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22 May 2007 : Column 374WH—continued

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10.22 am

The Minister for Industry and the Regions (Margaret Hodge): I congratulate my hon. Friend the Member for Central Ayrshire (Mr. Donohoe) on securing this second debate on franchising, thereby ensuring an interesting exchange of views.

I start by saying that I completely understand the distress caused to the constituents of hon. Members here today. However, across the Government and Opposition Front Benches, there is good unanimity of intent and of understanding about how we go forward on the issues that have been raised.

Let me first put the context, as other hon. Members have done. We all recognise that franchising is growing and we want to encourage it. It is a well recognised route for many who start a business. It is particularly attractive to those with less business experience, who may want to limit their risk and buy into franchising. Particular groups, possibly including women, see franchising as a way into business; they may also include people coming out of the Army with a lump sum that they want to invest in starting on the route to entrepreneurship. We want to encourage franchising, as part of our general encouragement of the growth of small business and entrepreneurship. As all hon. Members who have spoken have said, franchise turnover and the number of people working in franchises are growing.

The hon. Member for Hertford and Stortford (Mr. Prisk) asked me to state our view of the franchising sector. I share his analysis that there are advantages. A franchisee buys an established brand with a proven business model and thereby somewhat reduces the risk in comparison with establishing a business from scratch. The franchisee also benefits from the franchisor’s promotion of the brand; that form of support is available. Furthermore, a responsible brand owner will provide support in other forms, such as training, marketing and other know-how of various kinds. As the business model of franchises is proven, it is usually easier to raise finance for them, although today we have heard doubts about whether the banks in the case that was raised practised the due diligence that one would expect of financial institutions. Furthermore, as other Members have said, some banks have teams that focus on franchising opportunities.

The sector also has disadvantages, such as the payments made to the brand owner, which caused problems and reduced the viability of the business in the case that has been mentioned. Furthermore, the franchisee is obliged to adhere to the established model and has to obtain approval for any changes that he or she may want, and the business can be sold only to those approved by the brand owner. Finally, the brand owner could go out of business. There are both advantages and disadvantages.

Franchises are a form of business that may be suitable for some people and unsuitable or less suitable for others. However, the advantages and disadvantages of franchising should not obscure the essential nature of the venture: to buy a franchise is to buy or start up a business. The plain fact is that business is risky; the essence of entrepreneurship is that businesses succeed and fail for a variety of reasons. If a business model
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succeeds in one place, that does not mean that it will succeed in another, or in a different time or market. Anybody who buys or starts up a business, whatever its form—franchise or otherwise—needs to assess the opportunities, costs and risks with great care. If they are starting in areas outside his or her personal experience, they need to get professional advice.

Both the hon. Member for Westmorland and Lonsdale (Tim Farron) and my hon. Friend the Member for Central Ayrshire raised the issue of the regulation of franchising. As my hon. Friend knows, during the debate last year, the then Minister for Energy, my hon. Friend the Member for Croydon, North (Malcolm Wicks), said that the Government had yet to be convinced that it was necessary or desirable to introduce regulation that followed the model in the States. There are two reasons for that. First, not enough cases have been brought to our attention. I questioned my officials in preparing for this debate, and discovered that the case raised has been one of only two that have been brought to the Department’s attention.

Mr. Donohoe: Is the Minister aware of the case in the High Court this month?

Margaret Hodge: Interestingly enough, that case, to which I shall come, involves a company limited by a guarantee. In the instance that we are discussing, one of the issues that has bedevilled the individuals who took out the franchise is that they are dealing with a partnership, not a company. The legislative recourse available to them is different and more limited. In a partnership, the risk is to the individuals, who need to be pursued. In a limited company, there is a disqualification; that, I understand, is the route down which the recent High Court case went.

So we have not had enough evidence, although we shall keep monitoring, as we clearly need to. The other issue is whether regulation might provide a false sense of security. We always have to be wary. Even if we were to introduce the American-style regulation, that is not very different from what the BFA does voluntarily. In this case, it has probably not done so as effectively as we would have liked, and it has provided false comfort to the constituents of the hon. Member for Westmorland and Lonsdale and my hon. Friend the Member for Central Ayrshire. That probably meant that their constituents did not undertake all the assessments that they should have done to ensure that the venture, into which they put considerable amounts of money, was a proper one.

Mr. Donohoe: Surely what the website says about the responsibilities, checks and balances within the BFA would lead the reader to conclude that the organisation had the industry under control. It is clear that the constituents of my fellow debaters this morning are of the clear opinion that that was enough, along with other checks and balances to lead them to conclude that the venture was worth while.

Margaret Hodge: I have looked at the website; in fact, I have various pages of it with me. Let me say to my hon. Friend, since this is the second time that he has raised the issue, that the start of the website states:

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I can understand how that can provide some comfort to the people who visit that website. It is interesting to note that the BFA is sponsored by various banks, of which the Bank of Scotland is one.

Mr. Donohoe: As the Minister has visited the website this morning, it might be of interest to her to learn—in case she did not see it—that the president of the BFA is one Bernard Ingham.

Margaret Hodge: I had not picked that one up. However, I did pick up on an explicit set of drawbacks of entering into a franchise agreement. One paragraph talks about the unethical franchisor and says:

that is what has been described this morning—

although I am not sure that that is what happened in the cases that have been mentioned,

The website contains such warnings and, if I were investing a lot of money and putting up my house as security to buy such a franchise, I would go beyond simply seeing whether the franchisor is listed on the BFA website. There is an element of decision making where the onus and the burden have to lie with the individual who makes the decision. Those constituents should probably have investigated everything a bit further.

However, I am prepared to re-advertise the BFA through I have asked my officials to investigate whether it is appropriate for the Government to advertise a voluntary organisation—a trade association of franchise institutions—to ensure that we do not unwittingly provide false comfort or false information to individuals who might use a Government website for support when buying a franchise. I will write to all hon. Members who have participated in the debate once we have undertaken the review to see whether listing the BFA through the Business Link website is appropriate.

Membership of the organisation is voluntary, and it is a trade association. The hon. Member for Rochford and Southend, East (James Duddridge) asked whether we funded it. No, we do not. I am pleased to learn that, rather than vetting franchisors when they first ask to become members, it vets its franchisors more regularly to ensure that they should remain members of the organisation.

Let me deal with a point that the hon. Member for Westmorland and Lonsdale raised when he described his constituent’s experience. It sounded to me as though his constituent might have been the victim of misrepresentation, fraud or some anti-competitive practices, or reckless mismanagement on the part of
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some company—I was not clear whether it was the company or the partnership with which his constituent had to do business. There are protections in law for anyone who thinks that they have been a victim of such abuses. If the hon. Gentleman believes that any of the circumstances in that case involve such practices, I hope that he will draw the matter to the attention of the appropriate authorities.

If we were to make some new form of regulation—some special controls of franchising—we would have to justify them as necessary and show that there has been a systemic problem or risk with franchise businesses that has not arisen for other businesses. I have not had evidence presented to me to show that that is the case, nor has new evidence been presented this morning that would lead me to conclude otherwise. It must be clear that, in cases that involve no misrepresentation, fraud or deception, but in which the business simply does not make it in the marketplace, no conceivable form of regulation could save that company. It is simply not possible for the Government to insure business against the possibility of failure.

I have dealt with the fact that some of the people involved in the franchise business were disqualified as directors. Once someone is disqualified as a director, we inform Companies House. In cases where someone acts as a director of a limited company while they are disqualified, we have a hotline at the DTI—we take that matter extremely seriously and we would pursue it. It was unclear from the speeches of the hon. Member for Westmorland and Lonsdale and my hon. Friend the Member for Central Ayrshire whether their constituents dealt with a company or a partnership, because the legal framework is different. Those who feel that they have lost money as a result of the actions of a partnership can pursue the individuals, so no disqualification procedure is in place. If either hon. Member wants to write to me on that, I am happy to write back to clarify the position for their constituents.

A number of hon. Members raised the issue of the banks. Clearly, we want to ensure that banks act with a duty of care for their customers, as my hon. Friend the Member for Central Ayrshire mentioned. My hon. Friend the Member for Paisley and Renfrewshire, North (Jim Sheridan) talked about banks’ moral responsibility, and we all believe that that is important. I am pleased that the initiative is going to be taken collectively to seek a meeting with the banks to ensure that they exercise due diligence when supporting individuals who move into franchises.

Mr. Donohoe: Will the Minister tell us whether she has meetings with the banks and their directors?

Margaret Hodge: The banks, of course, are regulated by the Financial Services Authority. The Treasury, not the Department of Trade and Industry, has responsibility for financial services, but I do indeed meet individual banks and the British Bankers Association from time to time, and I am happy to raise the issue when I next meet them. I suggest to hon. Members that they also have available the services of the banking ombudsman. If they feel that inappropriate support and advice was given to their constituents, a reference to the ombudsman from my hon. Friend the Member for Central Ayrshire and the
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hon. Member for Westmorland and Lonsdale together, or with the hon. Member for Hertford and Stortford, might be appropriate.

The hon. Member for Hertford and Stortford rightly put the issue of franchised businesses in the context of the business support that we give to start-ups. Although we cannot insure businesses against failure, we do a great deal to help small business and support business start-ups. As he and I have often said in debates, we share the view that they are absolutely vital to the future health and prosperity of the economy.

We are proud of our record; he is more critical of it, but there are 600,000 more small businesses today than there were when we came into government in 1997, and employment in the SME sector has risen by more than 1 million. We have a record number of British entrepreneurs, including for the first time ever, I am delighted to say, more than 1 million self-employed women. I should like to go further than that. As he well knows, small business now accounts for more than half of private-sector turnover.

We do not keep specific information on the support and advice given to franchisees, but Business Link is reaching more people each year. In 2003-04, just over 600,000 people were supported by Business Link, and in the most recent year for which we have figures, we are up to nearly 800,000—a substantial increase in the number of individuals supported. I hope that the new contracts for Business Link that are just starting up, to be run by the regional development agencies, will increase its effectiveness yet further and enable it to provide further support to the SME sector.

As the hon. Gentleman will know, we are trying to make our advice and support to small businesses much more user-friendly, by reducing the number of business support schemes from 3,000 to 100, which will help with access and reduce the undoubted confusion that both he and I believe businesses currently face.

Mr. Prisk: I do not wish to drift too far from the subject, but can the Minister tell us when the Government hope to publish the criteria for that simplification? We have had correspondence in the past on both franchised and non-franchised small businesses, but it would be helpful if she could say whether she expects to publish the criteria imminently. I think that they were due in March, but does she now expect them before we rise before the summer?

Margaret Hodge: We are well on the route to developing the criteria, and they will be published well before the summer recess in a consultation paper that
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the Chancellor promised in the Budget. We are currently preparing that paper. The hon. Gentleman will know that we are doing effective work on raising the spirit of entrepreneurship among school children through Enterprise Insight, enterprise week and other initiatives. It is heartening, when comparing our record with those of other European and other G7 and G8 countries, to see that our rate and awareness of entrepreneurship and the likelihood of people becoming entrepreneurs is on the rise, and that we are moving up the international ladder. We are offering such things as a leadership and management programme for SMEs, which I know the hon. Gentleman agrees is important, and improving access to finance, particularly through the enterprise fund.

The Business Link website,, is particularly important. It draws together information from more than 50 bodies and provides straightforward details on regulations that apply to small businesses. It has a host of useful business tools, is an internationally award-winning website and now has more than 5.5 million unique visitors each year.

With that background, I appreciate the raising of the debate. It is important, and it has made me think clearly about whether we should consider more regulation for the franchising sector and whether current support is appropriate. I do not believe that the time has come for formal regulation, and I am not convinced that it would necessarily have provided the right support to the individuals who lost so much money in the constituencies of my hon. Friend the Member for Central Ayrshire and the hon. Member for Westmorland and Lonsdale.

We should do what we can to support franchises, because they are an important route into entrepreneurship, as hon. Members have said. But at the end of the day, it is up to anyone venturing into business, whether as a franchise or independently, to make their own inquiries and decide what to do in the light of their own priorities, judgments and capacities. Of course they should seek professional advice, from whatever source—we have discussed the role of the banks—but whatever the advice, the judgment must in the end be down to the individual making the commitment. However, I take on board the issue of the BFA, and I shall come back to hon. Members on that. I hope that they feel that they have had a good opportunity this morning to air their constituents’ concerns, and I assure them that the Government have listened hard to what they have said about the experiences of those constituents.

12.47 pm

Sitting suspended.

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Dairy Industry

11 am

Mark Williams (Ceredigion) (LD): It is a privilege to serve under your chairmanship, Mr. Chope. The last time that I recall us having a full hour and a half debate on the state of the UK’s dairy industry was in November 2005, when such a debate was initiated by the hon. Member for Preseli Pembrokeshire (Mr. Crabb). Not many Members are here today; however, there is a similarity between the faces present today and those present then. I am sure that Members will agree that this debate is long overdue.

Since November 2005, there have been many developments in the dairy sector and it would be churlish not to acknowledge that a lot have been positive. The ongoing Competition Commission inquiry gives us hope that some form of regulation will be introduced into the market and that that will help to provide dairy farmers with better farm-gate prices. Farmers’ unions, the women’s institute and other rural interest groups are succeeding in building a much higher profile for the plight of Britain’s dairy farmers, notably through the great milk debate that was launched in April; many Members will have had experience of that in their constituencies. We ignore the WI at our peril, particularly as others have been less responsive to its concerns.

Supermarkets are starting to get to grips with their responsibility to ensure that farm-gate prices are set at a fair level. However, such progress cannot come a minute too soon for dairy farmers. Today, the average farm-gate price for a litre of milk is just under 18p, yet research by the National Farmers Union and the Royal Association of British Dairy Farmers estimates the price of production at 21.23p a litre.

The situation is compounded by the escalating costs faced by our farming community. Figures provided by the National Farmers Union of Wales show that the cost of diesel has more than doubled and that the cost of nitrogenous fertilisers has risen by more than 50 per cent. in the past six years. During the past four years, the average price of electricity for small industries, including farms, has risen by some 90 per cent. In that context, farmers secured a price of 24.5p a litre 10 years ago, compared with 18p a litre today.

I remind the Minister of the serious and worsening impact of tuberculosis on dairy farming. The Government’s perceived lack of action on bovine TB does little to support the industry. I know that the Minister takes a particular interest in this matter, and I urge him to implement a clear and universal strategy to deal with bovine TB at the first opportunity.

Agricultural policy is a devolved matter, but there are cross-border issues. For example, English badgers are free to enter Wales, as Welsh ones are to enter England.

Mr. Stephen Crabb (Preseli Pembrokeshire) (Con): The hon. Gentleman has rightly pointed out that policy on bovine TB has been devolved to the Welsh Assembly. Does he agree that we have had four wasted years under the last Assembly Administration, during which the problem was not tackled? Does he also agree that the interaction between low farm-gate milk prices and the spread of bovine TB in his constituency and in mine risks decimating the dairy sector?

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