtain franchisee registration under sections 6A and 6B of the FA. This is as the current function and design of MyFex 2.0 system only permits franchisors to open an account. An unintended consequence that could arise, is that a franchisee could be found liable for failing to register itself due to the inaction of its franchisor. Therefore, it is crucial for franchisees to follow up very closely with their respective franchisors to ensure that they are properly registered under sections 6A and 6B of the FA.
Public display of franchise registration
A new section has been created, section 10B, which makes it compulsory for a franchisor and franchisee to display the franchise registration at a conspicuous position in the place of business. Failure to do so is an offence which attracts the general penalty in section 39 of the FA. This is another obligation imposed by the Amending Act to enable easier monitoring of compliance by enforcement officers from the KPDN.
Mandatory elements in a franchise agreement
Section 18(2) of the FA prescribes the mandatory elements that are required to be present in a franchise agreement. Pursuant to section 18(3) of the FA, failure to comply with section 18(2) would render a franchise agreement null and void. Section 18(3) has been removed by the Amending Act. The Amending Act has now made changes to section 18(6) where franchisors and franchisees can potentially be liable for an offence if they fail to comply with section 18 of the FA.
The removal of section 18(3) of the FA suggests that a franchise agreement may still be enforceable notwithstanding that it is non-compliant with section 18 of the FA. Nevertheless, section 39(2)(a) of the FA still permits the Court to declare a franchise agreement to be null and void after sentencing a franchisor that is found guilty of an offence.
Hence, it is crucial that franchisors and franchisees consult their lawyers to review their franchise agreement thoroughly as any non-compliance with section 18 would result in criminal penalties.
Revision of Fees
The KPDN has initiated an overhaul of the Third Schedule of Franchise (Forms and Fees) Regulations 1999 which contains the list of fees that are payable for various franchise matters under the FA. The revision of fees can be found in the Franchise (Forms and Fees) (Amendment) Regulations 2022.
Prior to the amendments, there are only several matters which require payment to be made to the Franchise Registry and they are approval of franchise registration, processing of franchise registration, processing of amendments to disclosure documents and processing of registration of franchise broker.
Payment of fees is now extended to a number of other matters including renewal of franchise registration, registration of franchisee and registration of franchise consultant. There is a distinction in the amount of fees payable by a local franchisor and foreign franchisor for franchise registration.
A summary of selected fees areas follows:
Final Remarks
The Amending Act has certainly brought about some long-awaited revisions to the FA that resolve existing ambiguities within the original legislation. Franchisors and franchisees are now subjected to stricter requirements under the FA due to the new changes that are brought by the Amending Act. The imposition of criminal sanctions for non-compliance of various provisions in the FA signals a strong message from the KPDN to franchisors and franchisees to take their obligations seriously.
The revision of the schedule of fees by the KPDN for franchise matters as well as the need for periodic renewals of franchise registration has resulted in a notable increase in costs that are required to run a franchise business in Malaysia, especially for foreign franchisors and their franchisees. Nevertheless, it seems that KPDN has chosen to impose lower fee rates to local franchisor and their franchisees to encourage more local companies to adopt this mode of business. It remains to be seen whether the overall increase in the costs of registering and maintaining a franchise registration would create barriers to entry or discourage foreign companies from participating in the franchise system in Malaysia.
For further enquiries on franchise matters, you may contact Jonathan Lim Hon Kiat, Stanley Lee Wai Jin, or Nurul Syahirah Azman of Zaid Ibrahim & Co (in association with KPMG Law).
This article is for general information only and is not a substitute for legal advice
[1] A person who commits an offence under the FA for which no penalty is expressly provided shall, on conviction, be liable:
- if such a person is a body corporate, to a fine of not less than RM 10,000 and not more than RM50,000 and for a second or subsequent offence, to a fine of not less than RM20,000 and not more than RM 100,000
- if such a person is not a body corporate, to a fine of not less than RM 5,000 and not more than RM 25,000 or to an imprisonment for a term not exceeding 6 months, and for a second or subsequent offence, to a fine of not less than RM 10,000 and not more than RM 50,000 or to imprisonment for a term not exceeding 1 year.