Why the UK Franchising Industry Should Be Regulated

Franchising is a significant sector in the UK economy, contributing billions of pounds annually and providing thousands of jobs. It enables entrepreneurs to start businesses with the support of an established brand, reducing risks associated with starting from scratch. However, despite its economic importance, the UK franchising industry remains largely unregulated. Regrettably, this lack of oversight regularly leads to franchisees being misled, suffering financial losses, and huge levels of stress. It also brings the industry into disrepute.

Unlike countries such as the USA, Germany and Australia, which have specific laws governing franchising, the UK relies on general business regulations, legal precedents, and voluntary codes of conduct. The absence of dedicated franchising laws leaves franchisees vulnerable to exploitation. As has been experienced in other industries, self-regulation doesn’t work.

In the last ten years we have seen a rapid increase in the number of franchises that are not based on a profitable business model and the franchisees are bound to fail. Trade associations have sprung up that purport to validate these franchises but make no attempt to carry out thorough accreditation. There is no doubt that the UK franchising industry should be regulated but, with the general trend in the opposite direction, that is unlikely to happen any time soon.

The Current State of UK Franchising

The UK’s franchising industry operates under general commercial law, such as the Consumer Rights Act 2015 and the Misrepresentation Act 1967. However, there are no franchise-specific regulations that ensure fair dealings between franchisors and franchisees.

The British Franchise Association (BFA) offers a voluntary code of ethics, but adherence is not mandatory. This means that unethical franchisors can still operate without facing legal consequences. The BFA has set guidelines, enshrined in the Code of Ethics, but they only apply to the minority of UK franchisors that are BFA members. Otherwise, it lacks enforcement powers, making it ineffective in preventing misconduct.

The lack of regulation has resulted in cases where franchisees invest significant amounts of money only to find that promised support, training, or marketing is insufficient. Franchise agreements are non-negotiable and heavily weighted in favour of the franchisor. They impose strict contract terms, leaving franchisees financially and legally trapped. The most problematic of these terms are ones that require the franchisee to pay a minimum monthly fee.

Key Reasons the UK Franchising Industry Should Be Regulated

1. Protection Against Misleading Practices

One of the major issues in UK franchising is the potential for misleading information. Some franchisors exaggerate potential earnings, downplay risks, or provide selective success stories while hiding failures. Franchisees, often investing their life savings, may enter agreements based on incomplete or manipulated information.

Regulation would require franchisors to provide full financial disclosure, including success and failure rates, upfront costs, and potential risks. This would help prospective franchisees make informed decisions rather than being lured by misleading marketing.

2. Improved Financial Transparency

Franchisees typically pay initial fees and royalties or management service fees (msf). They often also pay marketing contributions to promote for business for the franchisees. These do not belong to the franchisor, but there is often little oversight on how the money is used. In some cases, the contributions are spent on other things such as advertising to recruit new franchisees or franchise trade exhibitions.

Regulation could enforce audited financial reporting, ensuring that franchisors only use marketing contributions for their intended purposes. This would create a more trustworthy and accountable system.

3. Dispute Resolution Mechanisms

Many franchisees face challenges resolving disputes with franchisors due to power imbalances. Since contracts are always biased in favour of franchisors, franchisees have limited legal recourse. Litigation is costly and time-consuming, making it an impractical option for many.

A regulated franchise ombudsman or arbitration system would provide a cost-effective, fair dispute resolution process. This would ensure that franchisees have a platform to address grievances without resorting to expensive legal battles. To be fair, the BFA has made an attempt to address this by brokering a mediation service but, as previously stated, it does not represent a majority of UK franchisors.

4. Preventing the Rise of “Franchise Scams”

The lack of regulation has allowed some fraudulent franchisors to take advantage of unsuspecting investors. These “franchise scams” involve selling licenses for businesses that have no real chance of success or are misrepresented as lucrative opportunities.

Regulation would require franchisors to be licensed and registered, ensuring they meet certain ethical and financial standards before selling franchises. This would weed out fraudulent operators and protect investors. In particular it would eliminate franchisors who have never actually operated the business that they are franchising and developed it to a point where the level of profitability is sufficient to allow the franchisees to make a realistic return on their investment, and pay a msf to the franchisor.

5. Supporting Small Business Growth and Economic Stability

Franchising plays a crucial role in supporting small businesses and job creation. However, when franchisees fail due to lack of support or misleading claims, it not only affects individuals but also impacts their families. Failed franchises result in job losses, lost life savings and a massive toll in the mental wellbeing of the franchisee.

Regulation would create a more stable franchising environment, boosting small business success rates and contributing to economic growth. By ensuring fair play, regulation would encourage more people to invest in franchises with confidence.

6. Learning from International Best Practices

Other countries have already implemented franchise regulations with positive results. For instance, Australia has the Franchising Code of Conduct, which mandates disclosure documents and fair contract terms. The USA has the Franchise Rule, enforced by the Federal Trade Commission (FTC), requiring franchisors to disclose key financial and operational details before agreements are signed. Canada, Germany and France also have laws protecting franchisees from unfair practices.

The UK could learn from these models and implement a regulatory framework that balances franchisor and franchisee rights.

Potential Challenges of Regulation

While franchising regulation would offer many benefits, there are some challenges to consider such as the increased bureaucracy. Franchisors may argue that regulation creates additional administrative burdens, slowing down business growth. However, proper oversight prevents unethical practices that harm the industry in the long run.

The costs associated with compliance is another consideration. Implementing new legal requirements may increase costs for franchisors, but these costs would be justified by the long-term stability and trust they would build. Some established franchisors would resist change, fearing that regulations would limit their control. However, fair rules benefit ethical franchisors by creating a level playing field.

How Regulation Could Be Implemented

A Franchise Regulation Authority could be established to oversee the industry, ensuring compliance with fair trading practices. It would have to make compliance mandatory for any organisation or individual to sell or promote a management franchise or business licencing scheme.

Mandatory Disclosure Requirements – Franchisors would have to provide potential franchisees with detailed financial and operational information before signing agreements.

Fair Contract Standards – Contracts would have to be reviewed to prevent unfair clauses and ensure franchisee rights are protected. Cleverly worded clauses to limit the duty of good faith would need to be outlawed.

Licensing System – Only franchisors that met certain criteria would be allowed to sell franchises.

Dispute Resolution Services – A dedicated franchise ombudsman should handle complaints and enforce fair resolutions.

Annual Audits and Reporting – Franchisors would be required to submit financial reports showing the profitability of all their franchisees. Also recruitment and failure rates.

Conclusion

The UK franchising industry is a major economic driver, but its lack of regulation leaves franchisees exposed to financial and legal risks. Without oversight, unethical franchisors can exploit investors, damaging the industry’s reputation and causing financial losses.

By introducing regulation, the UK can protect franchisees, improve industry transparency, and create a fairer business environment. Learning from international best practices, a well-regulated franchise industry would benefit not just individual investors but also the broader economy. Regulation is not about restricting business—it is about ensuring fair play, promoting sustainable growth, and building trust in the UK franchising sector.