Regulation: Red tape or remedy?

The issue of regulation is currently a significant point of discussion within the UK franchising industry. There is currently no UK legislation that specifically regulates franchising. Matt Bones speaks with Damian Humphrey of Ashton KCJ Solicitors about the lack of regulations in UK franchising, but how a code of ethics is adhered to.

The lack of regulation is perhaps surprising given that businesses in general are required to comply with an ever increasing amount of laws and regulations and the franchising sector is fast becoming a substantial driver of the UK economy.

A number of developed (and less developed) economies throughout the world require franchisors to comply with stringent rules and regulations prior to, and while, operating the franchise. The complexity of the legislation introduced by Governments worldwide and accordingly the burden it places on franchisors varies substantially. It is widely considered that the USA’s franchising laws are amongst the most onerous, while with other countries, the laws area relatively light touch. A common theme running through international franchising legislation is an obligation to disclose certain information about the franchisor and the network to a prospective franchise owner prior to entering into the franchise documentation.

Some jurisdictions also impose requirements to register certain documentation and impose a statutory obligation to act in good faith towards franchise owners. While none of these obligations exist under UK legislation, where a franchisor is a member of the British Franchise Association (bfa) there is a provision under the Code of Ethics which states that: “…[franchise owners] shall be given a copy of the present Code of Ethics as well as full and accurate disclosure of all information material to the franchise relationship within a reasonable time prior to the execution of any binding document”

Given that:

A: franchisors are not required to become members of the bfa and subject themselves to any disclosure requirement (although it is good practice not only to avoid disputes with franchise owners, but also as a way to attract franchise owners; and

B: a franchisor’s failure to disclose such information has no express legal implications, the debate continues as to whether the franchising sector could benefit from specific franchise legislation and in particular a legal obligation on franchisors to disclose information to franchise owners at the outset (and possibly during) the relationship.

Supporters of franchise regulation argue that it will protect franchise owners from rogue franchisors and provide franchise owners with a greater level of comfort when entering into the franchise. In turn the benefit to the franchisors is that if the sector is more regulated then the good name and reputation of ethical franchisors are not tarnished by a few ‘bad apples’. Those against regulation believe that it will not protect franchises from those that seek to operate outside of ethical boundaries and simply make it harder (and more expensive) for franchisors to set up franchise operations, the cost of which will ultimately be borne by the franchise owners. Having assisted clients to franchise into a number of regulated and non-regulated jurisdictions around the world the writer of this article is not convinced regulation is the way forward and is often a hindrance rather than a help.

In many countries they are starting to treat the relationship between franchisor and franchise owner as a business to consumer relationship to give the franchise owner the benefit of consumer protection legislation. In the UK, we continue to treat the relationship as a business to business relationship and long may this continue.