Email to Mr. Doug Weber, Ombudsman for Banking Services and Investments, OBSI

Assuming that only ten per cent (10%) of the cases are strong (Bank Act, PIPEDA, CSBFA) and with a mean claim value per case of $100,000, that would mean and outstanding claim total value of $980,000 for the one franchise system.

All franchises
Since there are 1,300 franchised systems in Canada, the aggregate latent claim value would be $1,274-million. At least seventy-five per cent (75%) of all franchisees have a CSBFA loan. Often, they are the only loans offered to franchisees by banks. In 2003-04, there were 1,472 CSBFA loans worth $177.3-million let to franchises.

Email to Mr. Doug Weber, Ombudsman for Banking Services and Investments, OBSI

To: Mr. Doug Weber, Ombudsman for Banking Services and Investments, OBSI
From: Mr. Les Stewart, Canadian Alliance of Franchise Operators
Date: April 6, 2005

Dear Mr. Weber,

While advising Andrei and Alexandre Oudovikine in their complaint, it has become apparent that the questionable lending practices are much more widespread than initially thought.

Please accept my draft findings regarding franchise-lending practices. These preliminary ideas indicate how a private initiative may impact the OBSI.

I would welcome your comments as I have potential clients already wanting to initiate a review of similar grounds as the Oudovikine's.


Negligent or Fraudulent Lending
While it is difficult to determine how representative our experience has been, some ballpark estimates may suffice for right now. I stress that our best information is that the lending quality issues are shared by all financial institutions that serve all franchise systems.

One franchise
We know of six additional cases of current Country Style franchisees in which the same bank and the same lending officer (same transit number) arranged Canada Small Business Financing Act, CSBFA and other loans.

I have been following this franchise system since 2000 and have a spreadsheet with ninety-two former franchisees. Together, without much digging, there are 98 potential claimants.

Assuming that only ten per cent (10%) of the cases are strong (Bank Act, PIPEDA, CSBFA) and with a mean claim value per case of $100,000, that would mean and outstanding claim total value of $980,000 for the one franchise system.

All franchises
Since there are 1,300 franchised systems in Canada, the aggregate latent claim value would be $1,274-million. At least seventy-five per cent (75%) of all franchisees have a CSBFA loan. Often, they are the only loans offered to franchisees by banks. In 2003-04, there were 1,472 CSBFA loans worth $177.3-million let to franchises.

Independent small businesses
We are aware of 3 cases of very irregular CSBFA loans in non-franchised small businesses. Tracking sales agents' activity often identifies suspicious lending practices quite easily. In 2003-04, there were 9,678 CSBFA loans worth $833.3-million let to non-franchises.

FINDINGS
There are in excess of $1.2-billion of suspicious franchise loans currently on file. They represent a reputation risk to the banks that let them if a pattern of abuse or conspiracy were to emerge.

Small businesspeople have long complained about the banking activity ranging from benign neglect to opportunism. Of all small businesspeople, franchisees have proven to be in a uniquely vulnerable position. The primary origin of abuse has been the franchisor but that may be changing.

Reputation risk
The combined stock market valuation of the five largest banks is $176.4-billion. A one-dollar per share decrease would cost the banking industry $3.2-billion in market valuation.

Through a web site, the many complaint obstacles could be overcome to allow literally hundreds of individual franchisees bringing forward their claims through the banks' existing complaint channels. A more managed, efficient and streamlined process should be arranged. Systemic wrongdoing should not be dependent on the abusers good faith dealings.

Private initiative
There is an opportunity for a contingency fee-based consulting company that investigates, champions and settles document-based franchisee banking abuse claims. The shareholders of that firm would use their media, political, industry reputation and communication skills to maximize their revenue with a surprisingly small amount of capital.

There would be great merit in making a highly polarized public spectacle of the first well-documented case. The economic model suggests a highly divisive approach: maximize public awareness, moral indignation and political vilification and watch as the firm's value grow (number of clients, mean settlement fee). One financial institution would be forced to deal and the rest would follow.

The fairly new federal privacy legislation would be invaluable in identifying collusive behaviour. There always has to be a breach of privacy to facilitate a wrongdoing. Find the lack of PIPEDA documents, file a complaint with the Privacy Commissioner of Canada and audit the first month's current account. Most of this could be developed into a web-based expert flow chart. For the strained or bankrupt franchisee, they have everything to win and nothing to lose.

Conclusion
There exists a tremendous opportunity for a private consulting firm, headed by knowledgeable advocates who have high credibility and access to the media, provincial and federal politics, regulatory and franchise communities.

The challenge for the OBSI will be to develop policies that acknowledge and reflect collective and systemic reality of franchise banking relationships while maintaining the financial institution's and its own reputation.

I am happy to discuss these issues with you, pursue the alternatives and move toward a speedy, confidential and permanent resolution of the initial and future cases.

Sincerely,

Les Stewart
Canadian Alliance of Franchise Operators
705-737-4635 Tel
ten.ofac|trawets.sel#ten.ofac|trawets.sel
www.cafo.net


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