Trading Schemes Bill

HC Deb 02 February 1996 vol 270 cc1268-81

Order for Second Reading read.

12.49 pm

Sir Nicholas Scott (Chelsea)

I beg to move, That the Bill be now read a Second time.

This is the first time for many years that I have moved a Second Reading without the comforting support of the Dispatch Box. However, the appeal throughout the House of this Bill was not apparent for many of the measures that I moved from the Dispatch Box, especially when I was a Social Security Minister. I hope that the Bill, which has simple aims, will have widespread support and that it will pass swiftly to the statute book.

The Bill seeks to tackle loopholes that have emerged in current legislation governing selling and trading schemes. The Bill does not seek to impose unreasonable restraints on legitimate direct selling businesses. Before turning to the Bill's substance, I should like to thank the Minister for Competition and Consumer Affairs, my hon. Friend the Member for Solihull (Mr. Taylor), and his advisers for their help and guidance. The Department of Trade and Industry published a consultation paper on the issue last year, which provoked considerable interest in this area of commercial activity and, in due course, support for early action, which is represented by the Bill.

I am also grateful to the Direct Selling Association for its advice and guidance. It has taken the lead in advising those engaged in direct selling and by drawing up a code of conduct for its members. In every way, it has sought to ensure that those engaged in direct selling—which, as I shall show, plays a significant part in the overall retail sector of our economy—understand their rights, responsibilities and duties to those to whom they sell.

I am especially grateful to the DSA's director, Mr. Richard Berry, who has been an immense help, and to Mr. Mike Smythe of Lawrence Graham, who also has considerable expertise in this area and helped me in the preparation of the Bill. I also thank hon. Members in all parts of the House who, in one way or another, have expressed their support for the Bill and its aims.

In essence, the Bill is designed to close a loophole in the Fair Trading Act 1973 through which the promoters of a wide range of "get rich quick" schemes have managed to avoid proper regulation. It is estimated—it can only be a tentative estimate—that over the past two years investors, especially, those looking for a good way to invest redundancy payments, have lost some £30 million as a result of the way in which some of those schemes have operated.

The most worrying schemes are strikingly similar to the widely reported pyramid selling scams prevalent in Romania and Russia in recent years. Under those schemes, people are persuaded to make regular payments to the promoter and to encourage others to do the same, having been promised that after a time they will receive a large return not only on their own investment but on those made by others whom they have introduced to the scheme. To gain credibility, some of the promoters have made payments to a few of the original participants, but usually within a year many of the promoters have absconded or managed to transfer the accumulated funds into offshore and thus untouchable bank accounts. That type of scheme is not, alas, covered by the present trading laws.

I have been advised by the DTI that the most effective solution—one that the Department is anxious to have on the statute book—would be to widen the scope of the pyramid selling regulations introduced under the Fair Trading Act 1973. The regulations were originally introduced to deal with abuses in the promotion of direct selling businesses. At that time, inexperienced participants were often encouraged to over-invest in stocks and products and were offered no opportunity to recover their investment if they were unsuccessful in their part-time businesses. The purpose of the Bill is to update the existing regulations.

As I have said, it is not my intention to impose bureaucratic restraint on the direct selling industry. The legitimate direct selling of consumer goods now accounts for approximately £1 billion of retail trade and offers very useful part-time employment to thousands of would-be entrepreneurs. It is an industry that deserves encouragement. In view of the growing number of people seeking ways to supplement their family incomes, however, it is right that we should ensure that such opportunities are properly and fairly regulated.

I am aware that some hon. Members—especially my hon. Friend the Member for Southend, East (Sir T. Taylor), who is not able to be here—wish the Bill to go further. I do not believe that it would be practical to produce legislation—certainly not a private Member's Bill—to cover every aspect of the misuse of trading schemes and pyramid selling operations. Once the Bill has reached the statute book, as I hope that it will, it might be possible for the Government or another hon. Member to consider whether other legislation—primary or secondary—Could extend the protection of people involved in a sphere of commercial activity which is overwhelmingly positive for our economy as a whole and for those engaged in it, but in which there have been too many abuses in recent years for us to turn our back on them. The Bill is therefore restricted to so-called pyramid selling and similar schemes.

Nearly everyone will have come across pyramid selling or direct selling operations. There is a distinction between them which I shall make clear. Pyramid selling activities, which are covered in the Bill, are the ones about which we should be concerned. I imagine that hundreds if not thousands of our constituents earn or supplement their income by selling goods or services through a trading scheme. This can be a rewarding and legitimate sideline or a lucrative form of full-time self-employment. In many trading schemes, it is also possible to earn by recruiting others and from commission on sales made by those recruits.

These trading schemes provide opportunities for thousands of individuals to become entrepreneurs and perhaps 300,000 men and women supplement their income in this way. Their sales can vary from a few hundred pounds a year to tens of thousands of pounds a year, and hon. Members may be surprised to learn that total annual turnover is estimated to exceed some £300 million. Members of such trading schemes are, in practice, retailers. They are. not acting as consumers, so they do not benefit from measures designed to protect consumers. As entrepreneurs, manifestly they take risks. The Fair Trading Act 1973 is designed to provide protection from the greatest risks. Under that Act, it is an offence to persuade someone to make a payment with the promise of rewards for getting others to join the scheme. That is central to what I am talking about and should ensure that trading schemes are primarily retailing arrangements.

The Act also provides for regulations to ensure that every member of a trading scheme has a fair contract with the scheme's promoter. There can also be regulations about the sort of promotional material that is used to recruit new members. Unfortunately, as we have discovered in recent years, the protection of the Fair Trading Act is not available to members and potential members of all trading schemes. The Bill seeks to extend that scope, but it cannot do everything and some schemes will fall outside its scope.

The greatest risk comes from the expectation of riches from recruiting others. That expectation is created and inflated to persuade gullible people to put money into what I can only call a pyramid scam. If the scheme were subject to the Fair Trading Act, it would be unlawful to accept any payment induced by the prospect of substantial rewards from recruiting others, or even to try to persuade someone to make such a payment.

The basis of pyramid scams is geometric progression. Some of us may remember the story of the Egyptian slave who persuaded his master to agree to give him one grain of rice for the first square of the chessboard, two grains for the second, four for the third, eight for the fourth, and so on. The slave's master was bankrupt before half the chessboard had been covered and accounted for. The slave, like the promoters of modern pyramid selling scams, understood the power of geometric progression.

Promoters of modern scams are greedier even than the Egyptian slave, whose scam involved mere doubling. Modern pyramid scams are more likely to use a higher power, say, of five. In a modern scam, each new member might be expected to recruit five people, who each recruit five people, and so on. There would in theory be 19,530 people in a six-level pyramid of recruits below each member.

If the member paid £50 to join the scam on the basis of £10 for each of the five persons recruited to the next level down, £1 for each person at the next four levels down, and £10 for each person at the sixth level down, in theory he could expect to get more than £160,000. Turn that into a monthly scheme, as is frequently the case—with payments by standing order, of course—and he might expect an annual income of £1,922,560 for every £600 that he pays, although it seems that he would have a fat chance of receiving anything like that.

At first glance, of course, for many people it seems only too easy to earn great sums, and the risks seem remarkably low for the possible returns. In my example, the punter would have covered his stake by recruiting only five others, but only the first to join such schemes receive substantial rewards. Most—in fact, the great majority—of those who join such schemes lose all that they put in. Some people are seduced by the idea of great riches into paying considerable sums—thousands or even tens of thousands of pounds—into such schemes. Many of them, as I said, may have had significant redundancy payments and lost them as a result. Sadly, most have lost virtually all that they paid in. Many have lost hundreds, even thousands of pounds, and some have lost tens of thousands of pounds.

The schemes are nothing less than a swindle of the public. The promoters know full well that the schemes are not subject to the Fair Trading Act controls. Nevertheless, they often assure potential members that the scheme meets all the requirements of the Act. Indeed, the promotional material and contracts for such schemes often appear fully to meet the requirements of the regulations, even to the extent of including statutory warnings. That appearance of legality—it is just an appearance—is part and parcel of the swindle. The schemes do untold commercial damage to law-abiding schemes and their members. The promoters and members of those schemes say that the law-abiding schemes welcome the existing controls under the Fair Trading Act 1973. As I have explained, the purpose of the Bill is to ensure that members of all trading schemes have similar protection.

As I said at the outset, the Bill is simple in concept. It is designed to widen the coverage of the existing controls under the Fair Trading Act 1973. I shall run briefly through the clauses. Clause 1 would replace section 118 of part XI of the Fair Trading Act 1973, which determines which schemes are subject to the controls specified elsewhere in that part of the Act.

Section 118 limits the controls to schemes in which goods or services or both are provided by a promoter, and—I emphasise the word "and"—the goods and services are supplied by members, and most of the sales do not take place on premises where the promoter or member carries on business, and members expect benefits from the recruitment of other members, whether by themselves or others, from their own or any other member's change of status within a scheme, from supplying goods, training or other services to other participants and from commission on sales by other members. Under existing legislation, the controls apply only to schemes that satisfy all four criteria. However, many schemes, including reputable ones, do not satisfy one or another of the first three criteria. Indeed, almost any scheme could be restructured so that it did not satisfy all the criteria and thus the present controls are effectively voluntary.

Clause 1 would replace the four criteria. Proposed subsection (1) contains two criteria. The first is that the participants expect to benefit from any of the matters specified in proposed subsection (2). The second criterion contains conditions relating to the goods and services sold through the scheme. I shall come later to the definition of "goods" in this context. The conditions for the second criterion are set out in subsections (3) and (4). One or other of the conditions must be met unless the powers provided in proposed subsection (7)(a) are used to disapply the second criterion. That sounds complicated, but if hon. Members look at the Bill, they will see that it is relatively straightforward. The proposed section 118 lists all the ways in which members of trading schemes may earn income. The main ways are introducing others to the scheme and selling goods and services. Other ways are also covered by the Bill. They include commission on sales made by other members, and payments related to the continued participation or promotion, or other change in status, of members. I could go on, but as most of the provisions, if the House passes the Bill this morning, will be set out in greater detail in regulations for which the Bill provides, I hope that the House will look favourably on the legislation.

It is essential that the controls apply to any trading scheme and not only to the very limited number covered by existing provisions. The proposed controls would apply to any trading scheme devised in which the public may be in danger from inducements to make payments based on the prospect of rewards from recruiting others. Clause 1 has been drafted to go as wide as necessary but no wider. As I have explained, proposed section 118(6) makes it possible to narrow the coverage and there are other powers to fine-tune the provisions in the Bill as a whole. Proposed subsection (8) would widen the definition of goods and proposed subsection (9) would define "provision or supply".

Clause 2 is a technical adjustment to the existing legislation. These days, when we pass legislation, we need increasingly to take account of developments in technology and commercial practice. It provides for the regulation of promotional material aimed at potential members. Such material may be advertisements, prospectuses, circulars or notices. The existing regulations apply only to documents, and clause 2 would widen the coverage to all forms of promotional material, such as videos, recorded messages and the use of the Internet, which is now commonly used to reach potential members.

Clause 2 also removes the distinction in section 119 between invitations to people to become participants, and information calculated to lead directly or indirectly to people becoming participants. The present distinction serves no practical purpose.

Clause 3 provides transitional protection, ensuring that nobody can be prosecuted as a result of the wider coverage in the new arrangements unless he has consented to or connived in the act that constitutes the offence.

Clause 4 ensures financial provision for the Bill. However, I understand that the Bill is expected to result in a reduction rather than an increase in public expenditure, which will come as a surprise to hon. Members. Without the Bill, the enforcement authorities have had to use other legislation to protect the public from scams that the Bill, will make subject to the Fair Trading Act controls. Those are expected to be more cost-effective, and thus to result in a reduction in public expenditure.

Clause 5 contains the short title and provides for the Bill's application to Northern Ireland. It also provides for a commencement order, which will make it possible for the Act to be brought into force at the same time as any regulations made under it.

I finish on the note on which I began. The Bill will not solve all the problems in a difficult, complicated and sensitive area, but I believe that it will stop the exploitation of vulnerable people by those who peddle promises of instant riches. It is time for Parliament to halt those practices. I therefore commend the Bill to the House and ask hon. Members to give it a Second Reading.

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: 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. The Bill refers to the introduction by any person of other persons who become participants in a trading scheme and proposes controls on the continued participation of participants in a trading scheme … the promotion, transfer or other change of status of participants in a trading scheme. The Bill will also regulate the supply of goods or services by any person to or for other persons … the acquisition of goods or services by any person. All in all, this is a timely Bill. My hon. Friend the Minister has said that the legislation governing pyramid and other similar trading schemes is more than 20 years old. The controls provide essential protection to members of such schemes. While many trading schemes provide opportunities for thousands of individuals to become entrepreneurs, there has been a proliferation of schemes outside those controls. Because of the risk to members of such schemes, the Government published a consultation document on the matter last year. My right hon. Friend's Bill, which would implement the main proposals in the Government's consultation document, would give protection to thousands of small entrepreneurs and protect sometimes people who are innocent in that group. It aims to widen existing controls to apply to all trading schemes the members of which recruit others. Therefore, I commend my right hon. Friend's Bill to the House.

1.19 pm

Mr. Piers Merchant (Beckenham)

My right hon. 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.

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 right hon. 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.

As so often happens when I scrutinise legislation, however, I found the language of the Bill almost unintelligible. To understand the Bill, one must use the brief in the Library. The Bill's language refers, as it must, to how bits of the Fair Trading Act 1973 are to be amended. There is no way in which the Trading Schemes Bill could be described as self-contained. Without reference to existing legislation, it is not a comprehensible document. We must eventually move to being able to draft our legislation in plain language—to self-contained Acts and Bills that can stand up on their own and be understood by the layman and even by me.

1.35 pm

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 right hon. 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: 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. In his judgment on the petition to wind up Global Pioneers Ltd., Mr. Justice Harman said: 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". Frequency Programming World—or FPW as it was known—operated what it described as a "computer-generated money pay-out plan" which it said had 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! Madam Deputy Speaker, you may find it hard to believe, but another scheme, operated by Alchemy UK plc, included what it described as testimonials from Sir Isaac Newton, William Shakespeare, Francis Bacon, Leonardo da Vinci and Marie Curie. It claimed that its scheme was based on 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. 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 OE 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 yet again they have run circles around the DTI and will continue to trade unaffected". 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 the Fair 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.

Question put and agreed to.

Bill accordingly read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 61 (Committal of Bills).