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Westminster Hall

Tuesday 22 May 2007

[Mr. Christopher Chope in the Chair]

Franchise Industry

Motion made, and Question proposed, That the sitting be now adjourned.—[Margaret Hodge.]

9.30 am

Mr. Brian H. Donohoe (Central Ayrshire) (Lab): I welcome the opportunity to discuss the case of one of my constituents and the need for the franchise industry to be regulated, and I thank Mr. Speaker and his staff for granting the debate. I thank also hon. Members who have turned up to give their support on this worthwhile subject. I have previously had a successful debate on this subject and I am sure that today’s debate will be equally successful.

My reason for securing the debate was to highlight the bad practices in some elements of the franchise industry. Despite previous debates and the tremendous amount of publicity on this issue, still no concrete action has been taken and people in the industry are vulnerable as a result. Many have had the same misfortune as my constituent, Mr. Andy Walker, whose problems I shall outline solely to demonstrate that the Government must give serious consideration to this issue and take a far more proactive approach.

The franchise industry is a fascinating study of what is happening in the commercial world. Franchising is worth £10.8 billion and is growing at twice the rate of the rest of the UK economy, so it is important both as an industry and in sustaining the growth of employment in our economy. The debate should in no way be seen as an attack on the thousands of people who are involved in excellent and, in the main, responsible business. The industry is supposed to be regulated by an organisation that I shall mention frequently today: the British Franchise Association. One of its main functions is to help potential franchisees to recognise the good, the bad and the ugly for what they are, but it has completely failed to fulfil that aim.

My involvement in this issue began when my constituent, Mr. Andy Walker, came to me with a complaint. He has been self-employed for 30 years—most of his adult life. For 15 of those years, he operated a fairly successful furniture company in Kilmarnock, but he later looked into franchising for a change of direction. Having done a tremendous amount of research, Mr. Walker decided that the franchise that he should choose was 24 Self Video. He had sold his furniture business some time before, and he used his life savings and his house as collateral, which proves that he did not take the decision lightly. He researched the idea for some time before deciding that taking on the 24 Self Video franchise would be the way to earn what he wanted to earn. However, the venture came to an end and he lost a significant sum of money. He might even lose his house as a result of money being lent to him. He has two main complaints—against the British Franchise Association and against the Royal Bank of Scotland.

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It is apparent that this issue concerns more than just a single constituent, because there have recently been similar cases. This month, the High Court wound up five companies in the Warrington and Leigh areas of the north-west that were involved in bogus perfume franchises. The investigation of the Companies Investigation Branch showed that the companies had given false references to prospective franchisees to lure them into purchasing franchises. The companies were also held to have unfairly tampered with figures on prospective earnings.

The company that trades as 24 Self Video Ltd. is also known as RAS Partnership in some records. When it was set up it had three directors, two of whom had previously been disqualified by the Department. They hid behind the front man, Michael Duffy, who was the managing director and who has a clear record. The other two directors were Tony Sacco, who was disqualified from 2002 until 2009, and Martin Reilly, who was disqualified from 2000 until the present day. Indeed, those individuals persist in selling franchises under the aegis of the RAS Partnership and another company called WoK 2 Go. We need the Department of Trade and Industry to clarify the situation regarding the directors and their ability to operate, even though they have been disqualified. Will my right hon. Friend the Minister tell us what further action, other than disqualification, was taken in relation to those directors?

From February 2003 to 2005, some 30 outlets were opened as franchises of the company, of which 15 have now closed. Those figures tell their own story. The total loss to the franchisees, who stumped up approximately £120,000 each, was nearly £2 million. Of the remaining franchises, none has reported any profits. The people who invested in those franchises all thought that they were protected by the BFA, but it has failed them all. Regulation of some sort, by the Government or another body, must be introduced.

My constituent’s second complaint is about the role of the bank. His case is about the worst example of banks’ operations that I have seen in 15 years, and I have seen some really bad ones.

Jim Sheridan (Paisley and Renfrewshire, North) (Lab): I want to make a point about the responsibility and accountability of banks. My hon. Friend will be aware of the company Filter Queen, which has caused problems in both our constituencies. It still owes wages to staff and has entered into illegal credit agreements with both the bank and its customers. Does he think that the bank has a moral responsibility to deal with the problem that Filter Queen has created?

Mr. Donohoe: My hon. Friend makes a good point. That is another example of companies, almost in collusion with banks, seemingly being able to hoodwink the public. In the case of Filter Queen, not only were the public hoodwinked; its employees were dealt an equally bad hand, in so far as they still have not been paid a penny for all their work. The public were being sold a virtual vacuum cleaner for about £1,600, involving an annual percentage rate of about 35 to 40 per cent. of cost. Vulnerable people are out of pocket by extremely large sums and will never be able to pay. We now have the ridiculous situation of the banks moving forward on that score and examining ways of getting their money back. That can involve all sorts of severity for those individuals. I am grateful for my hon. Friend’s intervention.

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In the case that I was describing, the bank also failed; it was guilty of clouding the assistance, if any, that it gives. The impression given was that all that banks care about is whether the money loaned is to be repaid in full, without any checks and balances in the system. That was the clear impression given in this instance and in others. Another question needs to be answered: why would the RBS and its associated bank, NatWest, lend money for this particular event when no other bank in the country would? Clearly, such behaviour is unacceptable in an era of apparent corporate responsibility. There was nothing responsible in either RBS’s conduct or its subsequent actions and words.

In that connection, meetings have been requested and I have had meetings over a long period of time. I, like my constituent and others across the country, have written to the RBS chief executive, Sir Fred Goodwin. He takes the attitude that the bank takes no responsibility because in such circumstances, it is not deemed to have given any advice. I attempted to meet Mr. Gordon Pell, RBS’s chief executive of retail markets, to discuss these issues with my constituent and others, but he rejected any possibility of a meeting. I attempted to meet Sir Fred Goodman; again, I was refused any access. As a final attempt, I had a discussion with Sir Tom McKillip, who is a born and bred Ayrshire boy. We are normally quite proud of him, but in this instance when I tried to convince him, he, too, suggested that he did not see any merit in having a meeting on this subject.

I have written to the BFA and have had a meeting with Brian Smart, its director general. It takes no responsibility, either. It stated that

That is what we got from Brian Smart. I have also had discussions with other Members whose constituents have had similar experiences.

What could the solution be? I do not want this debate to be seen as an attempt to over-regulate the industry. We seek increased investment in its operation, free from excessive red tape. However, a responsibly regulated industry would increase the incentive for third parties to invest. Any publicity that can be given to that fact would be good publicity, and it would be good for the industry.

A tremendous number of individuals have been badly let down by the company, BFA and the bank. We must seriously consider making alterations to those two institutions. In the case of banks, there is little we can do directly, save reminding them of their common law duty of care for their customers—that has been missing from banks for a generation. Such care should include responsible lending practices.

I do not want to over-regulate the franchising industry but we need a thorough review of how it is regulated. The most popular online destination among potential franchisees is the BFA. Before coming here this morning, I went on to Google and typed in “BFA” and “franchising”. On every occasion, the BFA’s website popped up and gave the impression of a very professional operation that was overarching, secure and watchful as a regulator of the industry, whereas in fact, it employs eight people.

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The website’s categories section mentions strict “ethical” and “viability” criteria for franchise operations. Associate members are committed to the

Potential investors would be forgiven for thinking of the BFA as a safe pair of hands. The Minister perhaps has a responsibility to enforce a revamping and expansion of the BFA, and to subject it to a renewal programme. The whole process needs to be reshaped in a way that protects the individual, and if that means introducing regulation, so be it.

A review of the DTI’s position in this area of business is necessary. Its twofold duty should be to ensure supervision of bodies such as the BFA and to make certain that giant banks such as RBS act with the correct integrity and with a degree of responsibility. It must be mandatory for the BFA to be advised of any closure of franchisees, in order to notify prospective franchisers. I am sure that the Minister is aware that such a provision is mandatory in the United States. It should be considered for the UK, in the light of the evidence that I am presenting this morning.

The BFA must make more rigorous checks on its franchises and must ensure that they are reviewed constantly. It is plainly wrong for an individual to be able to form a partnership while disqualified from being a director, no matter what sort of company we are talking about. In the interim period, while effecting far-reaching change in the BFA, we must ensure that the organisation clearly warns potential investors about the limitations of its vetting ability.

In summary: the individual requires protection, but that is missing; the BFA requires more resources in every sense of the word; banks need to demonstrate social responsibility and accountability; and the Government should consider introducing the US policy of mandatory conditions. Any individual in any circumstance who is considering such a business should not believe a thing that they see on the web.

9.49 am

James Duddridge (Rochford and Southend, East) (Con): I congratulate the hon. Member for Central Ayrshire (Mr. Donohoe) on securing this debate, and on his excellent work on franchising. It is rare to receive a letter from a constituent recommending that one speak to another Back Bencher who is an expert on a subject, but that is why I spoke to the hon. Gentleman about a matter that was prompted by a constituency case. I have had a number of conversations with him, and he is indeed a great advocate not only for his constituents, but for franchisees around the country.

The franchise sector is incredibly important. As well as generating £10.8 billion, it employs 370,000 people. Franchisers come in all shapes and sizes. When I wander down Southend high street, it may appear to be dominated by large companies, but in reality behind the facades of Threshers, McDonalds and so on are entrepreneurial franchisees. I am not usually in favour of greater regulation, but individual examples show that that the regulation of franchisees falls between two sets of regulations for small and large companies. I want to encourage the Minister to review the situation.

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I have had a number of positive discussions with the British Franchise Association, which seems to pack more punch than the eight people it employs. I was quite shocked to hear that it employs only eight people, and I shall be interested to hear the Minister’s comments on its funding. That is a genuine comment and not a leading one. I am interested in the structure and the intent behind the association.

The association’s Brian Smart has been helpful in a constituency case that I brought forward. Richard Stallard purchased a British Franchise Association starter pack and looked at the required criteria for the association’s associate membership: two years’ audited accounts, and proof that the business was franchisable, viable, and could sustain a franchise network, and that the business operator had training skills and could help to operate the business remotely. If an organisation promotes itself through the BFA, it is the underlying organisation that has the duties and responsibilities, not the association. I think my constituent felt that the association’s endorsement did not exist, and that people should be cautious about the details of franchisees and visit other franchisees.

I declare an interest: I was a banker for 10 years, for which I do not apologise. During that time, I did not operate in the franchise sector, nor did I work for the Royal Bank of Scotland or NatWest, but I understand that most banks have franchise units to help to bridge the gap for entrepreneurs coming into the market. One paradox in asking for more regulation for franchisers is that many entrepreneurs go into a franchise operation rather than a small company because of the excessive burden of regulation on small businesses. It is hand-holding to get over the critical mass of branding issues, both in the external market and regulatory issues such as health and safety, and employee conditions, through which the franchiser supports the franchisee.

While supporting the hon. Gentleman, I would not want the Minister in a review of the franchise association to pour on an excessive burden. As the hon. Gentleman said, it is an expanding industry and bridges a gap between small companies, start-ups and multi-nationals. I look forward to the Minister’s comments.

9.53 am

Tim Farron (Westmorland and Lonsdale) (LD): I echo the hon. Member for Rochford and Southend, East (James Duddridge) in congratulating the hon. Member for Central Ayrshire (Mr. Donohoe) on securing this debate. The subject is incredibly important to an increasing number of people, and I pay tribute to him for his unstinting work in defending those who have been victims of what seems to be sharp practice—to put it mildly—with people who have attempted to make an honest living by owning a business as part of a franchise operation.

We have heard that franchising in the UK is worth almost £11 billion, that it is growing incredibly quickly at twice the rate of economic growth elsewhere in the economy, and that is employs 333 million people. The attraction of becoming involved in a franchise is clear. It enables people to get out of the rat race and to have their own business, with a lower risk because they are
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not going it alone. The financing may be easier because banks will lend up to 70 per cent. of start-up costs, which is a lot more than for a new enterprise, and franchisees take on a proven business concept and do not start out alone. They also have, at least in theory, a support network, training, and an operating blueprint.

The track record of franchisees is good. Less than 2 per cent. of the franchisee population failed in 2006. Risks are involved in any business, but they seem to be lower in franchise operations. However, one risk is that the initial cost of buying into a franchise operation can be high, and there may be termination restrictions. Anyone going into a franchise must consider those important issues. It is important to echo what hon. Members have said: that the franchise industry is reputable, by and large. Many high street names that we are all aware of are franchise operations, and many others, equally reputable, are not household names. It is a growing industry but there are con artists out there. We are privileged to be able to talk about one area and to ask the Minister to pay particular attention to it because there are also incompetent firms. The Daily Telegraph told the story of Grovewood Publishing, which was still signing up licensees when it was under investigation for insolvency. There are clear issues that need to be addressed, but by and large the industry is reputable and healthy.

On a personal level, a matter was brought to my attention late last year when a constituent, Mr. Paul Wakefield, came to my surgery armed with a printout from Hansard of a speech on this subject by the hon. Gentleman and with his dreadful story. On behalf of Mr. Wakefield and the many other decent business people who have been at the wrong end of sharp practice, l would like to express my happiness that the issue is now getting the airing in Parliament that it deserves, to thank the Minister for her presence and to express my hope that she will assist the many people who have been affected by this scandal by taking effective action.

My constituent was determined that I should tell his story in this debate, and I know that it will ring many bells with other Members here and outside. In early 2004, Mr. Wakefield entered into a franchise agreement with the company 24 Self Video. He showed due diligence and completed all the relevant checks, which included scrutinising the details of the agreement with his accountant. Everything seemed to add up, and there were no grounds to believe that it was anything other than a straightforward business agreement under which Mr. Wakefield, an experienced and successful businessman, could hope to operate fairly and with the expectation of doing well in his new venture.

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