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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 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.
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.
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 Xl 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:
Once members had been suckered in, they were given guidance on how to recruit. The recruitment material continues:
Eventually it says:
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.
"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.
29 Mar 1996 : Column 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."
"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."
"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".
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