Hamilton Pratt

Regulation of Franchising

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

There are no specific UK laws relating to franchising itself although the European Commission published a block exemption which exempted certain franchise agreements from regulation under Article 81 of the EC Treaty. This block exemption has since been replaced by a block exemption which applies to "vertical agreements" which include franchise agreements.

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.