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Mr. Merchant: Does my hon. Friend accept that one of the major differences between the national lottery and the schemes he has described is that people do not spend their entire redundancy payment on the national lottery?
Mr. Coombs: I take that point. I was defending only money circulation schemes in which people are made aware, through the regulations we have talked about,of the potential downside and in which they take part on virtually a social basis, knowing full well the risks that they take.
We all agree that the national lottery, although a money circulation scheme of rare proportions, is worth while. That suggests that one should not throw the baby out with the bath water, not only in terms of direct selling and franchising operations, but in terms of money circulation schemes.
The Minister for Small Business, Industry and Energy (Mr. Richard Page):
I intervene on the narrow point that the national lottery gives even odds to everybody whereas the schemes that my hon. Friend is describing, which are right scams, have differentiated odds as one goes further down the chain. That is the essential difference.
Mr. Coombs:
I agree that it depends on the kind of schemes. The odds depend on the rules that apply to individual schemes. My point is that whether we are talking about direct selling, franchising or money circulation, the regulatory regime should be not only rigorous and all-embracing, as proposed in the Bill, but sensible. On that basis, I support the Bill.
10.33 am
Lady Olga Maitland (Sutton and Cheam): I congratulate my right hon. Friend the Member for Chelsea (Sir N. Scott) on introducing this important Bill; the whole House is grateful to him for promoting it. The Bill has not caught the public headlines, but the wider public--the vulnerable, commercially innocent people who have been caught up in scams--will undoubtedly have great cause to be grateful for it.
I can describe the perpetrators of the scams only as sharp sharks and swindlers. It is hard to find an attractive adjective for them because, to be perfectly honest, they have gone out of their way to prey on people's vulnerability. I have seen the way in which they have approached people who have recently been declared redundant, people whose businesses have gone bankrupt and people who have left the armed services, as my hon. Friend the Member for Blaby (Mr. Robathan) pointed out. People in the armed services seem to be more innocent than others when it comes to commercial transactions.
I myself was pressured by someone who had left the Navy and who thought he was on to a winner. It was rather embarrassing to watch the way in which he and his wife put me under tremendous sales pressure to try to get me to join their recruitment drive. In the end, I had a feeling that it would all end in tears, as it surely did.
We are talking about get-rich-quick schemes which have mushroomed over the years. It was absolutely appropriate that we should overhaul legislation that seemed appropriate 20 years ago, but which had become rather toothless. It is significant that no one has been prosecuted despite a number of well-documented scams.
The Bill will have an effect on the way in which pyramid selling schemes are promoted. We have to bear in mind the fact that they are sometimes promoted through rather innocent and harmless methods, such as hand bills or a little notice in a newsagent's window which suggests that one can easily earn £1,000 a week for just two or three hours of effort. It is only too easy to be taken in.
It is salutary to look at one or two examples. In the autumn of 1991, the television star Danny Baker made a promotional video for a firm called Entertainment Xpress. The company promised to supply cut-price CDs and videos to members who signed up at £29.95 a year. Any regular music buyer could save a few pounds a year, but the real money came from recruiting others into the scheme. The Baker video promised earnings of up to £29,000 and even as much as £207,000 a year, depending where one was placed in the pyramid. All that people had to do was to recruit new members; it was too easy. Those members brought in two more members who went out and found two more. Once people were at the top, having gone through five layers on the way and having recruited at least 16 members, they earned only a paltry £1. If one controlled a pyramid of more than 8,000, one could earn £29,000.
The trading standards officers calculated that the method would require the recruitment of virtually every regular music-buying family in a city the size of Aberdeen. The very top level would have required cities the size of Birmingham, Glasgow or Edinburgh. The good news is that Mr. Baker withdrew his endorsement of the video when the scam was properly explained to him and Entertainment Xpress went bust in 1992. Other examples of schemes that depended on recycling members include Alchemy Foundation, which was wound up by the Department of Trade and Industry in 1994, and successor companies such as Powertag and Headlogic, which were also shut down.
Lest anyone should believe that all methods of pyramid selling are bogus, it is important to recognise that there are some reputable schemes, such as those that my hon. Friend the Member for Mid-Kent (Mr. Rowe) has described. Amway and Cabouchon jewellery operate reputable schemes which can provide a useful source of income for people such as housewives who want to earn pin money to supplement their regular income. I have heard only praise from people who have operated with Cabouchon. They sell a product for which they get a direct return. It is quite different from the schemes dealt with by the Bill, which sell only recruitment, for which there is no return.
Mr. Den Dover (Chorley):
I congratulate my right hon. Friend the Member for Chelsea (Sir N. Scott) on seeking to update the legislation on such activities, which is20 years old and seriously out of date.
Franchising organisations should not fear their activities coming under this legislation. They should welcome it. I emphasise the need for very light regulations which do not cramp an ever-increasing source of income for all sorts of entrepreneurs who, through no fault of their own, have lost their main employment and want to create job opportunities for themselves.
The Government should perhaps produce guidelines or a code of practice rather than regulations. I am anxious to ensure that people are not taken advantage of through their lack of experience or gullibility. If the Government were to put out guidelines, it would help people and ensure that the practices that we are discussing are engaged in responsibly and are effective, efficient and profitable for those taking part. I am impressed by the number of hon. Members present to support my right hon. Friend the Member for Chelsea. I wish him well in the passage of the measure into legislation.
Mr. Piers Merchant (Beckenham):
I was fortunate enough to be able to speak on Second Reading and in the brief Committee stage of the Bill. I am grateful for the opportunity to contribute to Third Reading.
I have strongly supported my right hon. Friend the Member for Chelsea (Sir N. Scott) and his Bill and I do so now in the almost certain knowledge that it will shortly pass into law. It is an unusual example of regulation that should both simplify the law and save public expenditure. Both my right hon. Friend and my hon. Friend the Member for Solihull (Mr. Taylor), the Minister who dealt with the earlier stages of the Bill, said that in their best judgment the changes would save public money, principally because the regulations would simplify the environment.
Trading standards officers will be able to enforce this legislation against the schemes that we have been discussing much more easily than they could enforce the previous legislation. That is why there should be a net saving in public expenditure. It will be simpler for trading standards officers to take action, simpler for the public, whom the legislation is designed to protect, and simpler for industry as well. That is why the good side of the industry--which is, of course, the majority--strongly supports the Bill. Amway has been mentioned and is an example of an excellent company which operates in this way and has long pressed for reform, as does the Direct Selling Association, which represents the bulk of the industry.
The people who will suffer are the minority of bad, exploitative, almost criminal, parts of the industry which exist by operating scams and using loopholes in the law--the chain letter and pure cash-generation schemes, sometimes referred to as snowball schemes, which is an appropriate description as they gather size and then melt away. Such schemes cannot work because they exist on ultimately impossible assumptions--a constant increase in the size of support and constant generation of more money. As many good examples have already been given, I shall not give any more. The examples have shown that it is easy to sell such schemes but that they can never realise their ambitions. They are false premises based on false prospectuses.
I recall the notorious case of Hudson the railway king in the last century, who used a similar scam based on shares. He was for a while able to satisfy new shareholders with promises of huge returns by paying them out of the new shares that he sold. Ultimately,the scheme collapsed because he could not forever continue to sell new shares and thus satisfy the original shareholders. Such schemes will be ended by the changes in the Bill and the regulations that will stem from them.
I wish briefly to consider the victims of the schemes, partly because on Second Reading I mentioned a constituent of mine who lost all his redundancy money after many years of work by falling prey to the sort of misleading advertising connected with such scurrilous schemes. As I said in my intervention, the Bill will protect the gullible people who will fall for such schemes, but the problem goes much further than that.
Many of the people involved are basically sensible, well intentioned and well balanced. The trouble is that they are often inexperienced in business. More to the point, they fall prey to the glitzy advertising attached to the schemes and believe that they are entering a genuine business based on enterprise. It is often not immediately apparent that that is not the case. They suddenly find that they have lost all their investment, which may be their life savings or their redundancy settlements.
This Bill will close the loophole which has enabled many such schemes to operate in defiance of the Fair Trading Act 1973, which was largely a reaction to some glaringly bad examples of pyramid selling in the previous decade. Things have moved on since then. People with devious intentions always manage after a while to find loopholes in legislation. That is precisely what has happened. As the world and trading have changed, minds have set to work and ways have been found around the restrictions that that the 1973 Act brought to bear. Those who have wished to exploit have been able to do so. This is a timely means of setting right those problems.
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