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Franchise Highlight

Regulation Under the Franchise Act 1998

The Importance of the Franchise Act 1998 : 

Source: Ministry of Domestic Trade, Co-Operatives and Consumerism

Before the enactment of the Franchise Act in 1998, fanchising in Malaysia was generally governed by contractual principles. The absence of complex statutory provisions or guidelines allowed parties to freely negotiate the terms of their franchising arrangement. In contrast, the Franchise Act highly regulates the franchising industry as it not only controls the terms of any franchise agreement but also implements a systematic scheme of registration for the franchisor, franchisee, franchise consultants and franchise brokers. Although this has created a regimented legal structure for the franchising industry in Malaysia, the Franchise Act brings with it certainty and greater protection for Malaysian businesses, particularly the small medium businesses. It will also to prevent unscrupulous parties to take advantage or exploiting any loopholes from the fast-growing franchise industry in Malaysia.

Franchise Act 1998 applies to the sale of any franchise in Malaysia. The sale of a franchise is deemed to be in Malaysia where an offer to sell or buy a franchise, is made in Malaysia and accepted within or outside Malaysia; or; is made outside Malaysia and accepted within Malaysia; and the franchised business is operated or will be operating in Malaysia.

The Franchise Act 1998 was gazetted on 31 December 1998 and its main objective is to govern and regulate the franchise industry in Malaysia. The Act includes the standardization of operations and regulations of industry and offer protection within the Malaysian franchise fraternity.

i.        Franchisors can benefit from the Franchise Act 1998 as such :

  • To protect the business system from being duplicated or plagiarized by other parties. This has been stated clearly in Section 27, Franchise Act 1998;
  • The security of Franchisor’s confidential information with regards to the franchise business. Section 26 of the Franchise Act 1998 includes the obligation of the franchisee and its employees to ensure the franchisor’s confidential information is well protected.
  • The permission to collect and impose fees, which includes the franchisee fee, royalty and promotion fee as deemed necessary by the franchisor. This is stated under Section 21, 22 and 23 of the Franchise Act 1998; and
  • A guaranteed and fixed franchise term, whereby the Government under Section 25 of the Franchise Act 1998 has fixed that the franchise term should not be less than five (5) years.

iv.       The Franchise Act 1998 can benefit the franchisees as well:

  • The Act requires that the franchisor to provide the Franchise Agreement and the Disclosure Document in a written format, complete with clearly stated terms and conditions. The ensures that potential franchisees can access important with regards to the business before making any commitments;
  • The protection of discrimination among franchisees as stated under Section 20 of the Franchise Act 1998. This section prohibits the franchisor to discriminate its franchisees in matters involving the business, i.e. the franchise fees, royalties, supply of good and services, rentals and advertising services;
  • Cheap and effective advertising and promotion in which the Government under Section 23 of the Franchise Act 1998 allows the Franchisor to collect promotion fees from the franchisee to cater for advertising and promotional activities towards the franchise business. In turn, individual franchisees need not fork out a large sum of capital to accommodate the high cost of promotion;
  • Guaranteed Franchise Term. The Government under Section 25 of the Franchise Act 1998 has fixed that franchise term should not be less than five (5) years. Therefore, unless of any breach of contract on either parties, the Franchisee is protected to operate the franchise business for a minimum of five (5) years.

2)         Post-registration Obligations

 

The Franchise Act 1998 mandated that the franchisors/master  franchisees registered under Section 16 of the Franchise Act 1998 to submit the following documents annually:

 

i)          A copy of the company’s Annual Report

  • Franchisors/master franchisee needs to submit the annual report of the franchise business to the Registrar within 30 days from the ending of the financial year.
  • The annual report must be submitted using the prescribed BAF 6 Form and must include the following:
  • Reports submitted must be signed and sealed by the company.

a)     Number/name/address of franchise outlets consisting of:

–          Company-owned outlets;

–          Local franchisee-owned outlets (local); and

–          Overseas franchisee owned outlets.

b)   Annual returns

c)   Updated disclosure documents

d)   Latest audited accounts

 

ii)         Financial Statement of the Promotion Fund

Franchisor/Master Franchisees that impose promotion fees to the franchisees need to establish a Promotion Fund managed under a separate account and should only be used for the promotion of the franchise product.  Under Section 22 of the Franchise Act 1998, the franchisors/master franchisees are required to submit a copy of the financial statement of the fund.  The financial statement needs to be certified by a Chartered Accountant/ Commissioner of Oaths/Public Notary and submitted annually within 30 days from the ending of each financial year.

 

iii)         Other than that, it is mandatory for the franchisors/master franchisees to fulfil their obligations as stipulated in their Franchise Agreement and to ensure that their franchise businesses are run fairly and ethically.

 

In order to encourage healthy competition and also to bolster the industry, the government recently amended the Franchise Act 1998. The Franchise (Amendment) Act 2012 came into force on 1st January 2013. The Amendment Act introduces three new provisions, amends twenty two sections and deletes two other sections from the Act. This article focuses on some of the key amendments to the Act.

The amendments to the existing Franchise Act have resulted in more stringent requirements and greater regulation with increased penalties and offences. It is important for both franchisors and franchisees to note these changes as current practices and documentation that may have to be revised. Apart from that, in an effort to ensure the protection of the rights to both franchisors and franchisees, the Franchise Act purports to extensively and continuously regulate and supervise the area of franchising. The commencement of the Franchise Act may prompt legal consequences to existing and potential franchises as well as other contractual business relationships. Some non-franchise arrangements, such as distributorship arrangements, technical assistance or licensing arrangements that satisfy the criteria of a “franchise” or deemed to be a “franchise” may be considered a loose franchise arrangement, although it may not be intended as a franchise arrangement by the contracting parties.