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1.32 pm
Mr. Alan Duncan (Rutland and Melton): As a result of the Bill, my right hon. Friend the Member for Chelsea (Sir N. Scott) can from now on be properly described as the nation's chief scam buster, as that is what he is attacking. The proper title is the Trading Schemes Bill,
and schemes are what it tackles--scheming schemes, wicked schemes and schemes devised to deceive. They are nothing to do with genuine trade; the trade that the Bill rightly attacks is trade in false hopes, false promises and on a false prospectus.
My right hon. Friend the Member for Chelsea is dealing with what might be termed chain-letter trading. The schemes are not devised properly, to trade on margins for profit in a reasonable way, but by what he described as a geometric progression, to generate cash along lines that are bound eventually to collapse and deprive investors of the money that they put in.
It is a sad fact of commercial life that people are all too often tempted by the promise of easy riches. Some do not realise when they are being taken for suckers. That is what the Bill will tackle.
The Bill will introduce into the area that my righthon. Friend identified the safeguards that apply in other areas. From now on, there will be proper contracts and rights of redress and, as much as it is possible to put it into law, provisions to prevent people parting with their money in a scheme that is bound to go into liquidation.I urge the House to give the Bill its full support.
The Minister for Competition and Consumer Affairs (Mr. John M. Taylor):
My hon. Friend the Member for Rutland and Melton (Mr. Duncan) is self-deprecating in an unjustified but, as always, engaging and rather charming way. I accept his remarks about simpler language and self-contained Bills, but if I were to hold up in evidence the Act of Parliament that the Bill seeks to amend, he would understand how difficult an exercise in self-containment would have been. I am not complacent about the matters that he raised. He is basically right and the public are on his side.
I thank my hon. Friend the Member for Brentford and Isleworth (Mr. Deva) for his thoughtful and informed comments. My hon. Friend the Member for Beckenham (Mr. Merchant) described what I can only call a horror story about a scheme whose operating methods will be made unlawful by the Bill. We might both well say thank goodness. He also asked me to consider some variations on the Bill as it progresses, as we all hope that it will. Subject to what my right hon. Friend the Member for Chelsea (Sir N. Scott) may say--it is his Bill--I am prepared to be as helpful as I can.
I must repair an omission by congratulating my right hon. Friend the Member for Chelsea on introducing the Bill. I am grateful to him for seeking to repair legislation in an area in which the public are vulnerable.
The Government, as hon. Members will have gathered, welcome the Bill, which will make it possible for all trading schemes whose members recruit others to be subject to control under either the Financial Services Act 1986 or part XI of the Fair Trading Act 1973.
At present, the coverage of the Fair Trading Act's controls is narrow. I am pleased to report that, where those controls apply, they have been extremely effective in protecting members and potential members of trading schemes from being persuaded to take excessive risks. These controls, both the offences and the regulations, have the widespread support of the direct selling industry, but the Fair Trading Act cannot protect members and potential members of schemes that are not subject to its controls. We need to widen the coverage of those controls.
The Government, the industry and consumer organisations are as one in wanting the protection of the controls to extend to the members and potential members of all trading schemes whose members recruit others.
I understand that the total sales of schemes that currently comply with the Act's requirements probably exceed £300 million. All those sales are made by self-employed members of the schemes. There are probably some 300,000 such enterprising individuals, who sell a wide range of consumer goods, mostly in the customers' or their own homes. Some sell home cleaning and other household products; others cosmetics, jewellery, clothes, diet supplements, water filters, books, toys, and much else.
The Fair Trading Act's controls ensure that those individuals were not misled when recruited, and that each has a contract with the scheme's promoter that is fair, both in that the potential member is fully informed of the details of the scheme to which he is considering committing himself and in that the risks inherent in any sales operation are not loaded on to the member but shared with the promoter. The contractual rights of every member of a regulated scheme are protected by civil law.
We have consulted widely over possible amendments to part XI of the Fair Trading Act. Promoters of schemes that meet the Act's requirements generally agree that the Fair Trading Act 1973 provides much-needed protection. They are concerned--rightly concerned--that that protection is not available to members of all trading schemes.
At present, the protection is offered only for members and potential members of schemes according to two qualifying conditions. First, protection exists where the goods or services are provided by the promoter and sold to third parties under transactions effected by the members of the scheme. Secondly, protection exists where most of those transactions do not take place on premises where the promoter or the participant carries on other business.
Not all trading schemes follow that pattern. That results in part from changes in commercial arrangements in the past 20 years. There are reputable schemes that are not subject to the controls. I was pleased to learn that many such schemes nevertheless meet the 1973 Act's requirements in full.
It is clear that some schemes have been devised deliberately to avoid the controls. Recently there has been a proliferation of schemes in which members make payments, and in which their financial reward depends on them and other participants recruiting new members to the
scheme. Such schemes are essentially unsound because it is absolutely certain that there are not enough people in the world to ensure that all who join can get the promised rewards. Some of those schemes may also involve members in selling something or other--such as a scheme for personal self-improvement or a decorator's paint-brush rest. But essentially those pyramid scams serve no real purpose other than the enrichment of their promoters. They are no more than money circulation schemes. They are a swindle.
Too many people have been taken in by such schemes' promises of riches. As my right hon. Friend said, too many people have lost their savings through those money circulation schemes. Members and potential members of too many types of trading scheme do not have the protection that the Fair Trading Act already provides for traditional schemes.
Pyramid scams are not new; nor are they confined to this country. Across much of Europe they are called "snowball schemes", and are outlawed in many countries.
In 1920, the United States was host to a pyramid scam operated by Charles Ponzi. Members of his scheme expected to double their money in three months. But all the payments out to those who joined early were made from the payments in by those who joined late. Eventually the scheme foundered, and Ponzi was sent to prison. Since then, Americans have called such pyramid scams Ponzi schemes.
Members of the House may recall publicity about recent pyramid scams in Russia and Romania. A Russian scam called three M was reported by the Financial Times to have lured 10 million investors into a company in which the only business was selling shares in itself, while the Romanian scheme, Caritas, was reported to have had 4 million members who paid in £690 million. Its members were promised a sevenfold return on their money in a hundred days. It foundered, after nearly two years, when new money stopped flowing in.
What is perhaps new is the sophistication of recent pyramid scams, which is why we have to return to the statute book and why we are grateful to my righthon. Friend. What is, sadly, old is how many people are taken in. Last year, 17,000 people lost £10 million in just three money circulation schemes. One person lost £78,000. My Department receives a large postbag and many telephone inquiries from anxious people who have been persuaded to join those scams.
It has been a matter of considerable frustration that it has not been possible to prosecute the promoters of those schemes under the Fair Trading Act 1973. If those scams were subject to the 1973 Act, its controls would outlaw their operating methods. As I have explained, we have used such powers as we have to protect the public from such schemes, but those are limited in their application, cumbersome and not totally effective.
The Department has used such measures as are available to wind up companies operating such schemes. The Bill will make it possible to prosecute the promoters, whatever their identity, if they try to persuade people to give money--by promising riches if others are persuaded to do the same. The Bill will also make it possible to act quickly--it does not require a pattern of trading to be established before action can be taken.
It may help hon. Members to appreciate the problem if I quote from the promotional material for some of the schemes that were operated by companies recently wound up by the courts.
Global Pioneers Ltd. had a brochure that opens with a letter from John Lisgo:
In his judgment on the petition to wind up Global Pioneers Ltd., Mr. Justice Harman said:
Frequency Programming World--or FPW as itwas known--operated what it described as a "computer-generated money pay-out plan" which it said had
Madam Deputy Speaker, you may find it hard to believe, but another scheme, operated by AlchemyUK plc, included what it described as testimonials fromSir Isaac Newton, William Shakespeare, Francis Bacon, Leonardo da Vinci and Marie Curie. It claimed that its scheme was based on
Clearly, I have not reached high enough Government office. I do not know whether my right hon. Friend the Member for Chelsea, who is a Privy Councillor, which is a fairly high attainment in our political affairs, ever became privy to the formula recommended by Sir Isaac Newton or whether it was withheld from him. Clearly, as an Under-Secretary of State, I am not supposed to know the model, so I shall never become rich.
When the wonderful scheme, Alchemy UK plc, was wound up by the courts--they all seem to end up in the courts--its directors informed its members that
The Government believe that money circulation schemes should be subject to the controls of the Fair Trading Act. The recruitment offences under the Act would then effectively outlaw the operating methods of the pyramid scams.
There have been trading schemes that fall within the definition of investment business in the Financial Services Act 1986. To ensure that no scheme is subject to control under both the Financial Services Act and theFair Trading Act, the Bill excludes from control under the
Fair Trading Act trading schemes under which the promoters or participants carry on investment business in the United Kingdom. I emphasise "investment business" because it is a term of art referred to in the Bill at clause 1(6)(a). It is a specific term of art that is necessary to ensure that there is no gap between the Financial Services Act and the Fair Trading Act, and to ensure that they do not overlap.
Some money circulation schemes have also fallen within the definition of investment business for largely technical reasons. But the nature of those schemes makes them unfitted for regulation as investment business. The Government therefore intend to make an order under section 2 of the Financial Services Act to take the schemes out of the scope of that Act. We intend the order to come into effect at the same time as the Bill comes into force. In that way, those money circulation schemes will not benefit from the exclusion of investment business. They will be subject to the controls of the Fair Trading Act.
The Trading Schemes Bill provides powers to exclude prescribed schemes from all the Fair Trading Act controls. We intend to use that power to exclude two types of scheme: first, franchise schemes in which only one UK participant can benefit from the activities of other participants; and secondly, simple chain letters.
Franchise schemes are generally trading schemes that operate on a larger scale than the typical direct selling scheme. Typically, the participants or franchisees make a substantial investment in the business. There is much confusion about their position. At present, the only franchise schemes that are not subject to any of the Act's controls are: those where the franchisees do not sell goods or services provided by the franchisor; or if most of the sales are made on premises where either the franchisor or franchisee carries on other business. Therefore, most franchise schemes are already subject to control under the Fair Trading Act. But most are exempt from the pyramid selling schemes regulations, which exempt schemes where only one UK participant can expect to benefit from the activities of other members of the scheme.
I am pleased to note that the Direct Selling Association has expressed support for the Bill. It is the main trade association for businesses whose sales personnel are self-employed. I understand that its members have nearly 500,000 independent sales people. The majority of those businesses are subject to the current controls. In addition, they comply with the code, which demands higher standards than are statutorily required.
The vast majority of people who are involved in direct sales operate lawfully and legitimately: they go about their proper business. It is the few who damage the rest. The Government are pleased to support the Bill, which would bring the protection of the criminal courts to potential members of all trading schemes and ensure that all those who join a scheme have contractual rights that are protected by civil courts. Many hon. Members have pressed for some such action and the proposal to introduce protection has been widely welcomed. I, too, welcome the Bill and I hope that it soon becomes law.
"Dear Reader, Over the past few years I have developed a system that has virtually guaranteed instant profits, and with the right guidance I know anyone can be just as successful. My journey begun with just £200, yet within less than 36 months, I had turned it into half a million pounds annual turnover and today I now enjoy personal incomes exceeding £20,000 per month."
"I am satisfied that the company inevitably would fail to make the returns it promised to its subscribers because the growth of these schemes cannot be exponential--there must come an end in time. Alternatively, if in the real world nobody expects them to be exponential, the representations that the rewards were available must have been untrue and untrue in the knowledge of the people who made them. On either footing they are a swindle on the public".
"proved so incredibly successful that the club has decided to expand its membership, so now you too can benefit from its amazing returns and--what is more--there are no limits!
You are not required to do anything at all to profit from it--no sending mailshots or any other work! All you do is simply enter as much as you want, and bank your profit. £460 clear for every £140 entered. It really is that simple--no strings, no catch, no limits!"
"the mathematical matrix formulae that for decades have been used by western Governments to fund their economies. The very same formulae that are guarded so secretly and only until now disclosed to those who obtain the highest Government office."
"yet again they have run circles around the DTI and will continue to trade unaffected".
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