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*The above articles reflect the law at the date on which they were written. Since that time the law may have changed. No reliance should therefore be placed on any statements or opinions in the articles without first checking that they represent the current state of the law.

Menace of law to nail pyramid swindlers

A new law designed to tighten the controls on pyramid selling and multi-level marketing schemes threatens to make many franchises unworkable. The Trading Schemes Act 1996, which comes into effect in August, casts its net so wide almost all businesses, including franchises, are effected. Anyone breaking the law could be committing any of the four criminal offences and be liable to fines or even jail.

Having begun with a catch-all law, the DTI, whose aim is to deter swindlers went on to write exemptions in the Act designed to exclude legitimate businesses. But franchise lawyer David Bigmore says the exclusions are not wide enough and many franchises might still find themselves trapped.

The first type of exclusion states that single-tier trading schemes are exempt. But Bigmore claims the way the law is worded means franchisors who use self-employed salesmen or independent contractors, or whose franchisees employ independent contractors, may find themselves subjected to the Act.

The second exclusion exempts VAT registered businesses. That means smaller franchisees with turnovers of less that £48,000 must register, forcing them to raise their prices by 17.5%. The law could also allow a disaffected franchisee to threaten a deregister and plunge the entire franchise operation into the murky waters of the new Act.

Bigmore believes the DTI mistakenly categorises businesses rather than aiming at the intention to swindle. He adds "You can use any business as a fraudulent vehicle, and that's more or less what the Act says. Basically what they've done is take the pyramid out of pyramid selling. All we can hope to do is change the exclusions."

Bigmore and the British Franchisee Association are lobbying to free franchising from the oppressive law. In the meantime, franchisors wanting to know where they stand should seek legal opinion.