In this article, we shall look at the following in relation to trading schemes:
1. What is Pyramid Selling?
2. What are Trading Schemes?
3. Relevant Law & the Offence?
4. Definition of a regulated Trading Scheme.
In the second article, we shall look at the following:
5. Minimum Standards of best practice set down by the Regs (where the Regs apply).
6. Promoter Obligations to ensure compliance with the Regs.
7. Possible Exclusions.
Many schemes are entirely legitimate, giving people opportunity to run their own small businesses. However some schemes have taken advantage of their participants and have taken their money without giving anything by the way of an honest business opportunity. This has led to legislation which makes illegal the way in which some kinds of schemes operate. One method that became viewed as a particular malpractice and a nuisance was what we know in common parlance as “pyramid selling”.
1. What is Pyramid Selling?
Pyramid selling involved participants buying products and services from promoters. Once a member of the scheme i.e. the participant earns commission by selling the promoter’s products and services and bonuses by attracting new members. Each distributor pays less for the product than the price received from the public and from those at lower levels in the distribution chain. Since one profits by merely being a link in the distribution chain, the emphasis is on recruiting more distributors rather than on retailing. The essence of a pyramid scheme is the right to receive rewards for recruiting other participants, unrelated to the sale of products or services to end-users.
2. What are Trading Schemes?
Trading schemes also known as direct selling schemes, multi-level franchising etc which are organised on a multi-level marketing (MLM) or network marketing (NM) basis typically involve participants earning money by selling the scheme’s goods or services. If a participant is offered an opportunity to:
a. Earn money by selling the scheme’s goods and services; and,
b. Earn an additional commission by recruiting others to sell (“Recruits”); and,
c. Earn additional rewards from the sales made by those Recruits,
then the business is likely to be MLM or NM and therefore be subject to the Trading Schemes Regulations 1997.
3. Relevant Law & the Offence?
Relevant legislation:
– Fair Trading Act 1973, Part XI as amended by the Trading Schemes Act 1996 (the “Act”) and the Trading Schemes Regulations 1997 (the “Regs”).
The Offence:
– The law makes it a criminal offence to persuade someone to make a payment to a scheme by promising benefits from getting other people to join a trading scheme. (Fair Trading Act 1973 section 120(3)).
This does not make recruitment rewards unlawful. It does make it unlawful to persuade someone that the main motive for joining is to profit from recruiting others or to take money from someone on the basis of such a motive.
– The law also makes it a criminal offence to run a scheme which does not meet the rules described under the Regs.
4. Definition of a regulated “Trading Scheme”
Part XI (section 118) of the Act applies to trading schemes meeting two criteria:
1. Participants expect to benefit from their participation in the scheme in respect of any of the Specified Matters; and,
2. Good or services are provided by the promoter to the participants for them to supply to someone else or are supplied by the promoter to third parties introduced by the participants…
The Specified Matters from which benefits results are in respect to any of the following:
a. the introduction by any person of other persons who become participants in a trading scheme (recruitment);
b. the continued participation of participants in a trading scheme (loyalty and continuity);
c. the promotion, transfer or other change of status of participants within a trading scheme;
d. the supply of goods or services by any person to or for other persons;
e. the acquisition of goods or services by any person.
The above information should give an indication as to whether or not a scheme or arrangement falls within the remit of the Regs or not. If it might, it will be useful to go on to read the second article on this subject. Guidance on the Regs can be found here
