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22 May 2007 : Column 368WH—continued

The up-front fee to the franchiser was £127,000, so my constituent set about raising those funds, which he did via a business loan from the Royal Bank of Scotland’s subsidiary NatWest for £80,000, with the remainder being sourced from his own resources. Mr. Wakefield began trading in June 2004 and the business started well—it is important to say that. At that stage, 24 Self Video seemed to be fulfilling its part of the bargain, and Mr. Wakefield was demonstrating his successful business track record by doing well for the first nine months. It was clear that there was a good customer base, the business was progressing successfully, and there was every reason to be optimistic about the future, but after
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nine months things began to go wrong because the parent company of 24 Self Video, the RAS Partnership, massively increased the price of stock and Mr Wakefield's business immediately began to lose money. There was no warning of the price increases, and no obvious justifications were set out. Mr. Wakefield protested, but he continued to work hard at his business. Over the next two years, he kept his business going, but he struggled greatly, and in doing so, he had to pour significant additional amounts of his own money into the business to keep it afloat. At the same time, he had to continue paying back his loan to NatWest.

Mr. Wakefield approached 24 Self Video for help and advice. As I have already said, one attraction of being involved in a franchise is that one has a central support and advice network. However, 24 Self Video refused to help. He also asked whether he could see information about the financial situations of other franchisees—anonymised, if need be—in order to understand why his situation had become so difficult. As we now know, he was not alone in that dreadful situation, but needless to say, 24 Self Video refused to provide him with help in that situation, too.

Mr. Wakefield’s business folded in 2006. 24 Self Video offered him £15,000 to buy back his equipment and stock. He had to accept the offer; he had no choice, given his parlous situation. However, it subsequently became apparent that 24 Self Video had re-sold Mr. Wakefield’s equipment and stock for the staggering sum of about £130,000—presumably to another franchisee who could find themselves in the same difficult situation as my constituent.

Mr. Wakefield is now left with a substantial share of his loan to repay—plus lawyers fees—as a result of extremely questionable practice by the parent company. We already know that, to put it mildly, the directors had form. Mr. Wakefield discovered that he was not alone, and thanks to the work of the hon. Gentleman, it has become clear that there were other victims.

My constituent is an honest and competent business man with a successful track record. Nevertheless, his experience no doubt led him to think hard about what he may have done wrong to end up in that sorry position. It is now apparent that Mr. Wakefield’s situation was not of his own making, and that others who share his plight have similar stories to tell.

The victims of that practice wish to receive some form of compensation, and I should like the Minister to consider the way in which that may be possible. However, it is just as important to Mr. Wakefield and others to ensure that justice is done and action is taken to ensure that other business people are not put in the same position and do not suffer the same fate.

There are important questions to be asked. What checks did the Royal Bank of Scotland’s subsidiary, NatWest, which lent Mr. Wakefield the money, make when agreeing to such a substantial loan?

James Duddridge: My ears pricked up at the mention of RBS and NatWest for a second time. Has the hon. Gentleman had any discussions with RBS? If he has found it as difficult as the hon. Member for Central Ayrshire (Mr. Donohoe) to receive an audience with
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the great and the good at RBS, would he support a cross-party letter to raise the issue, calling for a meeting about its treatment of and responsibilities towards franchisees generally?

Tim Farron: I have and I would. We have attempted to establish communications with the bank, but we have not been terribly successful, so I would support the cross-party approach that the hon. Gentleman has outlined.

On the other side of the coin, when banks lend such amounts of money, they must realise that they are putting people in a potentially difficult position. We must ask what checks were made on the directors of the enterprise and their past record. If one were to set up one’s own private enterprise, separate from a franchise, there would be no chance of securing the type of loan that one can secure as a franchisee. There is clearly much greater need for due diligence by banks. I wonder what checks were made on the terms of the franchise agreement. One would have thought that any sensible business adviser at a bank would go through the terms that, for example, potentially allowed such unjustified hikes in stock prices. I should be grateful to hear from the Minister what she thinks can be done to ensure greater due diligence.

Mr. Donohoe: Will the hon. Gentleman explain his constituent’s problem when dealing with RBS and the director in question? Did the hon. Gentleman’s constituent make mention of the problem?

Tim Farron: I cannot go into detail at this point, but my constituent’s difficulty was with getting an audience with anyone above branch level. He felt that he had been abandoned, and perhaps even that the bank understood that errors had been made and that it did not want to encourage a sense that they had been made by taking the matter further. I am happy to discuss my constituent’s details outside the Chamber, because he is happy for his experience to be used to help us get to the bottom of the situation.

It is important to state, as others have, that the British Franchise Association punches above its weight given its size. It has been in operation for about 30 years, and its code of conduct is based on the code that the European Franchise Federation recognises. The BFA provides mediation and arbitration schemes and an excellent service in many ways. However, it seems sensible for the BFA to require that members meet the criteria for accreditation consistently, not just when they join the association. I am glad that the BFA has tightened its rules to require notification of disqualification during membership, and that it has broadened disclosure to include key managers, not just directors.

The hon. Gentleman cited practice in the United States, where there are disclosure rules and a uniform franchise offering scheme to facilitate compliance with disclosure requirements. The United States is a different kettle of fish: there are 50 different states, and many have different legal codes. Theirs is a more complex situation, so I understand why the need for regulation may be greater in the United States than in
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this country. However, if our voluntary operation is not working, I hope that the Minister will consider taking further action.

I hope also that the Minister will determine to take effective and immediate action so that the victims of this scandal receive justice. That would make it certain that no other business people were allowed to suffer in the same way from a series of outrageous practices that aim to make the parent company huge sums of money at the expense of decent, hard-working business people.

10.7 am

Mr. Mark Prisk (Hertford and Stortford) (Con): I look forward to serving under your guidance in this debate, Mr. Chope. I shall begin by warmly commending the hon. Member for Central Ayrshire (Mr. Donohoe) on securing the debate. Members will know that he has a consistent record of dealing with the issue, and I am sure that his constituents value his interest and the contribution that he has made today.

At the beginning of the debate, the hon. Gentleman highlighted the case of 24 Self Video, to which the hon. Member for Westmorland and Lonsdale (Tim Farron) also referred. Clearly, there is a significant problem with that case, and I am sure that the Minister will wish to respond to it. Mention was made of the bank’s role, the apparent failure of appropriate due diligence on its part, and the unwillingness of its management to listen to Members’ concerns.

On that note, I welcome the remarks made by my hon. Friend the Member for Rochford and Southend, East (James Duddridge), who showed that such debates allow us to work on a cross-party basis. A joint letter, as was suggested, might be able to uncover some of the issues involved in the case. That is a good sign for the way in which many such issues can be dealt with—the heavy hand of Whitehall is not always required. Often, Members can use their position to apply a little leverage and pressure to remind large institutions that they have a role to play in our society and that they need to listen to our constituents’ concerns. I hope that that initiative will proceed.

The hon. Member for Central Ayrshire also raised the possibility of a United States-style mandatory disclosure, which I believe would take place every year. I do not claim to be an expert on the way in which that process operates, but I would be interested to know whether the Minister feels that such a scheme is to be encouraged, given that the costs might be, say, £5,000 a year per franchisee. My hon. Friend raised the issue of how we can ensure that we strike the right balance between regulation and investor and business confidence. Striking that balance is at the heart of the debate.

Clearly, franchised businesses are important to the UK economy. It has been estimated that some 370,000 people in this country are employed as a direct result of franchising. As the hon. Gentleman said, the turnover of such businesses and the supply chain that supports them is in the region of £10 billion to £11 billion. As a business model, franchising operates not just in one sector. It seems that 20 or more business sectors have a significant element of franchised enterprises—they might be the local print shop or graphic design agency, for instance, or involved in insurance, hairdressing, fast food and video rental, as we have heard.

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A wide range of quite well-known brands are franchises. I suspect that we are all familiar with the long-standing Kall Kwik, but there is also Subway, the sandwich business from the United States that is now growing in the United Kingdom, and estate agency businesses such as Winkworth, which are often franchised. People will obviously be familiar, too, with fast food eateries such as McDonald’s and high-street chains such as The Body Shop. Other franchises that come to mind include Printfast and Snappy Snaps.

Given the money that is involved in all those different kinds of businesses and the employment that they generate, it is clear that franchising is an important part of the UK economy. However, franchising is also significant in the debate about small businesses. The franchise option is popular and profitable for thousands of new entrepreneurs beginning start-up businesses. The latest figures, which relate to the whole of last year, show that, roughly speaking, 3,000 small start-ups began their lives as franchised businesses in this country last year.

Why is franchising a popular option? The answer is fairly simple: an established brand or business will have been tested in the market and will therefore have a track record. For someone considering starting up a fast food outlet, for instance, choosing an established franchise, with a name that the public know and perhaps trust, is more likely to be successful than something of similar or greater worth, but which is inevitably untested. As we heard, ironically, a proven track record is also important when someone is seeking to raise finance to launch a business. It is clearly much easier to convince a bank with a proven business model. However, as we have also heard, the down side is the danger of assuming that that business model will not need the same level of due diligence that would be applied to any other. Those risks will fall either on the bank or—because in the end, the bank will have its money—on the shoulders of the entrepreneur.

The performance of individual franchises is underpinned by an annual survey of the sector, which is funded by NatWest bank and commissioned by the BFA. The survey has been run for more than 20 years. Given that it is commissioned by the BFA, there will be an interest in its outcome. However, to be fair, having checked it, I understand that it is undertaken by independent consultants, so I have reasonable confidence that it gives at least a fair picture of the market. The survey shows that franchising delivers the lowest business failure rates of any kind of business start-up. Last year, for example, just 1.8 per cent. of franchises failed, compared with more than 9 per cent. for comparable start-ups generally. The survey suggests that that pattern not only was evident last year, but has been so year in year out.

Given that evidence and its possible implications for encouraging more successful start-ups, can the Minister tell us what assessment her Department has made of the sector and its relative performance? Is that differential in success and failure reflected in her statistics? It would also be helpful if the Minister could tell us how the existing business support network interacts with start-ups and what advice business links provide to budding franchisees, as there might be an issue there relating to points that hon. Members have raised today.

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The franchise industry is largely self-regulated, and has been that way since 1977, when the major companies involved in the business decided to set up their own association, the British Franchising Association. The BFA had just nine founding members, but over the years it has grown significantly. I am told that there are now in the region of 350 different franchise brands in the UK; indeed, the BFA tells me that under its franchise network alone there are some 15,000 businesses.

As I understand it—this is simply from some cursory research; I do not pretend to be an expert, as the hon. Gentleman clearly is—the BFA’s principal ability to regulate is based on its membership procedure and the requirements that it places on applicants who wish to join, whether as an associate or a full member. Even at what is called a provisional level—that is, before being approved for associate membership—the directors of a company are checked against the records at Companies House and then vetted for suitability. Thereafter, moving from the provisional list to associate membership requires certain guarantees and declarations from the applicant, as well as proof of earnings from existing franchisees.

Mr. Donohoe: May I correct the hon. Gentleman’s impression about that? One of the fundamental problems in the case that I raised was that that process did not happen. There was no check whatever. The people taking out the franchise were of the opinion that those checks had been made, but after correspondence between the franchisee and the association, it was determined that that had not happened.

Mr. Prisk: I am grateful to the hon. Gentleman. If there was a failure of process by the association, that would need to be looked at with great care and concern. The approach that has been described to me seems reasonable. The question is whether it has been taken, and he is absolutely right to raise that question in his constituent’s interests.

Overall, my concern is whether there is due process to try to ensure that known rogues, as it were, do not become members of the association and that innocent potential franchisees do not therefore assume, albeit with good reason, that something is not as it claims to be. The question is whether the BFA or any other body should seek actively to police the industry, to try to prevent malpractice or illegality. The hon. Gentleman has quite rightly raised questions about his constituent’s circumstances. Although I have listened to the points that he has raised, I am not party to the case, so it would probably be wise for me not to comment in detail about the whys and wherefores. However, he has raised some important issues, not least that of the role of responsible lending, which I am sure the Minister will wish to address in full shortly.

For my part, I think that there are issues that we can and should consider, about how the industry operates and whether there is clear evidence of systemic market failure that this Government—or, for that matter, any Government—should address. First, with the exception that the hon. Gentleman just raised, the BFA seems to have tried to take reasonable steps within its powers to prevent rogues from coming into the business, yet without creating unfair, undue or anti-competitive
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barriers for new entrants. However, there may have been a failure in that process, and I am sure that the Minister would want to comment on that. I am also told that the BFA operates a complaint and dispute scheme, which includes low-cost mediation and arbitration for both current and former franchisees. However, I recognise that unhappy franchisees may feel that a body for franchisers may not be entirely representative of their interests and concerns. I wonder whether the Minister could say whether she thinks the existing arrangements are satisfactory.

Secondly, under the current law, anyone who is disqualified from acting as a director is also disqualified from any direct or indirect involvement in the management of a franchise company. Any breach of those restrictions is a criminal offence under the Company Directors Disqualification Act 1986 and should be dealt with appropriately. However, I should also be interested to know whether the Minister feels that the new Companies Act 2006, which she took through the House, might also assist in such cases.

Thirdly, although the cases raised today are clearly distressing to those affected, it is not possible to say that they represent systemic market failure that demands immediate Government intervention. Clearly, in any market there are and will continue to be failures in the sector, but the fact that franchises continue to have a lower rate of failure than the rest of the market weakens the claim that the industry somehow represents undue risk.

Lastly, there is the question of how far and how much Government should intervene to try to protect businesses from failure. By its very nature, enterprise is risky; I do not believe that it is desirable or practical for the state constantly to interfere to try to remove risk. That does not mean that I am unsympathetic to the constituents’ concerns and the instances raised by the hon. Gentleman and others in this debate. I myself have set up a business and run one for 10 years. I know and understand the stress and strain—and also the rewards—that come from running a small business. I am not unsympathetic. However, the best way to minimise the opportunity for malpractice—or, worse, illegality—is for there to be transparency in the marketplace and for people to abide at all times by the principle to which the hon. Gentleman alluded: that of caveat emptor, of buyer beware. We should take nothing for granted.

Without question, the franchising sector is an important and growing part of our economy. It is entirely right that we should consider how the industry is operating and whether the current regulatory framework is performing. Naturally, the Minister will wish to dwell on the issues raised by the hon. Gentleman, and I understand that. It is important that she sets out clearly the Government’s complete response to his points.

However, I also hope that the Minister will be able to respond to the questions that I have tried to raise, and that she will set out the Government’s assessment of the strengths and weaknesses of the franchising model and the regulatory environment within which it operates. The Government rightly speak of the need for light-touch regulation. I hope that today she will be able to show us her commitment to that principle.

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