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1.11 pm
Mr. Nirj Joseph Deva (Brentford and Isleworth): Pyramid selling and multi-level marketing have become great and expanding businesses. Such marketing exercises involve more than people trading from their own homes; it has come to my notice that professional people such as doctors, surgeons and others who see and relate to people at different levels are also now encouraging and indulging in multi-level marketing and pyramid selling.
Patients come to see doctors to get fitter and healthier, and in that relationship they may be encouraged to buy water filters, air cleaners or filters and other things, in the surgery. That is a remarkable development. I have come across cases in which people were encouraged to buy in that way, and the professionally qualified doctors and accountants--I suppose even lawyers--who sell various goods on a part-time basis to their clients are earning large amounts of money.
That is a complicated matter, and the Bill proposed by my right hon. Friend the Member for Chelsea(Sir N. Scott) is an attempt to put certain matters right. In the late 1960s, when such trading schemes came into being, there was a great deal of demand. There were many abuses, and successive Governments have made attempts to correct those, as the schemes have expanded to include many millions of people.
The abuses current at that time included demands that participants pay to participate in a scheme, coupled with the promise of bonuses when they recruited others into the scheme; the absence of any written contract setting out a participant's rights; the absence of a cooling-off period for new recruits, or of a right for participants to claim refunds for unsold goods on withdrawal from the scheme; and inadequate or misleading information about the nature of the scheme and the rewards available to participants. These aspects were regulated under the Fair Trading Act 1973 and the pyramid selling regulations contained in section 119 of that Act.
The main aim of part XI of the 1973 Act and the regulations was to ban the taking of certain payments by a scheme's promoters. The receipt of participation fees from recruits, payments for trading, non-returnable deposits and payments of more than £25 for goods obtained during the first seven days of participation in a scheme were outlawed. That went a long way at the time towards making things better, but not much better. My right hon. Friend's Bill will go further to make the current situation more effective.
Section 120 of part XI of the 1973 Act identified two specific criminal offences--receiving payment from a potential participant who was persuaded by the prospect of benefits from introducing others to a scheme, and using the prospect of benefits from introducing others to a scheme to try to persuade someone to make a payment. The Bill is designed to amend the scope of the definition of trading schemes under part XI of the 1973 Act, and applies controls to a wider range of schemes. Its purpose is to protect vulnerable people from financial loss by ensuring that all trading schemes whose members recruit other people are subject to controls under the Financial Services Act 1986 and under part XI of the 1973 Act.
My right hon. Friend spoke in detail about some aspects of the scheme. In particular, section 118 of the 1973 Act defines the trading schemes to which part XI applies. The Bill introduces two new clauses--clause 1 proposes to substitute section 118 of the 1973 Act with a new clause designed to widen the definition of trading schemes. Clause 1 states:
The Bill refers to
and proposes controls on
The Bill will also regulate
Mr. Piers Merchant (Beckenham):
My righthon. Friend the Member for Chelsea (Sir N. Scott) has characteristically most eloquently run through the problems that exist in part of the pyramid selling industry and has suggested some sensible remedies. I congratulate him on that, and on introducing the Bill.
My right hon. Friend referred, as did my hon. Friend the Member for Brentford and Isleworth (Mr. Deva), to the 1960s. I just about remember the scandal that hit the press and media then involving pyramid selling--the scams, the blatant exploitation, indeed, the criminal links of some of the organisations. As a result, the Fair Trading Act 1973 took steps to control the industry. That was much welcomed, not least by a large section of the industry. The greatest proportion of the industry had never involved itself in the dubious practices of the 1960s, but its reputation was badly damaged by the dubious fringe and it wanted proper regulation to restore its respectability. Perhaps the only sad thing about the 1973 legislation was that it did not entirely achieve that. To an extent, the phrase "pyramid selling" still has somewhat dubious connotations. That is a shame because there is a legitimate industry which deserves protection and proper credibility.
There is always a tendency when new legislation is introduced for people to quote the bad examples in support of the need for change--a need that I do not challenge. It is important to remember that the majority of the direct selling industry, of which trading schemes are part, is legitimate, respectable and beneficial. It contributes a great deal to the economy. It is estimated that the size of the industry is in excess of £1 billion a year, of which trading schemes take up £200 million to £300 million. It is beneficial for consumers because it provides them with an often low-priced source of goods. It is beneficial for entrepreneurs and the small traders who
become involved. It generates employment. It exists as a low-cost pressure on the retail market, which is beneficial for other consumers as well as the economy as a whole.
I should like to give two examples of very different schemes which illustrate the healthy side of the industry and the reason why there are problems that need to be dealt with. On the positive side, some years ago a cousin of mine became involved with an organisation called Amway, which markets a wide range of goods for kitchen and household cleaning. A little while after joining the scheme, he sold me some of the products, which turned out to be of extremely high quality and competitively priced. I have no doubt from my experience as a consumer and my knowledge of his experience as a participant in such a scheme that the organisation was entirely benevolent and operated absolutely properly.
It did not surprise me when, a few years later, my cousin sent me a note originating from Amway which called for extra regulation and an improvement in the law to protect consumers. The company was actually campaigning for greater regulation. I understand that the Government later considered Amway's suggestions and some of what it wanted is incorporated in the changes proposed in the Bill, although it also suggested various other remedies.
I wish to contrast that story with the unfortunate experience of a constituent of mine. He was persuaded--perhaps I should say "conned"--to part with his newly received redundancy money. It was not a large sum and he was not a wealthy man. He was persuaded by an organisation that purported to be involved in some form of multi-level marketing, which was supposed to have some connection with insurance. The scheme was not quite clear, but its purpose was simply cash generation. My constituent was persuaded to hand over his money on the promise that he would be able to recruit more members to the scheme, who would hand over money to him. He would receive money from both directions. That sounds most implausible, but such schemes can seem very persuasive, especially to those who do not have much background or skill in marketing or business. My constituent believed that he would receive money from the person who recruited him as well as from those he would recruit.
Not surprisingly, my constituent did not hear much from the promoter of the scheme. After he had been relatively unsuccessful in tracking the promoter down, he found out, six months later, that the promoter had gone into liquidation and had set up in another similar business under a different company name. My constituent had lost all his money, but had no legal remedy. He looked into various methods to try to retrieve some of the money, to obtain compensation or to bring some criminal prosecution or civil action against the promoter of the scheme. However, there was no way in which he could effectively pursue his money. That story illustrates the unacceptable side of the multi-level marketing industry.
The proposals in the Bill would do much to stamp out that sort of practice. It would be overly optimistic to say that we could end all such criminal activity and all forms of swindle simply by passing an Act of Parliament. Clearly, people will still find ways to continue such frauds, especially if they involve a breach of the law, but the Bill would extend the protection of the law.
The Bill would redefine section 118 of the Fair Trading Act 1973, which defines those schemes that come under the other sections of the Act. The Bill would successfully broaden the scope of that Act to give protection to those people who are being caught out by some of the clever schemes that have been developed since 1973 and that revisit the abuses that existed in the 1960s.
Clause 2 is a fairly technical amendment to the Fair Trading Act 1973 and it would extend the definition of documentary advertising to include the more recently developed means of marketing and advertising--videos and, as my right hon. Friend the Member for Chelsea said, computers. My right hon. Friend referred to the Internet, but another common way to advertise is to give away small floppy disks. Those are then inserted in millions of computers and quickly bring up the advertising message, often in colour with graphics, sound and music. They are most effective and it is absolutely right that they should be covered by the Bill.
The Government published a consultation paper in 1995, called "Pyramid Selling and Similar Trading Schemes". That included a suggestion that the regulation of advertising of pyramid schemes should be extended. Is it possible, as we consider the Bill, to examine that suggestion in more detail? Perhaps the Government could consider whether that should be pursued and, if so, in what way.
I speak as someone who was connected with the advertising industry and who maintains an interest in it--not a financial interest, I hasten to add, but an interest in the operation of the industry. It is fair to say that it is well regulated and that it is a successful example of self-regulation, but I do not rule out the necessity of introducing statutory regulation as well from time to time. There is a good deal of evidence to suggest that most of what is required in the 1973 Act, as extended by the Bill, could be done under the self-regulatory system. Indeed, the consultation paper accepted that because it suggested that, where financial benefits were not mentioned, the schemes could be regulated through the British code of advertising practice, which is ultimately administered by the Advertising Standards Authority--a self-regulatory body.
The consultation paper also suggested that there might be merit in extending statutory protection where financial benefits were included in the advertisement. The suggestion was that the advertisement should contain the name and address of the promoter, full details of the goods being marketed and a statutory warning. I have no difficulty with that suggestion, which could be incorporated in the British code of advertising practice and possibly also in statute, but it might be of merit for the two options--directly by statute or regulation, or by agreement with the industry--to be pursued in more detail and, perhaps, incorporated in the Bill at some stage during its passage.
I end by wishing my right hon. Friend the Member for Chelsea and the Bill every success.
"For section 118 of the Fair Trading Act 1973 (trading schemes to which Part XI applies) there is substituted--
118.--(1) This Part of this Act applies to any trading scheme if--
(a) the prospect is held out to participants of receiving payments or other benefits in respect of any of the matters specified in subsection (2) of this section; and
(b) (subject to subsection (7) of this section) either or both of the conditions in subsections (3) and (4) of this section are fulfilled in relation to the scheme."
2 Feb 1996 : Column 1274
"the introduction by any person of other persons who become participants in a trading scheme"
"the continued participation of participants in a trading scheme . . . the promotion, transfer or other change of status of participants in a trading scheme."
"the supply of goods or services by any person to or for other persons . . . the acquisition of goods or services by any person."
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