Many franchise systems require their franchisees to use specific
types of equipment, which may require significant capital
expenditure. In order to keep start-up costs to a minimum and
enable their franchisees to focus their resources on delivering the
products and/or services required by the system, franchisors might
make the equipment available to a franchisee under a hire
Franchisors may also be tempted to lower entry barriers to their
franchise system by agreeing to accept initial fees in instalments
or by lending money to franchisees at the start of the franchise or
during the term, where a franchisee experiences cash-flow
This all sounds perfectly reasonable, particularly in the
context of a business to business franchisor/franchisee
relationship. However, it may come as a surprise to some
franchisors that the types of activities mentioned above might be
regulated by the UK's consumer credit regulatory regime, and
the consequences for non-compliance can be severe.
How is consumer credit regulated in the UK?
Until 1 April 2014, the UK's consumer credit regime was
statute based, established by the Consumer Credit Act 1974 (CCA)
(as amended by the Consumer Credit Act 2006), with the Office of
Fair Trading (OFT) responsible for the regulation of consumer
credit. Consumer credit regulation was subsequently brought within
the legal framework contained in the Financial Services and Markets
Act 2000 (FSMA) and the Financial Conduct Authority (FCA) became
responsible for consumer credit activities.
The FSMA defines credit as including "a cash loan and any
other form of financial accommodation" and identifies a number
of "regulated activities", of which regulated credit
agreements and regulated hire agreements are relevant to
A regulated credit agreement is an agreement between a lender
(i.e. the franchisor) and a borrower (i.e. the franchisee) in which
the franchisor provides the franchisee with credit of any amount
and is not an exempt agreement.
A regulated hire agreement is an agreement between (i) the owner
of the equipment (i.e. the franchisor) and (ii) an individual, sole
trader, a partnership of three or less or another incorporated body
(i.e. the franchisee), for the hiring of equipment to the
franchisee which is not an exempt agreement, is not a hire-purchase
agreement (i.e. the franchisee has no right to purchase the hired
goods) and is capable of subsisting for more than 3 months.
What are the exemptions?
The exemptions which are relevant for franchising include
the credit is for an amount exceeding £25,000;
the credit agreement is wholly or predominantly for business
the amount of credit is for a fixed sum and the number of
repayments is 12 or less within a 12 month period;
credit is provided without interest and other charges;
the franchisee is a "high net worth individual"
(although the income and asset thresholds are unlikely to be met by
your average business format unit franchisee).
What happens if an agreement is not exempt?
If none of the exemptions apply, then a franchisor will need to
apply to the FCA to become an authorised person and ensure that all
regulated agreements are in writing, give specific information in a
prescribed form and are provided at the correct time in a
The penalties for carrying on an unauthorised consumer credit
business can be severe – it is a criminal offence which
carries a maximum prison sentence of 2 years against directors, a
fine or both, not to mention the potentially disastrous impact on
the reputation and goodwill of the brand. The credit agreement
itself (which, in reality, might be the franchise agreement) may
also be unenforceable.
So what should franchisors do?
This all seems rather complex and onerous, but with careful
planning and advice, consumer credit compliance should not be such
an onerous task.
Franchisors should consider carefully the basis upon which they
transact with their franchisees and the terms of any credit they
extend to franchisees and/or any equipment they hire to
franchisees. It is important that those individuals within a
franchisor's organisation who are empowered to negotiate terms
with franchisees are aware of these issues, so as to avoid a
situation where a franchisor inadvertently carries on a regulated
activity without a valid authorisation.
Watch this space
The FCA is currently undertaking a review of the regime which
should be complete by early 2019. The aim is to simplify the regime
where possible and ensure an appropriate degree of consumer
protection while not placing disproportionate burdens on
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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