§ Not amended (in the Standing Committee), considered. Order for Third Reading read.9.34 am
§ Sir Nicholas Scott (Chelsea)
I beg to move, That the Bill be now read the Third time.
Some get-rich-quick schemes operate on the same basis as chain letters, with each member recruiting further members. Members pay out large sums in the expectation of a high return. Those payments are nearly always based on unrealistic forecasts of earnings from recruitment. The forecasts are derived from what I described during an earlier stage of the Bill's consideration as the principle of geometric progression, leading to theoretical levels of recruitment reward which, in reality, are impossible to achieve.
The House will recall from Second Reading that the intention behind the Bill is to deal with a weakness in the legislation that controls trading schemes. On Second Reading and in Committee there was almost universal support for the principles set out in the Bill.
I acknowledge that, in essence, this is an enabling Bill. The guts of the proposed legislation will appear in regulations that will be introduced by the Department of Trade and Industry in due course if the Bill passes through all stages of consideration in both Houses.
The regulations will be the most important feature of the proposed legislation and will be designed to deal with the weakness that I have identified. It is that weakness that has made it possible for the unscrupulous to mislead vulnerable members of the public into believing that substantial incomes can be derived from doing no more than making payments into a scheme and then doing their best to encourage others to do the same.
The Fair Trading Act 1973 makes it an offence to receive or solicit payments for trading schemes, but the offence applies only to schemes with certain characteristics. In recent years, the unscrupulous have had little, if any, difficulty in devising schemes that do not come within the scope of the 1973 Act.
My understanding—I have been approached by a number of people on the matter—is that thousands of people have lost millions of pounds through trading schemes that are not subject to the controls set out in the 1973 Act. To repeat a point that I made on Second Reading, perhaps one of the worst features of the existing weakness is that many victims were tricked into investing, they thought profitably, to secure their future, using money that they had received as redundancy payments 1290 when their previous careers had come to an end. A number of people have been in touch with me, telling me that they had been caught out in that way.
My Bill is designed to widen the coverage of the existing controls so that they apply to any trading scheme. The existing controls under the 1973 Act introduce offences relating to recruitment and the regulation of promotional material and contracts. The Bill does not change those offences but makes it possible for the controls to apply to all trading schemes whose members recruit others.
I am grateful to the House for the welcome that it gave the Bill on Second Reading and for its swift passage through Committee. I am also grateful for the support that I have received outside the House, particularly from the Direct Selling Association, which represents the best aspects of direct selling schemes and firms that are involved in them.
As entrepreneurs, of course, members of trading schemes, like other entrepreneurs, take risks, and some may have taken unwise risks with substantial redundancy payments, which they thought that they were investing wisely at the time. Too many people who got themselves into that position did not have a background in business, or experience of working in an entrepreneurial business, which might have alerted them to the dangers inherent in many such schemes.
The Fair Trading Act provides some of those people with protection from the greatest risks in investing in trading schemes. Having come fairly fresh to the issue, I believe that there is no doubt that the greatest risk comes with the expectation of riches from recruiting others into the scheme. The expectation is created and inflated to persuade people to put money into what, in shorthand terms, are pyramid scams. It is an offence, however, under the Act to persuade somebody to make a payment by promising rewards from others joining the scheme. The Act also provides for regulation of the promotional material that is used to recruit new members to such schemes. In addition, it provides for regulations to ensure that every member of a trading scheme has a fair contract with the scheme's promoters. I acknowledge that the Act's protection is necessary and soundly based.
The Direct Selling Association, which has vast experience, knowledge and expertise in this area, endorses the need for such protection. The association represents many companies that are subject to these controls. I hope that my Bill will deal with limitations in the existing legislation, largely through fresh regulations in due course. The existing protection is not currently available to members and potential members of all trading schemes; only a limited number are covered. Those who are not protected include many who, through naivety, ignorance or gullibility, are at the greatest risk of losing their investment. The Bill will ensure that protection is provided to members and potential members of all trading schemes.
After the Bill had passed its Committee stage, I was approached by representatives of the British Franchise Association Ltd., who expressed grave concern to me that the Bill might affect the operations of its members. I shall quote from a report from Mr. David Bigmore and Mr. Martin Mendelsohn, both of whom are solicitors, who have as one of their specialities the franchising business. Their note on these matters was copied to officials in the
1291 Department of Trade and Industry. I hope that Ministers concerned with the matter will be prepared to look carefully at the points made by those who represent the franchise industry.
Franchising is an important part of what in the broadest terms I shall call the retail sector in this country. In the United States, it already accounts for about half of all retailing businesses, and it is growing in this country. If we are to legislate in this area, I hope that account might be taken of the existence of problems that arise in the franchising business.
Mr. Bigmore says, on page 3 of the note with which he provided me and the Department, that both my hon. Friend the Minister for Small Business, Industry and Energy, who responded at earlier stages of the Bill, on 2 February, and the DTI's "Guide to the Provisions of the Trading Schemes Bill", believe that
The Bill will not change the position for most franchise schemes. This is because most franchise schemes are already subject to the Act's controls. Those schemes that have only one U.K. participant are exempt from the Regulations made under the Act but are subject to the recruitment offences. The Bill will change the position only for franchise schemes that are not currently subject to the Act's controls. The consultation did not reveal any such schemes but there could be such schemes if, for example
the franchisees do not sell goods or services provided by the franchisor"—
most of the sales are made on premises where the franchisor or franchisee carries on other business.
In future the franchisees of any such schemes will have the same protection as franchisees of other schemes".
In their submission, Mr. Bigmore and Mr. Mendelsohn say that, under existing law, most franchise schemes are not subject to the Act's controls because they are not at sufficient levels to become involved in the legislation. Thus, in the standard domestic franchise, the franchiser is the promoter and the franchisees are participants. They say that for that arrangement to be a trading scheme, there would need to be a
prospect held out to participants"—
franchisees in this case—
of receiving payments or other benefits in respect of any one or more of the matters specified in (paragraphs (a)-(e) of) sub-section (2)".
They continue to describe in some detail the way in which the franchising industry in this country operates. It was not an area of which I was particularly conscious when I embarked on the Bill, but it has aroused a significant amount of concern within the franchising industry.
As the Bill is in essence an enabling Bill and the bulk of its impact will be provided by regulations rather than primary legislation, I hope that Ministers, or at least officials, from the DTI will pay particular attention to the representations of those who are concerned with franchising.
§ Mr. Andrew Rowe (Mid-Kent)
My right hon. Friend is right that it is terribly important not to embroil the franchising industry in the Bill by, as it were, inadvertence. One of the elements in the anxiety of the franchise industry is that there is still a considerable 1292 difference in the way in which different countries in the European Union define and handle franchising, and clearly anything that affects franchising in the United Kingdom will be taken by other European countries as some kind of precedent on which to build.
§ Sir Nicholas Scott
This approach to franchising developed on the other side of the Atlantic and, like so many other trends, favourable or unfavourable, it came to this country first—perhaps because of the commonality of language. As my hon. Friend rightly says, the approach is likely to spread, and perhaps it has already spread, to the retailing sector in many other EU countries. Perhaps a Union-wide approach will be necessary to tackle the matter.
The Bill will provide powers to exclude from its provisions such schemes as may be provided by order, and that mechanism could be used to exclude various types of franchise schemes. The Minister for Competition and Consumer Affairs has said that the Government intend to use that power to exclude franchise schemes in which only one UK participant can benefit from the activities of others. Therefore, the Bill will result in a lightening of control of UK franchise schemes with only a single tier. I am advised that most multi-layer franchise schemes are already subject to the controls, but that is being contested by Mr. Bigmore and Mr. Mendelsohn and will not be affected by the legislation.
I appreciate that some multi-layer schemes such as those in which franchisees do not sell goods or services provided by the franchiser and those in which most of the sales are made on premises where the franchiser or franchisee carries on other business are outside the present controls.
As I said earlier, my familiarity with the franchising industry is somewhat limited, but it would be anomalous if we did not seek to control multi-layer schemes. The need to protect members of franchise schemes and others is important, but how that is provided, whether through regulations or by other arrangements, is not for me to say. However, we would be lacking in sensitivity if we did not have regard to the needs of a large and growing sector of our economy, and we must carefully consider the representations of those who take a specialised interest in those matters. If those in franchising continue to be concerned, I hope that they will be carefully consulted about any regulations that flow from the Bill.
I hope that the House will give the Bill its wholehearted support. The Government support its principles and I have been assured that they do not intend to introduce any unreasonable regulations or restraints for trading schemes that are entirely legitimate and beyond criticism. Direct selling and franchising are large and fast-growing sectors of our economy. The House has a duty to ensure that the legislation properly reflects the need to ensure that those who are responsible for carrying on such businesses are not unduly hampered, but that people will be protected from those who use holes in existing legislation to run what are undoubtedly scams and tricks, to persuade people to part with their hard-earned money or redundancy payments.
I know that the Government support the principle of the Bill and I am grateful for their backing. The Bill was also supported in other parts of the House during its earlier stages.
§ Mr. Andrew Rowe (Mid-Kent)
I start by declaring an interest. The only outside interest for which I receive any remuneration whatever is that I am an adviser to Amway UK, which is one of the biggest direct selling companies in Britain. I assure the House that I spent much time thinking about it before I agreed to assist the company, because a connection with pyramid selling in even the most legitimate direct selling companies would cause any hon. Member to pause. I looked at how a reputable direct selling company operates before I agreed to be an adviser. I am glad that I did that, because I have learned a great deal about a field of endeavour about which I knew little before I took on the role.
As my right hon. Friend the Member for Chelsea (Sir N. Scott) said, this is a rapidly growing method of selling, but scams have caused huge distress to a substantial number of people who invested redundancy money or pensions and received nothing. One of the most common scams is that there is nothing whatever to sell, and that is absurd. When all the glamour and glitz of the west end hotel foyer or banqueting room were stripped away, people found that they were being asked to pay a substantial sum up front, in the hope that they could then con others into joining a scheme that had nothing whatever to sell. Sadly, the most vulnerable people are often the most desperate and they are easily persuaded that there is a crock of gold at the end of the rainbow.
Amway has tens of thousands of distributors throughout the land. Some of them work all the hours that God sends, and many husband-and-wife partnerships have managed to build substantial businesses. There are millionaires working for companies such as Amway, but the vast majority of workers are people who are trying to augment their incomes. Some vicars' spouses are augmenting the stipends of their husbands by toiling in a small way for the company, as such people do for many other direct selling organisations. Many of them are students who seek to augment their student loans.
Many people who get sucked into such an activity quickly find that they are temperamentally hopeless at it. One of the Bill's great advantages is that it will make it much harder for confidence tricksters and others to load such people up front with a huge stock of material that they are temperamentally unable or do not have the skill or assiduity to sell. In some instances, the stuff begins to depreciate or deteriorate the moment they take delivery of it. There has been little enforcement of any suggestion that the supplier should take it all back. Such behaviour has brought the entire direct selling operation into disrepute.
A similar difficulty may arise—indeed, it has arisen in Amway UK. Training materials are made available by companies within the Amway chain, and people who are not good at selling and who are temperamentally of the belief that, if they tried only a bit harder or seized on to the latest gimmick, their fortunes would be transformed, feel obliged regularly to buy the latest video, booklet or whatever and can easily build a substantial outlay for little return. Reputable companies in the Direct Selling Association, of which there are a substantial and growing number, are keen to ensure that people have a real opportunity to give back the materials that they purchased in good faith, but ill-advisedly, without losing large sums of money. My right hon. Friend's Bill will make such an improvement in standards even easier.
1294 The Bill takes the best practice in what is an innovative and growing form of selling and is determined both to generalise that good practice and to outlaw bad practice. The bad practice varies from downright fraud to careless overselling to people who are incapable of determining whether they are in a good position. One can never entirely protect gullible people by legislation or any other means, but one can ensure that the damage to those people is limited as far as possible and that they do not get sucked into things which, on any examination, are regarded as totally crooked.
Therefore, my right hon. Friend has done the country a considerable benefit by introducing the Bill. I am delighted that the Government recognise the value of trying to tighten the whole system and that they have, by endorsing the Bill, clearly recognised that direct selling is here to stay and that it is one of the many new ways of getting goods to the customer which the retailing revolution is bringing about.
Many people would, for all sorts of reasons, prefer to buy from someone they know products that they have grown used to in their home. That is an admirable feature. It is also a way of doing business which, for the distributor, fits in extraordinarily well with the growing instability of the employment market. People who expect to go in and out of work during their lifetime may find it a great anchor to have, as part of their family income, the amounts of money that come in from providing a relatively small number of customers with a steady supply of products. That is an admirable way of trying to iron out the peaks and troughs of an employment record which, in the modern technological world, is unlikely to be the flat line, or the climbing graph, which most of my generation expected to enjoy when we left school or university.
For all those reasons, I commend my right hon. Friend for introducing his admirable Bill.
§ 10.3 am
§ Mr. Andrew Robathan (Blaby)
As my hon. Friend the Member for Mid-Kent (Mr. Rowe) has said, this is an important issue. I am delighted to have the opportunity to speak on the measure. I just slightly regret that there does not seem to be much interest from the Opposition Benches. I know that the Opposition support it, but it is a pity—[Interruption.] I welcome the hon. Member for Newcastle upon Tyne, East (Mr. Brown). I hope we shall hear from the Opposition of their support for the Bill, but the empty Opposition Benches sit ill with the slogans that we hear about supporting business.
§ Mr. Paul Flynn (Newport, West)
The hon. Gentleman might realise that the reason for the empty Opposition Benches is that the Bill is entirely non-controversial and that it is not expected that any Member will speak against it. For that reason, Members hope that it will have a swift passage through the House this morning to allow hon. Members to consider in detail and come to a decision on other important Bills that are before us this morning.
§ Mr. Robathan
Indeed. The hon. Gentleman has his own issue in the Bull Bars (Prohibition) Bill, which I believe is coming up later and which I also commend to the House. I do not think that the hon. Gentleman will find much objection, certainly not from me anyway, to his measure. At 10 o'clock this morning, he has plenty of time to look forward to that.
1295 The Trading Schemes Bill deals with an important issue. Although I am sure that my right hon. Friend the Member for Chelsea (Sir N. Scott) will leave many lasting memorials to his time in this place, this Bill will certainly be one, perhaps not the greatest—
§ Mr. Robathan
One may leave one's memorials long before one passes on, and I know that my right hon. Friend will be back after the next election, as will we all, God willing, but this Bill may be one of the small memorials that he leaves the House and it might improve the lot of many people who might otherwise have become victims or dupes of bogus promoters of the dubious financial schemes that he has mentioned.
It is said that a fool and his money are easily parted, but this issue is much more complicated than that. There are many sad cases. I suspect that most Members have, as I have, met sad constituents who have explained how they have lost money in one scam or another and who have wondered what could be done about it. The sadness is that we discover that, often, little can be done.
What we might describe as an innocent abroad, perhaps a man in his 40s or 50s who has recently been made redundant and who is unable to get a job in the declining industry in which he was working before, may be enticed by advertisements into putting his redundancy money into a scam. Often, those people have no experience or knowledge of the world into which they are venturing—or think they are venturing—be it insurance, financial investment or selling of some sort and they see an opportunity. We should beware of criticising those people because they are being enterprising and trying to raise themselves from an unfortunate position.
§ Mr. Piers Merchant (Beckenham)
I agree with my hon. Friend. Does he agree that, when some people suggest that the Bill's purpose is to protect gullible people, although that may be true, it goes much further than that and many of the people who are caught by the sort of schemes that the Bill attempts to extinguish are not gullible? They have been seduced by deceptive literature, advertising and schemes.
§ Mr. Robathan
My hon. Friend makes an extremely good point. Before coming to this place, I was in the Army for many years and having left the Army, I was surprised, as I looked through the opportunities in the newspapers—the House of Commons was not there: I had to find that one for myself—that there were many enticing advertisements explaining how I could make money with my enormous skills, which, of course, were flattered by those seductive advertisements. When I replied to one, however, I discovered that it looked rather fishy.
That is the nub of the matter. Everything is about getting rich quick and, of course, getting rich quick is rare, apart from the lottery or tomorrow's Grand National. Incidentally, as we discuss the Grand National tomorrow and the Bill, I would appropriately recommend to the House Young Hustler, which at 7–1 must be a favourite.
§ Madam Deputy Speaker (Dame Janet Fookes)
Order. The hon. Gentleman may want to offer such advice, but not here and not now.
§ Mr. Robathan
I am not offering advice. I am just commenting that Young Hustler at 7–1 is running tomorrow. I take no responsibility for anyone who backs it.
§ Madam Deputy Speaker
Order. The hon. Gentleman must, however, take responsibility for the relevance of his remarks to the Bill.
§ Mr. Robathan
We are talking about get-rich-quick scams, but I shall move on from the Grand National and the lottery.
There are few ways in which one can get rich quick, or, indeed, get rich, apart from by working hard. Getting rich quick usually involves crime. I was going to comment on those of us who are backing a horse at Aintree tomorrow, but never mind. Those of us who are buying a lottery ticket tomorrow know in our hearts that we are unlikely to be able to spend Easter in the Bahamas as a result. Sadly, some people who are conned by pyramid selling and similar trading schemes, which my right hon. Friend the Member for Chelsea has mentioned, have lost so much that not only the Bahamas but even the most excellent resort of Blackpool is an unlikely destination.
When I was a child, I was occasionally privy at school to receiving what were known as chain letters. They were rather fun and said that one must not break the chain or one would get bad luck. I personally never returned one such letter, so I suppose I broke the chain. The letters usually originated in Minnesota or Uruguay, from some holy man or sadhu in the Himalayas, or perhaps some child in Sweden. Maths was never my strongest point at school, but I could understand quite easily that to keep such chain letters going, an enormous number of people needed to be involved.
More recently, and more seriously, about ten years ago, when I was working in London, the same sort of letters began to appear, but they demanded money. It was not a great deal of money—£10 or so. They also warned that the chain must not be broken, but they were curiously mystical. Examples were given of people who had received £20,000 and of some who had had bad luck and lost a great deal of money. Such letters also all began in the deepest south of America or the mountains of Asia, but rather than coming from a holy man they were usually from a very clever mathematician.
I recall that in the space of about two months I received about three or four such letters, which always included lists of names. One had to send £10 to the top name, strike it out, and send on the letter to six more people.
§ Madam Deputy Speaker
That is not a point of order for the Chair. I thought that the hon. Member wanted to intervene.
§ Mr. Robathan
It might have been an intervention, but I thought that the hon. Gentleman wanted to get on to his 1297 Bill. Surely the point is that exactly the same sort of scam is run by businesses. If the hon. Gentleman would like to study previous discussions and the Second Reading debate, he will find that particular comments relate to Romania and Russia, which tie in quite closely with what I am talking about.
By examining the lists of names on those chain letters that required £10, I saw that there was at least one general and several people who may since have become generals—I was in the Army at the time—who were not dupes or fools but quite sensible, responsible and educated. When I received three letters, I began to smell a rat. I worked out that by sending six letters, I could receive 46,656 letters by the sixth stage, which, at £10 a head, would have amassed almost £500,000. If I was not at the beginning but already at the sixth stage, more than 2 billion people would have needed to have been involved in the chain for me to have received the same amount of money. If I was at only the fifth stage, the whole population of the United Kingdom—every man, woman and child—would have to have sent letters for me to be have received the same amount of money. I have lost money in some ventures, but I have never been quite as foolish as to engage in that.
Although that was not a particularly important scam, the issue that it raises is nevertheless serious and directly relates to the Bill, notwithstanding what the hon. Member for Newport, West (Mr. Flynn), who has just left, said. I was often told that such a practice was illegal, and perhaps my right hon. Friend the Member for Chelsea or my hon. Friend the Minister can confirm that. It should be illegal. Although the generation of such money is perhaps trivial, it is nevertheless worrying.
The same principle was applied by such companies as Global Pioneers Ltd. and Alchemy UK plc, as I understand it. Such companies were getting rich quick by putting money up front in order to get other people to give them money. Of course that is all too easy, and involves amounts much more than £10. Some people's losses have been great. Perhaps the promises of selling, financial work and insurance were given, and always the income was guaranteed—except that it never came. The parallel is clear.
My right hon. Friend the Member for Chelsea has been in touch with the Direct Selling Association, as he mentioned, and I am delighted that it supports the Bill. As my right hon. Friend and my hon. Friend the Member for Mid-Kent (Rowe) have mentioned, our retail habits and unemployment in the retail sector have changed over recent years. If we look to America, we see that it is likely to change even further. Many busy people choose to buy items from catalogues or from agents of direct selling companies. There is nothing wrong with that and I am delighted that the Bill will not harm it. It is important that bureaucratic regulation does not build up and stifle perfectly proper enterprise. The franchise sector has been mentioned and there are technical issues in it that need to be considered by the DTI in years to come—not necessarily by special investigation. Since the Bill concentrates on providing a framework and does not deal with detailed regulations, it is a great asset in that area.
My right hon. Friend the Member for Chelsea will know that I wanted to debate an amendment on Report, which, despite being accepted when I tabled it was declared defective. I am not sure why. It was not in any sense a wrecking amendment. It was to investigate the 1298 difference that was raised by consultees between directly inviting or asking people to participate, as opposed to informing or giving information designed to lead people into such participation. The consultees raised that as a matter of importance and my amendment would have altered the Bill so that section 119(1) of the Fair Trading Act 1973 would read:Regulations made by the Secretary of State by statutory instrument may make provision with respect to the issue, circulation or distribution of any form of advertisements, prospectuses, circulars or notices, which(a) contain any invitation to persons to become participants in a trading scheme to which this part of the Act applies, or(b) contain any information calculated to lead directly or indirectly to persons becoming participants in such a trading scheme".It is quite a technical point, and we have moved on without debate. It is important, however, that in the interpretation of law such factors are understood and dealt with. It should probably be dealt with in regulations drawn up by the DTI. My right hon. Friend the Member for Chelsea mentioned weaknesses in current legislation. I have been in the House for only four years but I have noticed that sometimes legislation is not perfect and we need to make certain that, when passing such legislation, even on a fairly empty Friday morning, it is absolutely correct.
I welcome the opportunity to support the Bill. I should be grateful if my right hon. Friend the Member for Chelsea would comment on one or two of the issues that I have raised. I congratulate him on his success in this small monument, and look forward to many further monuments to his diligence and industry during his time in the House.
§ Mr. Anthony Coombs (Wyre Forest)
I congratulate my right hon. Friend the Member for Chelsea on bringing the Bill forward. I was delighted to hear both him and my hon. Friend the Member for Mid-Kent (Mr. Rowe) say that it is very important that when passing such legislation one does not throw out the baby with the bath water. In this instance, the baby is very significant, robust, healthy and perfectly legitimate. I have noted, for instance, that the direct selling or franchising industry of the kind that we are attempting to regulate has a turnover nationally of about £300 million. Not only does it provide additional income entirely innocently and helpfully for a large variety of people, whether they be students, wives—we ought to say spouses—or vicars, it provides a training ground for many people to develop gradually their entrepreneurial skills with minimum overhead and maximum back-up.
That is why the Direct Selling Association supports the Bill's principle but does not want it to become the trojan horse of a huge amount of regulation, which would become bureaucratic and stifling. That is one of my concerns about legislation that opens up new areas of activity to regulation. I am sure that although all of us present in the Chamber consider that the regulation would be helpful and not unduly constricting, and at the same time would protect vulnerable people, it might in other cases, in particular locations with particular trading standards officers, be highly oppressive in a way that I am sure none of us would want.
1299 In nine years in the House, I have received but one complaint about direct selling organisations. People who are duped or feel that they have been wronged by such organisations may not be the type of people who want to admit it and go to their Member of Parliament to draw attention to what they regard as an unfortunate episode in their life. We should nevertheless take account of the lack of complaints and say that, although there may be a problem, that money circulation schemes may have to be better regulated and some people may well have lost money, the benefit of franchising and direct selling far outweighs the problems against which we hope to regulate today.
I have always believed that we should consider any type of regulation from two angles. We should protect vulnerable and innocent people. The trouble is that a person who complains that a trading scheme has gone wrong will always present themselves to the authorities as vulnerable, exploited and innocent. despite the fact that many people who enter such schemes are not innocent or gullible but greedy and seeking a quick return as much as the guy who set up the scheme. That may not be the easiest thing to admit in political terms, but in practice it is often the case.
§ Mr. Robathan
I agree with my hon. Friend, but are not the advertisements very seductive nevertheless? Greed is a factor, but so is need, in whatever work we do, because we wish to make money for our industry. Perhaps some people are greedy, but I have cases of people who believed that they had found a good way to make money but were duped.
§ Mr. Coombs
Of course that happens, which is why we are considering the Bill, but I am saying that any scheme of regulation should be considered against that proviso.
The deregulatory aspects are the other side of the argument about regulation. It is highly ironic that the document "Pyramid Selling and Similar Trading Schemes", produced on 16 March 1995, is—at least according to the Library brief—part of the Government's deregulation initiative. I should have thought that it was the major complaint of the majority of my constituents, including small companies and many people involved in business on a larger scale, that far from deregulation being the order of the day, despite many of the prognostications and pronouncements of Ministers, insidiously, gradually, their businesses are more and more overwhelmed with regulation, whether from Europe or from over-zealous civil servants locally or nationally. It should be our major preoccupation to reduce regulation and to produce regulations that are unlikely to be perverted in the way that I described earlier.
Significantly, in the past 15 years the United States of America has produced about 20 million jobs, mainly in the private sector, whereas in Europe the regulation effort may have reached its nemesis—about 8 million have been created, none of which has been in the private sector.
§ Mr. Coombs
I take that point. We would all welcome necessary regulation for properly run, sensible companies, 1300 but we should bear it in mind that one man's necessary regulation may be someone else's unnecessary interference in the way they go about their business.
I am in favour of the Bill and of extending the number and type of schemes it encompasses and the type of advertisements it oversees, because naturally I want to protect people who are genuinely vulnerable in a way that is in the public interest.
I shall now discuss pyramid selling schemes. Inner Sanctum, which my hon. Friend the Member for Blaby (Mr. Robathan) may have mentioned earlier, was a scheme that, through an unauthorised Swiss bank Swiss Investment Bankers AEG, offered people wildly unrealistic deposit rates on their money. The bank was registered in a place called Melchizedek, which was purported to be a rock off the coast of south America, but in fact Melchizedek is an Old Testament priest or king of Canaan.
Obviously, it was a scam from the start and people needed to be protected against it. Although it claimed 7,000 members, no one got their money back. It was eventually wound up by the Department of Trade and Industry and the Bank of England, and so say all of us. That is the type of scam against which people should be protected.
The Bill widens the scope of existing regulation. It is important to ensure that those regulations are appropriate for overseeing the franchise and direct selling industry.
The consultation document issued by the Department of Trade and Industry, "Pyramid Selling and Similar Trading Schemes", suggested ways in which regulations and controls might be updated to protect investors. These included the requirement for information to be revealed to new participants in schemes so that they go in with their eyes open; information such as details of the promoter, his registered address, the assumptions on which advertised profit levels were based, information on the role of participants and their obligations, the terms under which contracts originally entered into could be cancelled without penalty, the length of cooling-off periods and the penalties that would apply to participants if a promoter terminated their contract unilaterally.
As my hon. Friend the Member for Mid-Kent said, it is extremely important that people who put a lot of money into schemes, whether it be in trading or in advance orders for goods and so on, should be protected by buy-back provisions. I believe that that was suggested in the consultation document. Equally important, at least for the first two weeks of someone's participation in a scheme, maximum levels of achievable turnover should be quoted. Otherwise people would be swept away with promises of massive future riches and make investments that were unsustainable for them and which could not be relied on in the future.
I want the Minister to reassure me that, in addition to extending the Bill's scope, he will consider the suggestions in the consultation document, which would result in such industries being better policed—better, not more oppressively—in a way that is likely to be accurate and relevant.
I shall briefly mention money circulation schemes. In the 1920s, one Charles Ponzi, an American "entrepreneur"—probably the wrong way to describe him—set up a money circulation scheme; a scam in which millions of people lost millions of pounds. A few years 1301 ago the Caritas scheme, which my hon. Friend the Member for Blaby mentioned—based mainly in Romania and Russia—was wound up and 4 million people lost no less than £630 million.
There are also money circulation schemes, as my hon. Friend the Member for Blaby mentioned, which involve three levels and which give a return only when one person recruits six, and those six recruit another six. Before people make any money at all, they have to recruit 216 people. Before those people make any money, 1,296 have to be recruited and before those people make any money, 279,936 people have to be recruited. Before those people make any money, 60 million need to be involved in the scheme—the population of the United Kingdom. Such schemes are scandalous and unrealistic. It is rather like riding a bicycle. One has to ride faster and faster and faster, otherwise one will fall off. People need to be protected from such schemes.
I am not sure, however, that we can make the same point about all money circulation schemes. One of my concerns is that there may be money circulation schemes into which people go fully aware of the kind of scheme they are entering and which are regarded as a club in which everyone understands the potential downside. People may get a great deal of entertainment and pleasure from such schemes because they are almost a social club. Such schemes should be allowed to persist because they are private ventures in which everyone is a member, and willingly so. Those schemes should be regulated in a constructive and rigorous but sensitive and sensible way.
The biggest money circulation scheme in the country is the national lottery. It is not easy to say that, but it is effectively a money circulation scheme. The only basis on which it works is that the vast majority of people go into it knowing that their chances of winning or getting any return at all are minuscule. The vast majority of people go in knowing that they will lose their money, but society has taken the view that in terms of good causes and in terms of the innocent pleasure it gives to millions of people, it is worth while.
§ 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.
§ 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.
1303 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.
This is a valuable Bill and I congratulate my right hon. Friend the Member for Chelsea on it. It will be a blessing to all genuine traders involved in pyramid selling because it will legitimise their work by outlawing scams.
§ 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 is 20 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.
I am also impressed by the number of people who go into such activity. Amway UK Ltd. has said that the term "pyramid selling" should be more distinctly defined and perhaps related only to crooked activities. I would welcome the removal of that term because it has bad overtones throughout the industry. We are talking about selling in its widest aspect. That is a very good activity. All business organisations work on a pyramid basis, although there is currently much de-layering in industry 1304 across the board. We should ensure that the Bill deals with crooked activities and not with valid and important business activities.
§ 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 had, 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.
1305 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.
I am glad that the Bill makes specific reference to advertising. As one who worked in the advertising industry for a while, I am in many senses partial to it, but for the industry to operate correctly and be seen to be above criticism it is sometimes necessary to have strict regulation. It cannot always be self-regulation. I am glad, therefore, that the Bill includes statutory control on advertising, pyramid selling and other trading schemes. I welcome that, and I am glad that my right hon. Friend included them in the Bill.
For all those reasons, I strongly support the Bill. I believe that it will bring benefit to the public, to honest traders and to the direct selling industry in general. I hope that it will reach the statute book swiftly.
§ Mr. Richard Spring (Bury St. Edmunds)
I thank you, Madam Deputy Speaker, for giving me the opportunity to make a brief contribution. I congratulate my right hon. Friend the Member for Chelsea (Sir N. Scott) on introducing the Bill in an extremely sensible way, and on putting his case this morning cogently and persuasively.
Over the past 20 years, direct selling—whether it be pyramid selling, multi-level marketing, network marketing or whatever other term is used—has flourished. It is a real phenomenon of our times, and it is estimated that the market is now worth about £200 million. With that truly enormous increase over the past 20 years, many individuals have been brought into direct selling, dealing with kitchen goods, jewellery and other products, many of which are sold from people's homes. Collectively, all those schemes have come to be known as trading schemes.
A market worth £200 million is very big business indeed. The human spirit being what it is, where such sums are involved the market will inevitably attract people who are open to fraud and abuses of the law. Having seen the evolution of the business over 20 years, it is appropriate now to consider the legislative framework under which it all operates, to bring that up to date to cope with the size and complexity of the market and to make it relevant to the marketplace as it is, with all the mushrooming of activity that is involved.
The blunt truth is that the Fair Trading Act 1973 is no longer appropriate. Such a multiplicity of trading schemes operate in the United Kingdom that only some of them 1306 are subject to the Act's controls. The Bill will protect vulnerable people from loss by ensuring that all trading schemes whose members recruit others are subject to proper control.
A long catalogue of financial tragedy has been mentioned by my hon. Friends, especially my hon. Friends the Members for Beckenham (Mr. Merchant) and for Mid-Kent (Mr. Rowe), who talked about it most poignantly.
Given the changes that we have seen in marketing and consumer activity, the opportunity has arisen for many people to become budding small entrepreneurs. That is why I am pleased to see my hon. Friend the Minister for Small Business, Industry and Energy here to reply to the debate. Entrepreneurial activity at this level often encourages people to set up small businesses.
In this country there has been an explosion of entrepreneurial activity, especially at the small business level, often involving people who have taken redundancy payments or have retired early and decided to go into business, perhaps after some marketing or selling experience. Tragically, some—albeit a minority—have lost their money in crooked schemes. Nevertheless, I believe that the seed-corn of our success as an economy depends on such entrepreneurial and small business activity.
The Government have sought to help small businesses by increasing the value added tax threshold, cutting corporation taxes and removing much of the burden of inheritance tax. That has all led to the dramatic decline in unemployment in the United Kingdom, compared with the contrasting situation in so many of our European competitor nations. That has happened because we have fostered and encouraged the entrepreneurial initiative.
At the heart of the Bill is the idea of giving protection to people who in their own different ways, sometimes even part time, are mini-entrepreneurs. I strongly support that, because it will bring the legislative position to a state relevant to our situation as we approach the millennium. I congratulate my right hon. Friend the Member for Chelsea once again on bringing the Bill through to its Third Reading.
§ Mr. Nigel Griffiths (Edinburgh, South)
I welcome the Bill, and I have listened with great interest to Conservative Members revealing their detailed knowledge of the scams, swindles, schemes and shadowy chancers operating in the market. There appears to be great expertise on the Government side of the Chamber.
Despite all that knowledge of pyramid selling, network selling and multi-level marketing, however, there have been years of inaction in terms of clamping down on the scams about which we have heard in graphic detail. There have been several promises of action by the Government. Sadly, however, those promises have been broken and it has been left to a private Member, the right hon. Member for Chelsea (Sir N. Scott), to promote the Bill because the Government have found neither the will nor the way to do anything about the problem.
When I asked the then Minister at the Department of Trade and Industry, the hon. Member for Gainsborough and Horncastle (Mr. Leigh), on 31 March 1993 whether he would take action on the matter, he declined to do so.
1307 More time went by and in 1994, my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) specifically pressed the then Minister responsible, the hon. Member for West Derbyshire (Mr. McLoughlin), tobring forward legislation to outlaw any business scheme of pyramid selling requiring payments purely for the benefit of registrationand highlighted the sort of problems which existed. The then Minister replied:I have, at present, no plans to amend the Fair Trading Act 1973".—[Official Report, 27 April 1994; Vol. 242, c. 167.]In the same year, on 20 July, the Department of Trade and Industry had to go to the High Court to wind up Alchemy UK Ltd., a company which had preyed on people who had received redundancy payments or had a spare bit of cash, because thousands of people had lost thousands of pounds each.
The Direct Selling Association made fairly urgent representations to the Department—Amway, which we have already heard about, was also involved—and the then Minister said, also in July 1994, that at long last the Government were prepared to legislate. Sadly, however, no legislation followed, despite the fact that James Erlichman—then of The Guardian, now of the BBC—revealed that in that year almost 17,000 people in Britain had lost £10 million in such schemes.
Earl Ferrers, the Minister at the time, said that he was powerless to stop such schemes getting off the ground. We were aware of that fact: that is why we were asking for legislation. In March 1995, the DTI promised us a draft law, and in a boastful press release said that it intended to amend the Fair Trading Act 1973 and to clamp down on such abuses. Yet again, however, Ministers did nothing.
The latest money-for-nothing scam appears to be Titan Marketing, which offers invitations to join a business club. Tony Hetherington, of the Financial Mail on Sunday has exposed the hard sell, the threats of violence and the secrecy surrounding that German-based scheme. It has operated in Cheshire, Greater Manchester, Staffordshire, Stoke-on-Trent and Lancashire, where the trading standards officers have done their best to try to catch up with the crooks, and is similar to Alchemy UK, which the DTI had to wind up, FPW and Inner Sanctum.
My concern is that it has taken so long to get legislation on trading schemes on to the statute book. This legislation—which Labour has supported throughout its passage—was introduced not by the Government but by a private Member, and I am concerned that it was not passed by the House today in 10 minutes. A parliamentary on-line information system check on parliamentary contributions shows that in this debate we have heard from a group of hon. Members who have previously asked no questions and made no contribution—with the exception, of course, of the hon. Member for Mid-Kent (Mr. Rowe), who has shown a long-term interest in this issue and who represents Amway as a Member of Parliament and as a paid consultant, and the hon. Member for Beckenham (Mr. Merchant), who spoke in the debate on the Bill's Second Reading.
§ Mr. Spring
I am disappointed in what the hon. Gentleman has said. I happen to be vice-chairman of the Small Business Bureau and chairman of the parliamentary advisory group of the Small Business Bureau. Every 1308 Conservative Member is dedicated to ensuring that small businesses are allowed to operate successfully in this country. That is precisely what this measure is about, directly and indirectly. I hope that the hon. Gentleman will therefore understand why there is considerable interest in it: it is because, unlike the Labour party, Conservative Members have a real interest in creating jobs.
§ Mr. Dafydd Wigley (Caernarfon)
On a point of order, Madam Deputy Speaker. I apologise to the hon. Member for Edinburgh, South (Mr. Griffiths) for cutting across his speech, but 11 am is usually the time for statements in the House. Have you had any request from the Minister of Agriculture, Fisheries and Food to make a statement on the discussions in Brussels? I ask that question because of the very considerable urgency for the farming fraternity to have news of developments there. If no request for a statement has so far been made, can you tell the House whether you would be prepared to consider a request for a statement at 2.30 pm on this matter? Every day counts for farmers and ancillary businesses, Madam Deputy Speaker, as I am sure you know.
§ Madam Deputy Speaker
I have had no request for such a statement to be made. It is not for me or for any occupant of the Chair to tell the Government what statements they should make; but a Minister is in the Chamber, and no doubt that information can be passed through.
§ Mr. Griffiths
Madam Deputy Speaker. I should like fully to associate the Labour party with the point of order raised by the hon. Member for Caernarfon (Mr. Wigley), which was, of course, well made.
It is very interesting that the profound interest in this issue declared by the hon. Member for Bury St. Edmunds (Mr. Spring)—which he says that Labour Members do not have—was not manifested in a contribution on the Second Reading. Nor has the hon. Gentleman found time to table any questions on the subject or to take part in previous debates on direct selling—in contrast with the questions tabled, not particularly by me but by a great many of my colleagues, on this matter. We are concerned that people have lost their redundancy payments and that others who have worked and saved hard have been swindled out of their savings because of Government inaction.
I made that point because this measure should have gone through very quickly—on the nod, as we say—because it has had our full co-operation and support. If, as I believe, there is currently an attempt to talk out the Bull Bars (Prohibition) Bill, as there was with disabled rights legislation, the House will be particularly annoyed and the victims of bull bars will vent their anger on Conservative Members. I end my speech with that statement.
§ 11.4 am
§ The Minister for Small Business, Industry and Energy (Mr. Richard Page)
I join all my hon. Friends in congratulating my right hon. Friend the Member for r Chelsea (Sir N. Scott) on this legislation. It gives me great pleasure to support the Third Reading of his Bill. I was interested to read his comments in the debate on Second Reading, about promoting a Bill for the first time without the comfort of the Dispatch Box. I know exactly what he means.
1309 Before offering to support the measure, the Government considered long and hard the considerable postbag that we had on the subject, including responses that we received to consultations on proposals to change the legislation controlling pyramid selling and similar trading schemes. It might help the House if I were to set out briefly some of the background.
Trading schemes are widely used by companies that do not employ a sales force. Their sales forces are self-employed individuals earning commission on their sales. There are literally hundreds of thousands of individuals who are members of such trading schemes. Some of them supplement their income by selling consumer goods to their friends and neighbours. That point has been made by my hon. Friends. Those people sell all manner of things: cosmetics, jewellery, gold necklaces, flashy cufflinks, books, toys, household goods and—shock, horror—even sex aids. There is probably hardly a home in the country that has not, at one time or another, bought from a member of a trading scheme.
In some trading schemes, members may also earn commission on sales by other members of the scheme whom they have recruited. In that way, it is possible for some people to earn substantial sums through membership of a scheme.
Franchise schemes in which franchisees acquire the right to use a trade name or design owned by franchisers are also trading schemes. Those franchises include many household names, selling burgers and all types of takeaway meals, and services such as photocopying, drain cleaning, picture framing and printing. At the other end of the spectrum, of course, many chain letters are also trading schemes.
Trading schemes include many reputable organisations that make a significant contribution to Great Britain Ltd.—how great a contribution, it is impossible to say. On one definition, as my hon. Friend the Member for Bury St. Edmunds (Mr. Spring) said, it is several hundred million pounds. On another definition, it could be said that annual sales probably exceed £1 billion. I can say that with some confidence because, in 1994, retail sales of members of the Direct Selling Association were estimated to be £948 million. As the House has already been informed, the Direct Selling Association is the trade association for companies selling consumer goods in the home through independent self-employed sales people.
Members of trading schemes include the smallest of firms. My hon. Friend the Member for Bury St. Edmunds touched on the role of small businesses. As the Minister for Small Firms, Industry and Energy, I am very tempted to launch into a spiel about the importance of small businesses to the country. That would take up time, which I do not wish to do today, but I should underline the point that he made about the importance of small business to the UK.
We do not want to burden those people with unnecessary regulation. On the other hand, we want to ensure that entrepreneurs are not exploited by the promoters of the schemes in which they participate.
My hon. Friend the Member for Mid-Kent (Mr. Rowe) reminded the house of the pyramid scandals of the 1960s. In those scams, members bought a vast quantity of products, so that garages, attics and garden sheds were literally stuffed full of such items as shampoos or cleaning products that were virtually unsaleable.
1310 Those unfortunate victims had few rights. Some of them had no contracts, and others had contracts that made it impossible for them to return the stock in which they had invested. Other people had contracts with onerous termination conditions. The unfortunate members trapped in those schemes, unable to sell any of their stock, concentrated their efforts on recruiting others; and so the number of victims grew and grew.
Not every scheme supplied unsaleable goods. But even when it was not possible for members to sell the goods, in some cases, they bore virtually all the scheme's commercial risks. The company promoting such a scheme carried virtually little or no risk, making profits whether the goods were sold or not. There is no doubt that such schemes caused immense hardship to thousands of people.
Those were problems that part XI of the Fair Trading Act 1973 was intended to remedy. The legislation provides essential protection for sales people who belong to a trading scheme, so that they are not unfairly treated. The Act provides power to regulate contracts between promoters and members of a trading scheme. It also provides power to regulate promotional material aimed at recruiting new members to a trading scheme. The most important protection was the creation of an offence relating to recruitment, which prevents payments for others being recruited into the scheme and their being the main attraction of such a scheme.
These controls apply to schemes in which: goods and/or services are provided by the scheme's "promoter"; such goods and/or services are supplied to others by the scheme's members; most of the sales do not take place on premises where either the promoter or the member carries on some other business; and in which members expect benefits related to the activities of other members, activities such as the recruitment of other members, the supply of goods, training or other services to other members and commission on sales by other members.
Many trading schemes with a pyramid recruitment structure do not have all those characteristics, but at present, only schemes with all four of those characteristics are subject to the controls of the Fair Trading Act 1973. The Bill widens the coverage of the controls under that Act. I assure the House that the Government would not favour any measure that widened regulatory control if it were not absolutely necessary.
As has been said, the Bill has become necessary because unscrupulous people have found ways of avoiding the present controls, by devising schemes that do not have all the characteristics specified in the Act. That point was made by my hon. Friends the Members for Beckenham (Mr. Merchant) and for Sutton and Cheam (Lady Olga Maitland). Last year alone, 17,000 people lost £10 million in three such schemes. One poor individual lost £78,000.
I am not sure whether my hon. Friend the Member for Blaby (Mr. Robathan) was trying to illustrate the need for the Bill by giving a dodgy tip for the Grand National, but my advice to him is to stick to politics and not get into any form of the horse tipster business.
I cite a typical real-life example of the type of scheme with which we are dealing. It was run by One Life Ltd. and its recruitment material shows how insidious and clever such material can be. It states:The Facts of One Life … started in November 1974 with just 7 people. It is constantly expanding and now there are hundreds of people involved. There is no other company like it in the UK.1311In their first few weeks most people earn between five hundred pounds and two thousand pounds per week. In subsequent weeks people are disappointed if this hasn't doubled (or even trebled!). It is a part-time job that fits comfortably in with most people's full-time work.Once members had been suckered in, they were given guidance on how to recruit. The recruitment material continues:You have a good business opportunity to offer, show enthusiasm for it! If you appear apathetic you will put off your guests.When making the first moves, it is vital that you do not beg and plead with them to come to the seminars, show them that you are offering them something they need and make them desperate for more information …Create an air of importance around you, remember, few people are interested in a tramp. How you dress and what you say will influence people's attitude towards you …Provide hints in the form of magazines and car brochures so that the other person is interested in your finances. By them asking questions on expensive purchases, you are creating a window of opportunity. Let them make the first step. Try and find out if there is something that she or he desires. Use this as a carrot to entice them to attend the seminar.Eventually it says:Keep them guessing as to the nature of the business. If you start giving out more information than you should, it may be provided in the wrong way and at the wrong time. Remember, each person is worth thousands of pounds to you. Is it worth losing that potential investment".I believe that that technique persuaded more than 1,600 people across the country to pay an initial up-front membership fee of £2,000 each to One Life. As my hon. Friend the Member for Blaby, who has now vanished, is not very good at mathematics, I shall help him—it amounts to some £3.2 million.
As I have already explained, One Life is an example of the sort of scheme that avoids the present controls under part XI of the Fair Trading Act. I am sure that the House will be relieved to hear that, last November, we successfully petitioned the High Court to wind up One Life Ltd. following an investigation under section 447 of the Companies Act 1985. The petition was under the Insolvency Act 1986, which enables the Secretary of State to petition for the winding-up of a company where it appears to him expedient to the public interest to do so.
We have taken similar action against other companies operating such schemes, but the powers currently available for protecting the public against such scams are cumbersome and limited in their application. We can wind up only companies with a UK presence and, unfortunately, it is possible for the people behind such schemes to set up new companies and do the same time and again.
For example, last July, we successfully petitioned the courts to wind up a company called Goldmark Inc., which was trading as Lifeline (UK). That company's managers had previously been involved with Tsar Computer Projects Ltd., which operated a scheme called Peace of Mind. That company was wound up in August 1994—the month before Lifeline started to operate.
Last August, the High Court wound up a company called Alchemy (UK), which ran a scheme promising members more than £30,000 in return for 24 monthly payments of some £75. I am sure we all agree that that 1312 would be a fairly healthy rate of return. Within a mere 48 hours of the winding-up, two successor companies were incorporated and took over Alchemy's assets and membership. That reinforces the point made by my right hon. Friend the Member for Chelsea.
§ Mr. Page
My hon. Friend is straying from the Bill and moving to general legislation. Under general legislation, we have the power to disqualify directors if they are found to be operating companies fraudulently, but the Bill will, in particular circumstances, be able to deal with the situation that my hon. Friend describes.
The Bill is needed so that it is possible for action to be taken against those who exploit people who may be financially naive—those who persuade others to part with considerable sums of money by promising them riches if they can persuade others to do the same.
§ Mr. Robathan
I have not been out to place a bet on Young Hustler, although I recommend it.
My hon. Friend is explaining how penalties can be invoked. Will he confirm that someone who contravenes the Bill's provisions could go to gaol? In view of that, does he think that just over one hour on Second Reading and less than two hours on Third Reading is too long, which is what the Opposition seem to think? Curiously, they believe that even to discuss the matter is unreasonable.
§ Mr. Page
I shall resist my hon. Friend's invitation to get involved in a party political controversy, but I confirm that someone could go to prison if he contravened the Act. In view of the misery that some people cause by their activities, that is perfectly justifiable.
As I was saying, the Bill does not seek to move responsibility for enforcing the controls under part XI of the Fair Trading Act. That will remain the burden and responsibility of the Department of Trade and Industry. The Bill will not place extra work on trading standards departments. In fact, as has already been intimated, we expect the cost of taking action under the Fair Trading Act to be less than the cost of using the existing, less appropriate powers.
Enforcement of the Bill is expected to cost £200,000 a year at today's prices. That is nearly 25 per cent. less than the current annual cost of investigations, under the Companies Acts, of unscrupulous promoters and the submission of petitions to wind up these companies under the Insolvency Act. We also expect a reduction in the cost of handling inquiries from the public on whether particular schemes are subject to the provisions. I hope that that is of encouragement to my hon. Friend the Member for Mid-Kent.
The Bill is prudent. It seeks to widen the coverage of the existing controls under the Fair Trading Act only so far as necessary to protect the public from the risks associated with trading schemes.
In pyramid scams, very little may be provided other than money. The Bill provides for a wider definition of "goods" so that, for example, it covers money. It also lists 1313 the ways in which members of trading schemes may earn income and it then applies the controls to schemes in which members expect to earn income in one of the listed ways, and in which goods—as defined by the Bill—or services are provided by the promoter, whether to members or to others introduced by members.
Furthermore, the Bill provides power to widen further the coverage of the controls by disapplying altogether the qualifying criteria relating to goods and services. If in the event it were to prove necessary, we would not hesitate to use that power if the criteria relating to goods and services would otherwise protect pernicious schemes from prosecution.
The Bill also provides powers to exclude prescribed schemes from all the controls under part XI of the Fair Trading Act. That makes it possible to take out from those controls any type of scheme for which the Secretary of State is convinced that the controls are not required for the essential protection of the members of those schemes. I hope that that is of some comfort to my right hon. Friend the Member for Chelsea. The Bill provides powers that will address all the concerns expressed by the British Franchise Association Ltd. The greatest danger to the public is from schemes to which they are lured by promises of riches from the recruitment of others.
From our consultation, we have concluded that franchisees do not need the protection of the Act if their expected income comes entirely from their sales to third parties. We therefore intend to use the power to exclude prescribed schemes by excluding franchise schemes with only one person benefiting from the recruitment of others to the scheme.
The franchise schemes that we intend to exclude from those controls are at present subject only to the recruitment offences. That is because the existing powers provide for the regulations to apply differently to different types of trading scheme. The power is used at present to exempt two types of scheme from all the regulations. The exempt types of scheme are those in which only one participant in the UK can benefit from the activities of others, and those in which the financial benefits are no more than £30 in respect of the introduction of other participants.
Some hon. Members have mentioned chain letters, and harked back to their schooldays. We also intend to exclude simple chain letters from the controls under part XI of the Fair Trading Act. No doubt hon. Members have come across chain letters at various times. Some involve sending books, postcards, and other items to those higher on the list; others involve sending money; and others bring promises of bad luck to those who break the chain. The latter types may involve offences under the Lotteries and Amusements Act 1976 or the Malicious Communications Act 1988.
Under the Bill, many chain letters will become subject to control under part XI of the Fair Trading Act. It is clear that the most basic examples are not detrimental to the public. We therefore intend to use the power to exclude prescribed schemes, to exclude simple chain letters. The controls will apply to any chain if anyone can benefit from it throughout its existence. For example, the controls—including the recruitment offence—will apply to any chain in which new members send money to a central organiser who takes a cut before passing the money down the rest of the chain.
1314 The Bill also seeks to widen the controls over the promotional material used to recruit new members. It would make it possible for the regulations to apply to all forms of promotional material. Videos, recorded messages, the Internet and so on are now commonly used to attract potential members, but at present the controls apply only to documents.
The Government welcome the extension of the regulation-making powers to include other media. It is right to look ahead and it is right that all promotional materials should be treated equally under the regulations and that those considering joining a scheme are provided with the protection that we consider necessary, regardless of the form of the promotional material.
On Second Reading, my hon. Friend the Member for Beckenham asked whether the control over promotional material is best achieved by statute or through the Advertising Standards Authority. The Government prefer self-regulation where it is effective. The present Pyramid Selling Schemes Regulations therefore do not apply to advertisements that form part of a newspaper or magazine, and we intend to continue that exclusion in the trading schemes regulations. However, much of the promotional material for trading schemes is privately produced and distributed. Regulation is needed to ensure that promotional material does not deceive, whether by including misleading information or by excluding essential details.
In deciding to support the Bill, we have been greatly influenced by the consultation that we held last year over the legislation controlling pyramid selling and similar trading schemes. Widening the coverage of the controls under the Fair Trading Act was only one of the proposals in that consultation. A summary of the results is in the Library of the House.
We sent out more than a thousand consultation documents. Some 256 responses were received, of which 40 were from promoters and their representatives, and 173 were from consumer organisations and members or ex-members of trading schemes, including those who belonged to schemes operated by companies that the Department had wound up.
I shall not go through all the comments that we received from the organisations, but they gave encouraging endorsement to the proposals in the Bill. Comments received included:To allow these schemes to continue is to condone trickery.I was promised large tax free earnings. All I had to do was bring in as many as possible friends, relations, business associates.It is about time 'money games' were outlawed because they are `scams' and give our industry a bad name.The list of complaints and the support for the Bill are there for all to see.
The consultation not only addressed the coverage of the controls. It also proposed trading schemes regulations to replace the Pyramid Selling Schemes Regulations 1989 and the Pyramid Selling Schemes (Amendment) Regulations 1990. Those regulations relate to the promotional material aimed at potential recruits to trading schemes and to the contracts between a scheme's promoter and its members.
The present regulations are not ideal, as my hon. Friend the Member for Chorley (Mr. Dover) pointed out. In some respects, the apparent protection to members of 1315 requirements that are costly to promoters is considerably greater than the actual protection provided. In the light of our consultation, we intend to overhaul the regulations so that they provide more effective protection to members and potential members of schemes at no greater cost to schemes' promoters.
It would be unfair to promoters to replace the present regulations so soon after extending their coverage. Therefore, if the Bill is approved—and I believe it will be—we shall lay new regulations on a timetable that will enable them to come into force at the same time as the Trading Schemes Act. There will, of course, be transitional provisions to minimise the costs for schemes that already meet the requirements of the regulations.
It gives me great pleasure to repeat that my right hon. Friend the Member for Chelsea has done a service for the country in introducing the measure. I commend the Bill to the House.
§ Sir Nicholas Scott
With the leave of the House, I shall speak briefly. First, I wish to apologise on behalf of my hon. Friend the Member for Mid-Kent (Mr. Rowe), who has left the Chamber briefly to respond to a green card that has been delivered to him. Secondly, I wish to express my gratitude to all those who have played a part in the progress of the legislation to this stage. I am grateful for that unanimous support, because we are tackling an important issue.
I know that the House is rightly wary of the excessive use of secondary legislation instead of primary legislation, but on this matter secondary legislation is essential. Indeed, if there are further developments and scams of one sort or another and gaps are found, it should be possible speedily to plug them with further secondary legislation.
I repeat my gratitude to the House for the support that I have had and ask it to give the Bill a Third Reading.
§ Question put and agreed to.
§ Bill accordingly read the Third time, and passed