Hamilton Pratt

Regulation of Franchising

The United Kingdom remains one of the few countries which contains no
franchise regulations.  Successive governments believe that self regulation
through the British Franchise Association is the most effective
way of regulating franchising.

Background

The most popular areas of business activity for franchising in the United Kingdom include:

  • Fast food/Restaurant/Catering, Retail Shops, Business Services/ Computers, Health/ Leisure and Distribution/ Delivery Services.

Generally franchising in the United Kingdom is less heavily orientated towards retail concepts than in continental Europe.

The most recent NatWest BFA Franchise Survey indicates that the annual turnover of business format franchising in the United Kingdom was approximately £9.65 billion, 695 systems were in existence with a total of 33,800 franchised units.

Pyramid Selling

Franchising  was  incorrectly  associated   with  pyramid  selling   or multi-level  distributorships in the late 1960’s.  Pyramid selling occurs when “franchisees”  are  encouraged,  or find it more remunerative, to  seek  other sub-franchisees  (who  in turn are encouraged to find sub-sub-franchisees)  to sell the goods or services which are allegedly the subject of the “franchise”.

Sections  118 to 123 of the Fair Trading Act 1973 (“the  Act”)  regulate pyramid selling by regulating three aspects namely:

  • The control of advertising
  • The imposition of a “cooling off” period
  • The control of contractual provisions

These provisions have been amended by the Trading Schemes Act 1996 and Regulations published in 1997.

The Act only applies to “a trading scheme” as defined in  Section 118(8), but a very wide definition is given to "trading schemes" so that the term is likely to include virtually all franchise systems.

It should be noted that the legislation does not prevent pyramid selling and provided a promoter  of such a scheme takes care to comply with the requirements of the Act and the regulations made thereunder, a pyramid selling scheme can be operated.

Franchise Disclosure

Some  countries  have introduced legislation to protect franchisees by requiring  franchisors to make certain disclosures to prospective franchisees.  The British Franchise Association (“the BFA”) has, however, been hostile  to the  introduction of such laws.  Instead the BFA applies the European Code  of Ethics to its members.  Article 3.3 of the European Code provides:

“In  order  to  allow  prospective Individual Franchisees to  enter  into  any binding document with full knowledge they shall be given a copy of the present Code  of  Ethics  as  well  as full and accurate  written  disclosure  of  all information  material  to the franchise relationship within a reasonable  time prior to the execution of these binding documents.”

The requirements of the European Code of Ethics do not have any statutory backing and, of course,  franchisors who are not members of the BFA do not have to comply with the Code.