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Trading Schemes Bill

8.55 p.m.

Lord Astor of Hever: My Lords, I beg to move that this Bill be now read a second time. In concept, the Bill is simple. It widens the coverage of the existing controls under Part XI of the Fair Trading Act 1973 over pyramid selling and similar trading schemes.

Trading schemes are, or at least can be, an efficient form of retailing using a self-employed salesforce. The salesforce are members of the trading scheme. In some schemes the members may be franchisees, with a right to use, for example, the scheme's trade name or design.

Members of trading schemes earn a commission on their sales. These sales may be to the general public or in some schemes to other members. Sales to other members need not be only of goods for onward sale; they might, for example, be sales or recruitment aids or training.

In many schemes, members may also earn through recruiting more members to the scheme. For example, in some schemes members receive a payment for every member they recruit. In other schemes, members earn not only through their own sales and recruitment but get a commission on any sales made by members they recruited. In a number of schemes, a commission may be derived from on-sales made by members recruited by their recruits. Similarly, scheme members may benefit from their recruits recruiting more members; and even their recruits' recruits recruiting--and so on.

Trading schemes include many reputable companies. I am unable to put a figure on their annual turnover as trading schemes cover such a very wide range of operations. Many companies operating trading schemes belong to the Direct Selling Association. The association estimates that the total retail sales of its members was £948 million in 1994.

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While some members of trading schemes may be sizeable companies, the vast majority are individuals supplementing their income. But this is not a risk-free way of earning--and the risks can be very high--nor is every trading scheme reputable. Nearly 30 years ago there was a rash of trading schemes in which members lost considerable sums of money.

The initial problem appears to have been those schemes in which members were required to buy stocks of the scheme's products which in the event were virtually unsellable. At one stage it seemed as if garages and garden sheds across the country were jam-packed with shampoos and cleaning products that nobody wanted to buy. Many of the unfortunate owners of those shampoo lakes were trapped by contracts with onerous termination conditions. Unable to sell any of their stock to the public or back to the promoter, they concentrated their efforts on recruiting other members. Against this background, Part XI of the Fair Trading Act provided for protection to both members and potential members of trading schemes.

The most important protection, I believe, is that provided to potential members through the creation of recruitment offences. A payment is unlawful if induced by the prospect of rewards from introducing others to a trading scheme. It is unlawful to benefit from such a payment or to attempt to induce such a payment. These recruitment offences prevent payments for recruiting others being the main attraction of a trading scheme.

In addition, the Act provides for regulation of documents used to recruit members. So that the members of trading schemes are not unfairly treated, the Act provides power to regulate the contracts between the promoter of a trading scheme and its members.

The act does not provide a general definition of "pyramid selling" or "trading scheme"; rather, it defines which pyramid selling and trading schemes are subject to its controls. Unfortunately, this definition has proved to be too narrow. There are many trading schemes which are not subject to the Act's controls.

Not every scheme outside the Act's controls is disreputable. Indeed, I understand that many trading schemes have arrangements that comply fully with the Act's requirements even though these requirements probably do not apply to them. But, as was probably inevitable, there has been a proliferation of schemes that appear to have been devised to escape the controls.

At present the controls can apply only to schemes that have all the characteristics specified in the Act. These characteristics hinge on the provision of goods or services through the scheme. This is a loophole. Thousands of people have lost millions of pounds through schemes which do not involve the provision of any goods or services by the normal definition. In some schemes, commonly known as money-making schemes or money circulation schemes, little is provided other than money and promises of money.

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The Bill seeks to widen the coverage of the existing controls under Part XI of the Fair Trading Act. These controls are offences relating to recruitment and to breaches of the regulations over promotional material and contracts. The Bill does not change these offences.

The Bill replaces Section 118 in Part XI of the Fair Trading Act. This section determines which trading schemes are subject to the controls specified in this part of the Act. It is essential that this section has no loopholes. I fear that this has resulted in a section which is not easy to understand.

The Bill widens the coverage of the existing controls under Part XI of the Fair Trading Act. It does so by listing the ways in which members of trading schemes may earn income. It then applies the controls to all trading schemes in which members expect to earn income in one of the listed ways and goods or services are provided by the promoter, whether to members or to others introduced by members. It also provides, subject to the affirmative procedures, for regulations to disapply the criterion relating to goods and services. The only exception on the face of the Bill is trading schemes which are already subject to control under the Financial Services Act.

However, the Bill provides for regulations to exclude other schemes. In view of the many schemes that have been devised in order to avoid the present controls, it is clearly appropriate for the precise coverage of the controls to be determined through secondary legislation. The Government have already stated their intention to use this power to exclude two types of scheme: first, franchise schemes in which only one UK member can benefit from the activities of other members; and, secondly, simple chain letters.

The meaning of "goods" in the Bill is wider than that which generally applies. It embraces rights to property, and thus money.

The Bill also extends the existing power to regulate promotional material aimed at potential new members. At present the regulations can apply only to documents. The Bill makes it possible to regulate the issue, circulation or distribution of any form of promotional material. I understand that both audio and video tapes and even the Internet are much-used means of reaching potential members. With regard to the regulation of promotional material, the Bill removes the present useless distinction between "invitations" and,

    "other information calculated to lead to someone joining a trading scheme".

The Bill provides transitional arrangements so that proceedings cannot be brought as a result of the widening of the coverage of the controls against someone who has neither connived in nor consented to the act constituting the offence. The Bill has the necessary financial provision. I am pleased to report that it is expected to reduce public expenditure. The Bill also provides for a commencement order so that the Act can be brought into force at the same time as its secondary legislation.

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While the Bill is simple in concept, it is not in itself simple. I hope that I have been able to give your Lordships a simple explanation of what it comprises. I commend it to the House.

Moved, That the Bill be now read a second time.--(Lord Astor of Hever.)

9.8 p.m.

Lord McIntosh of Haringey: My Lords, I apologise to the House for not being my noble friend Lord Peston who, in turn, apologises for not being able to be present. I preface my brief remarks, as always, on Private Members' Bills by saying that I speak for myself and not for my party, but it is my understanding that my honourable friends in another place did welcome the Bill. I share that welcome and I wish the Bill well.

It is only the Bill's history that makes me somewhat unhappy. The Bill is, after all, an amendment to the Fair Trading Act 1973. The problems of trading schemes, which the noble Lord, Lord Astor of Hever, in his excellent introduction, made clear are sometimes reputable and sometimes far less than reputable, have been around for a very long time. My honourable friends in another place have been pressing the Government for a number of years now for action to deal with what is a considerable volume of unfair trading and exploitation of vulnerable and sometimes gullible people.

Successive Ministers in the DTI over the years have said in response to my honourable friends that they were prepared to legislate for the problems which are properly raised in the Bill. Indeed, the noble Earl, Lord Ferrers, two years ago said that he was powerless to stop these schemes getting off the ground. We knew that. That is why we have been pressing the Government themselves to legislate for such a long time.

I am disappointed on behalf of Back-Bench Members of another place that what ought to be government policy and government provision in legislation is in fact being done by means of a Private Member's Bill. In this case I do not believe that any harm is done in terms of the drafting, since I am sure that it was done by the department. Nevertheless, Private Members' Bills are supposed to represent an independent input to the legislative process. I do not think that is the case here. I believe that this is merely a government Bill which has been pushed on to a Private Member. I bear no ill will to Sir Nicholas Scott or to the noble Lord, Lord Astor of Hever, but I think that the Government should have done it themselves.

9.10 p.m.

Baroness Miller of Hendon: My Lords, the Government welcome this Bill which has already been passed as a Private Member's Bill in another place with Government and all-party support.

My noble friend Lord Ferrers, when Minister for Consumer Affairs, announced on 23rd November 1994 that the Government proposed to update the legislation controlling pyramid selling and similar trading schemes. The following year, the Government consulted widely over specific proposals, including one to widen the coverage of the existing controls.

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Before offering support for this Bill, the Government considered the responses we received to that consultation. We noted in particular the firmly held views of those who operate trading schemes already subject to this legislation. They consider that this legislation provides much-needed protection to the members and potential members of some trading schemes. They are concerned that that protection is presently available only to members and potential members of a restricted group of schemes.

Sections 118 to 123 of the Fair Trading Act 1973, comprising Part XI of that Act, were designed to provide protection for those who belong or are invited to belong to what were then popularly called "pyramid selling schemes" or "multi-level distributorships" or "network marketing". The Bill uses the less colourful term "trading scheme".

Since the 1973 Act was passed there has been a proliferation of pyramid selling schemes which are outside the Act's controls. At present there is little protection for those who join those schemes. This Bill updates the 1973 Act by increasing control over potentially undesirable trading schemes while not inhibiting bona fide schemes which enable people to be self-employed either full- or part-time.

Successful bona fide trading schemes depend on sales to the general public. Problems arise with schemes where there is little scope or incentive for the distributors, or members, to sell the product to the general public. Rather, in some schemes, it may be almost impossible to find anyone willing to buy the product, in which case the distributors may find themselves left with garages full of stock that they cannot sell.

Problems arise also when, as in some schemes, the distributors are encouraged to recruit more and more new sub-distributors who begin by paying a joining fee or buying some substantial starter pack. Such schemes are similar to the well known chain letter except that the promoter always receives a cut of the so-called investment. Like all chain letters, because of the rules of geometric progression, you soon run out of people to recruit.

That is where the main abuse of such schemes now comes from. The first problem I described--mountains of unsaleable stock--can already be addressed effectively by regulations using existing powers under the Fair Trading Act 1973. But this Act is no longer effective in providing protection from what I consider to be recruitment scams. Those are schemes where the main focus is on recruitment. The schemes are so structured that the rewards for recruitment of new participants, as distinct from actually selling the product, are amazingly attractive.

Section 120 of the 1973 Act provides that it is an offence to use the prospect of benefits from introducing others to a scheme to induce someone to make a payment. The penalties are set out in Section 122 and are currently a fine of up to £5,000 and/or three months'

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imprisonment on summary conviction. Enforcement is in the hands of the DTI, which has to bring charges within one year of the discovering of the offence.

Despite a proliferation of trading schemes using recruitment rewards to induce payments, prosecutions have been extremely rare. There have been none over the past 10 years. The lack of prosecutions does not reflect a lack of concern. It is because the recruitment offence only applies if the scheme in question has all of the set of characteristics specified in Section 118 of the Fair Trading Act. It is not difficult to devise a scheme that lacks one or more of these characteristics.

The reason for the present Bill is to widen the application of the existing controls over trading schemes and thereby increase the protection for the general public as well as for members or all such schemes. The principal control under the 1973 Act was intended to prevent pyramid selling schemes being focused on recruitment rather than on selling. It does so through recruitment offences.

It effectively makes it an offence to operate a scheme which meets the criteria of the Act if payments for recruitment are the inducement to join the scheme. It is not illegal to join the scheme or to make payments. It is illegal to benefit from an unlawfully induced payment or to attempt to induce such a payment. The coverage of this control is now too narrow. It does not apply, for example, to schemes which do not involve the supply of goods and services by members, even though in these schemes payments for recruiting other participants are the only reward for those who join.

It has been a source of considerable frustration that it has not been possible to prosecute the promoters of these schemes under the Fair Trading Act. The powers proposed under the new, replacement section will make it possible to outlaw these trading methods. As I have explained, we have used powers under other Acts to protect the public from the continuation of these undesirable if not fraudulent schemes, but these powers are themselves limited in their application. The Bill greatly extends the potential coverage of all these controls.

The powers under the 1973 Act are not only concerned with the recruitment offence. There are also regulations over the promotional material aimed at new recruits and regulations to ensure that participants are not unfairly treated by the promoters. Those regulations are still needed. They provide the framework within which both the promoters and the participants of bona fide trading schemes can flourish. The regulations do need improving. Following consultation last year, the Government intend to replace the regulations to provide more effective protection without increasing the compliance costs for promoters.

It is true that the Bill extends the coverage of the Part XI controls so that they can apply to any trading scheme which meets its criteria rather than the narrow criteria in the present Act. It is also true that there are many types of trading scheme which meet the Bill's criteria but for which the controls are not appropriate. An essential part of the Bill is that it provides the Secretary of State with power to exclude specified types of scheme from all the controls.

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The Government have already declared their intention to exclude two types of schemes: first, franchises in which only one person benefits from the activities of other participants; and, secondly, simple chain letters.

Views are already being sought on how best to achieve these intended exclusions and also on whether there are any other types of trading schemes that should be excluded from the controls. For example, it might be appropriate for the exclusion to take out any scheme where the members do not receive commission on other members' sales or receive any other kind of benefit from the activities of other members. I understand that such an exclusion would take out what are commonly described as "single level schemes", such as Avon, as well as most traditional types of franchise operation.

The key question is whether or not a type of scheme does or does not present the risks to the general public from which the Fair Trading Act is intended to provide protection. Some types of scheme do present risks. Such schemes should be subject to the recruitment offences and, if appropriate, regulations over their promotional material and participants' contract terms.

Trading schemes provide opportunities to hundreds of thousands of people to earn an income in the direct selling sector. Experience has shown that there is also a potential to exploit those who join such schemes. This legislation is intended to remove the scope for such abuse and thus leave the way clear for legitimate business to flourish.

The Trading Schemes Bill will ensure that protection is available to those who are considering joining, or might be induced to join, or who do join any trading scheme that meets its criteria. The Bill's criteria would make the protection much more widely available than at present. It seeks to remove the scope presently available to unscrupulous persons to devise schemes that avoid or evade these protecting controls.

On behalf of the Government, as I said at the beginning of this speech, I welcome this Bill and, like the noble Lord, Lord McIntosh of Haringey, hope that it will soon become law.

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