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Franchise Industry

Volume 460: debated on Tuesday 22 May 2007

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

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.

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.

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?

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.

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

“the fact a franchiser is or was in the BFA offers only assurance that the business concerned succeeded in meeting our accreditation criteria at the time they were assessed.”

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.

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

“Advertising Standards Authority’s code of practice and also to the association’s own complaints and disciplinary, appeals and re-accreditation rules.”

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.

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.

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.

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 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.

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 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?

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 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?

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.

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?

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 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.

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.

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.

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.

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.

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 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.

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 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.

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.

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.

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:

“All of our members have chosen to be vetted against a strict code of business practice”.

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.

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.

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:

“Unfortunately some franchisors have no intention of entering a long-term support relationship with the franchisee”—

that is what has been described this morning—

“instead they have heard that franchising is a way to make money quickly out of gullible franchisees. This is done by setting up a shell franchise—lots on offer but nothing to back it up, then selling such franchises”,

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

“to those who are so keen to become a franchisee that they fail to make a thorough appraisal of the business on offer. Make sure that you spot this type of franchise, take time to investigate different opportunities. You cannot afford to learn from your mistakes.”

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 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.

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 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.

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?

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 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.

Sitting suspended.