From the Vodafone case to the Post Office scandal, recent incidents in the media have highlighted the suffering of small business owners who have placed their trust in large corporations and invested their life savings, only to find themselves harshly penalised or unfairly treated by those corporations later down the line – often resulting in lost livelihoods, and causing significant distress.
Following numerous petitions to MPs, parliament is once again revisiting the debate around introducing franchise legislation to police franchisor conduct – but is this really the solution? And what advantages and disadvantages could such legislation bring with it?
The case against franchise legislation
Franchise businesses across Europe, the US and Australia are governed by franchising legislation which sets out requirements around disclosure and agreement registration. By comparison, the UK remains one of the few countries around the world to treat franchise businesses the same as any other from a legal perspective – meaning there are no additional requirements or laws that a business is required to comply with by virtue of being a franchise.
The lack of franchising legislation in the UK has often been cited as a key reason why the UK continues to be an attractive choice for overseas businesses to expand into. It also enables UK businesses to consider growth options without the barriers of extra costs and added complexity that goes with it.
On the other hand, the UK has leading trade bodies in place which impose ethical standards on their members aligning with those in place across the rest of Europe. For instance, the British Franchise Association (BFA) has in place a code of ethics which both its franchisor and franchisee members must adhere to in order to ensure fair and reasonable conduct, including restrictions around how members can deal with non-compliance, and terminate agreements. The BFA also offers a mediation scheme to resolve any disputes in a cost-effective way.
Based on some of the legislation which currently impacts franchising, such as the Trading Schemes Act, there is already some concern about how suitable or well drafted any legislation that is put in place by government will be and whether it would adequately address any of the concerns that have been raised – which are caused by a dubious few rather than the ethical many and unfairly represent the benefits of franchising to ordinary business owners (as opposed to large corporates) and the UK economy as whole. Some might therefore say that the industry polices itself and regulation is accordingly unnecessary, and prohibitive and best avoided.
The case for franchise legislation
Recent examples highlight how franchisors are escaping their ethical obligations (even if they were once members of ethical industry trade bodies), alongside spotlighting incidents where it seems such obligations are not facing adequate scrutiny.
As a franchise enthusiast who has seen the benefits of the system for both long-standing operators and growing businesses, there is something to be said for imposing standards that apply to all operators (and not just those who choose to join ethical trade organisations) to protect the reputation of the sector and the businesses operating within it..
Should it, for example, be mandated that all franchise businesses are required to join an ethical trade body prior to launch and to actively adhere to their ethical code? In my view, it should.
And what of legislation? Would having a mandatory disclosure document that is publicly registered and required to be supplied to prospects really make a difference? Potentially, yes – it would mean only genuinely proven concepts with a strong track record could engage in franchising. It would highlight where the bodies are buried, so to speak; and it might provide some of the checks and balances which are currently being circumvented presently. But legislation alone isn’t the full solution.
The success of any legislation is contingent on having the backup of an enforcement authority to train and guide those in the industry as to what the standards are, and to police effective compliance As for what such an enforcement body could look like, the BFA has the potential to be properly resourced to police the industry as a whole, as opposed to its membership alone.
That isn’t to say that such legislation wouldn’t bring with it potential barriers to franchise growth in the UK. For example, the associated cost of compliance with bespoke franchise laws would be considerable, increasing the documentation to be prepared, its visibility, and its complexity. It would also involve increased legal intervention as a result of numerous contracts being subject to a body of implied terms.
Finally, the legislation could bring with it an increased risk of lower overseas growth potential, alongside additional barriers to UK businesses growth plans at a time when UK businesses are already suffering. However, there are measures which could potentially be implemented to mitigate such risks, such as reduced restrictions for businesses below a certain size, for example.
It’s clear that something needs to change – and perhaps now is the time to do just that. Implementing franchise legislation would bring the UK into alignment with almost every other country in the world where franchise and other business laws apply – in turn enabling the UK to be perceived as equally rigorous in upholding quality and ethical franchising, and in its protection of those taking franchises, as the rest of the world.
What could the legislation look like?
Looking to other countries where franchise laws have been implemented as an example, legislation could potentially involve extending existing laws which we already have in place to protect consumers and others contracting parties considered vulnerable to franchisees.
Such measures could require franchisors to demonstrate their franchise credentials, track record, and any potential franchise failures to prospects so that they enter franchises in full knowledge of what they are taking on. Whilst this would involve the collation and disclosure of information similar to that required in the due diligence/disclosure process when a business is sold, the BFA already requires its members to have a disclosure document in place that is provided to prospects – and such additional documentation could serve as a useful marketing tool for those brands whose ethical credentials and track record are exemplary. In the UK members of the British Franchise Association are already required to have a disclosure document in place that is provided to prospects. The legislation could also require overseas entrants to have an existing UK presence, and to have at least tested the model in the UK so that prospects know that it is suitable for the UK environment before appointing others to grow the concept here. Franchise operators invest their life savings and livelihoods in taking franchises – checks and balances should be in place to protect them.
So, what next?
Whichever side of the debate you fall on – for self-regulation or not – for those passionate about the industry, the time has come to make changes to the way the sector works to place franchising in a better light, increase its appeal to potential prospects, and to prevent the occurrence of isolated incidents which misrepresent the benefits of this thriving sector.
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