House of Commons
Friday 29 March 1996
The House met at half-past Nine o'clock
PRAYERS
[Madam Speaker in the Chair]
Trading Schemes Bill
Not amended (in the Standing Committee), considered.
Order for Third Reading read.
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
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 andMr. 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
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, on2 February, and the DTI's "Guide to the Provisions of the Trading Schemes Bill", believe that
first--
or, secondly--
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
franchisees in this case--
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
9.34 am
"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".
"prospect held out to participants"--
"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)".
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