MULTI-LEVEL MARKETING AND PYRAMID SELLING (PROHIBITION) BILL

Order for Second Reading read.

3.32 p.m.

The Minister for Finance (Mr Hon Sui Sen): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

This Bill seeks to prohibit in Singapore the trading practice known as pyramid selling or, as it is sometimes more euphemistically described, multi-level marketing. Until the arrival on the Singapore scene of an international company known as Holiday Magic, this practice was comparatively unknown in Singapore, though the practice is widespread and has expanded enormously in recent years in certain western countries such as the United States of America, Canada, South Africa, Australia and the United Kingdom. Some of these countries have taken steps to ban pyramid selling; others have attempted to control or regulate it, but with varying degrees of success.

The Government has already clearly indicated its attitude to the practice of pyramid selling by taking action in the High Court in April this year to wind up, on grounds of public interest, the company known as Holiday Magic which carried on pyramid selling of cosmetics in Singapore. But petitioning the High Court for a winding up order of a company is a lengthy and time-consuming procedure. In the result it is a poor substitute to the expression of condemnation that is inherent in an Act of Parliament that outlaws in plain terms this trading practice and makes it a criminal offence for any person to promote or participate in such practice.

The essential features of pyramid selling are by now well known to Members. In general terms, it may be described as a scheme or arrangement relating to the sale of goods or provision of services under which the participants pay for their rights under the scheme and receive a reward for recruiting new participants. Taken together, these two factors lead to expansion of such schemes on the chain-letter principle. This may be better understood if I explain how these schemes work. In a typical pyramid scheme for the sale of goods, a company sells and the participants buy a right to sell its goods. Legally the participants are usually regarded as independent contractors who buy for resale the goods from the company or from other participants at a discount on the price to the consumer. The participants are often described as franchise holders. The original franchise holders, as well as selling goods themselves to the public, will recruit further participants to whom they will sell the goods for resale to the public and, in some cases, to yet another level of participants. In this way, a hierarchy is built up, each receiving a discount from the consumer's price on the goods he buys, the size of the discount depending on his position in the hierarchy. Hence, the terms "pyramid selling" and "multi-level marketing".

At all but the lowest level in the structure, the franchise holders receive a payment for recruiting new participants. This leads to expansion on the chain-letter principle. A new franchise holder pays immediately a sum of money; the amount of the payment being determined by the level at which he wishes to join the scheme. For this outlay the franchise holder usually receives some goods or credit for goods and some training in addition to his other rights under the schemes. Thus, at the higher levels the franchise holder can earn money in two ways; first, by profit on sales he makes himself and often by a commission on sales by those on his part of the pyramid; secondly, from payments for recruiting new participants (from the new recruits). Those at the lowest level of the pyramid form the bulk of the sales force: they are usually recruited to sell the products at the lowest rate of commission to the public. The company running the scheme has two main sources of income: the sale of its goods or services to the franchise holders, and a proportion of the payments made by new participants or by existing participants when they buy their way into a higher level.

The franchise holder suffers a number of disadvantages under these pyramid selling schemes, including the following. He does not usually have exclusive rights to sell in a defined territory. Goods and services are difficult to sell because the rewards for recruiting far exceed those to be earned from selling and because the discount structure of pyramid selling makes the goods expensive by the time they reach the customer. Furthermore the goods are rarely advertised. Since the higher level franchise holder can seldom recoup the investment by selling goods, he is often driven to terminate the contract and seek repayment from the company or to concentrate his efforts on earning a return from recruiting others. The conditions of the contract are such that it is impossible on termination to recover any part of the investment from the company except, perhaps, repayment for unsold goods.

High pressure salesmanship by the pyramid selling companies' representatives gloss over or conceal these inherent disadvantages but at the same time stress the high rewards (which are mostly illusory) available to a franchise holder. Little or no information is provided about the company's assets, turnover, capacity to supply goods, demand for products, or the number of franchise holders recruited or to be recruited. Recruits are, furthermore, put under heavy pressure by the selling or advertising tactics adopted by the promoters to sign a contract and little or no opportunity given to them to rescind if, on further reflection, they should wish to do so. Since the promoters rarely have a big stake in the scheme, the major part of the risks are taken by franchise holders at different levels in the scheme. The chief attraction of the scheme for these companies, apart from this, is that capital is made available cheaply and quickly and the franchise holders are left with the burden of holding and disposing of the stocks.

The result has been that countless franchise holders in the countries I have mentioned have over the years suffered considerable financial loss and hardship by being lured into these "get-rich-quick" schemes. The Government is determined that this sort of situation should not be allowed to develop in Singapore. Thus, the decision to legislate to outlaw the practice before it becomes widespread and before members of the public here are induced to part with their savings on a large scale.

The Government, after a close study of the operations of these pyramid selling schemes in Singapore and elsewhere, has come to the conclusion that the undesirable features of pyramid selling are so clearly contrary to the public interest that the objective should be to eliminate them rather than attempt to control them. We have no doubt in our minds that the objectionable features of a pyramid selling scheme to which I have referred are tainted with dishonesty and are potentially fraudulent in intent. But having said that, I should add that it would be extremely difficult to prove dishonesty or fraud in relation to these pyramid selling schemes under the existing general principles of our criminal and civil law. New provisions are, therefore, essential to deal specifically with this practice.

The present Bill accordingly makes it unlawful for any person to promote or participate in a multi-level marketing scheme or arrangement or to hold out that he is promoting or participating in such a scheme or arrangement. No business that is designed to promote such a scheme or arrangement will be allowed to be registered and no company, whether foreign or local, that proposes to promote such a scheme or arrangement will be registered or incorporated in Singapore. Every existing business or company that promotes a pyramid selling scheme must, upon the coming into operation of this Act, cease to do so. Existing companies that promote such a scheme or arrangement must within sixty days of the coming into operation of this Act take steps to wind themselves up voluntarily or petition the court to wind up the companies concerned. If they fail to take or complete the necessary steps to get themselves wound up, the Minister has power to petition the court to wind them up compulsorily.

It is confidently expected that these proposed measures, once they are translated into law, will be effective to eliminate pyramid selling in Singapore. However, it should be pointed out that it is not the intention of this Bill to outlaw schemes or arrangements which do not contain the objectionable elements that I have referred to. It is recognised that there are systems of franchising (including perhaps sub-franchising) and direct selling which are not necessarily objectionable and which should be allowed to develop.

From a legislative and drafting aspect, it is by no means easy to distinguish clearly pyramid selling schemes from those other systems which sometimes have a pyramid element in them. The question of definition, therefore, assumes primary importance in this Bill. The definition of a pyramid selling scheme or arrangement should be one that is easily understood and capable of effective application and be so drafted as to pinpoint the objectionable elements earlier mentioned. It should not, however, be so widely drafted as to prevent development of perfectly lawful schemes and arrangements. Provision has accordingly been inserted in clause 11 of the Bill for the Minister by regulations to spell out the elements of a scheme or arrangement that may he lawfully operated in Singapore. Although these elements have not as yet been comprehensively worked out by the Attorney-General, it is envisaged that schemes of franchise trading where the franchise holder does not recruit others and sells goods or provides a service from one level and from a retail establishment will not be objectionable. Again, schemes of direct selling where the company's main source of income is from the sale of goods and services rather than from payments for recruiting others and where the company subscribes to a code of conduct and where the franchise holders are agents of the company (not independent contractors) and work in a defined geographic area, etc., will not be objectionable.

The definition of a "pyramid selling scheme or arrangement" in section 2 is not intended accordingly to interfere with these other schemes or arrangements to which I have referred. The definition adopted will ensure that recruitment of participants in pyramid selling schemes on the chain-letter principle will be prevented for it would be impossible to take or make payments for rights in such a scheme or arrangement.

The Explanatory Statement to the Bill summarises the objects and reasons of the proposed legislation, and I need not elaborate upon them further except to draw attention to clause 10 which makes it clear that sales to consumers of commodities received by the seller under a pyramid selling scheme, the promotion of which becomes unlawful under the Bill, are not declared to be unlawful if the commodities were received by the seller at any time before the Act comes into operation. The purpose of this provision is to confer a limited measure of protection upon existing franchise holders who have already participated in an unlawful scheme.

Sir, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Hon Sui Sen].

Bill considered in Committee; reported without amendment; read a Third time and passed.