Trading Schemes, Pyramid Selling Quick Facts

Subject: Trading Schemes, Multi-level marketing, Pyramid Selling, Chain Letters, and Gifting Schemes Relevant or Related Legislation: Part XI of the Fair Trading Act, as amended by the Trading Schemes Act 1996 and the Trading Schemes Regulations 1997. The Gambling Act 2005. Current Position: • There are no immediate plans to review the trading schemes legislation. • There is precedent for schemes operating as chain letters being subject to the Lotteries and Amusement Act 1976. However, under the Gambling Act 2005 (when commenced) it will be an offence for a person to invite someone to join a chain-gift scheme or for them to knowingly participate in the promotion, administration or management of a chain-gift scheme. The Department for Culture, Media and Sport (DCMS) have policy responsibility for the Gambling Act 2005. Recent Relevant Campaigns or Consultation: The Office of Fair Trading (OFT) Scams Awareness month in February 2005 and the jointly produced booklet ‘How to Recognise a Scam’ included some relevant warnings, including: • What am I being asked to pay for? • Can I afford to lose the money? • Does it look to good to be true? (If it does, it probably is) Key Facts: • The Department for Business, Enterprise and Regulatory Reform (BERR) has enforcement responsibility for Trading Schemes legislation and will investigate schemes which appear to be breaking the law. • Trading schemes can be a legitimate opportunity for people to operate a business from home and are not illegal in the UK. • Trading schemes become illegitimate and illegal if, while purporting to offer business opportunities, the sole purpose of the scheme is to make money by recruiting other participants, rather than trading in goods or services. This form of bogus scheme is sometimes referred to as "pyramid selling". • There are also a wide range of bogus schemes which do not claim to trade in goods or services but which are known as "pyramid schemes". Schemes operating as chain letters or games are common examples. • All these bogus schemes need an infinite supply of new participants for everyone to make money. Since the supply will always be finite, the pyramid must collapse eventually and most participants will lose their money. • All schemes where money changes hands are subject to the general criminal law on fraud, theft, and deceit and the police are responsible for enforcement of the law in these areas. Frequently Asked Questions (FAQs)

Trading Schemes, Pyramid Selling Quick Facts
Q1. Can you advise me on whether I should join a trading scheme? Q2. Can you advise me on how to start up a trading scheme? Q3. I have lost money participating in a trading scheme. What can I do? Q4. I believe a certain Trading Scheme is operating illegally. What can I do about it? Q5. I have been invited to join a trading scheme and make a lot of money. Should I put money in it? Q6. I have been asked to join a chain gifting scheme. Should I get involved? Q7. I have lost money in a chain gifting scheme. Can I get my money back by going to the Small Claims Court? Q8. Why do chain gifting/pyramid schemes not work for most people? ----------------------Q1. Can you advise me on whether I should join a trading scheme? BERR cannot give legal advice about individual schemes nor can we approve schemes. The legality of a particular scheme would be a matter for the courts. It is very important for potential participants or scheme operators to understand that compliance with the legislation does not automatically mean that schemes are commercially viable. They should seek independent and impartial business and legal advice to help assess the pitfalls and potential of starting the business venture, prior to signing any agreement. Q2. Can you advise me on starting up a trading scheme?  A useful starting point for business information and advice is: England - Business Links: 0845 600 9006 www.businesslink.gov.uk Wales - Business Connect: 03000 6 03000 www.business-supportwales.gov.uk/ Scotland - Scottish Business Shop Network: 0141 221 5513 www.scotent.co.uk Northern Ireland - Invest Northern Ireland: 028 9023 9090 www.investni.com

Q3. I have lost money participating in a trading scheme. What can I do? The Department's booklet "The Trading Schemes Guide" describes the rights of participants in schemes regulated by trading schemes legislation. BERR cannot give legal advice to individuals or take legal action on their behalf. If you wish to pursue a claim against the scheme operator you should take independent legal advice or consult your local Citizens Advice Bureau. The small claims procedure is straightforward and provides the means to bring a claim before the civil courts at modest cost and without the need for a solicitor. Q4. I believe a particular trading scheme may be operating illegally. What can I do about it?

Trading Schemes, Pyramid Selling Quick Facts
BERR cannot give advice on individual schemes, but we do take enforcement action against schemes which break the law. This Department will consider complaints about trading schemes which may be acting illegally. Complaints should be forwarded to Consumer and Competition Policy Directorate, BERR, 1 Victoria Street, London, SW1H 0ET, setting out, in as much detail as possible, the nature of the complaint. We are unable to evaluate all schemes immediately. Any dealings this Department may have with promoters are in confidence and that interpretation of the Fair Trading Act and the legality of individual schemes would ultimately be a matter for the courts to decide. Q5. I have been invited to join a trading scheme and make a lot of money. Should I put money in it? The Department cannot give advice on individual cases. However, we encourage potential participants to consider: • Do I understand what is being offered to me? • Do I know what I will have to pay? • Do I understand that this is a self-employment opportunity and earnings will depend on the market and my efforts? • Is there a demand for the products of the scheme and can I honestly recommend them to others? • While I have a legal right to a contract, do I understand that, if things goes wrong, it will be up to me to enforce my rights? • Am I prepared to take the risk? • Should I seek independent advice before joining? Compliance with the legislation does not mean that a scheme is commercially viable. Potential participants should seek independent and professional business and legal advice before signing any contract. Q6. I have been asked to join a chain gifting scheme. Should I get involved? Under the Gambling Act 2005 it is an offence for a person to invite someone to join a chain-gift scheme or for them to knowingly participate in the promotion, administration or management of a chain-gift scheme. Q7. I have lost money in a chain gifting scheme. Can I get my money back by going to the Small Claims Court? The Department cannot advise on individual cases. Whether or not you could obtain some redress in the Small Claims Court would depend on the circumstances of the case (e.g. evidence of what you were told when joining the scheme, whether specific promises were made, whether there was any evidence of deception.) You need to take professional legal advice on your case. Q8. Why do chain gifting/pyramid schemes not work for most people? All such schemes would need an infinite supply of new participants for everyone to make money. Since the supply will always be finite, the pyramid must collapse eventually and most participants will lose their money.

Trading Schemes, Pyramid Selling Quick Facts
Example - If eight people each invest £1,000 each in a scheme and then progress through the levels of the pyramid, they will each expect to receive £8,000 when they reach the top. But for each of those eight people to receive that amount, it will be necessary for another 64 people to have each invested £1,000. Each of those 64 investors will be expecting to collect their £8,000, but that would mean another 512 people would have to have invested. Subsequent investors would need 4,096 participants then 32,768 participants, then 262,144 participants and so on. In simple terms, each participant needs another 8 investors in the scheme to get their money back and make a return. Eventually, the supply of potential investors must be exhausted, leaving the majority of people in the scheme receiving nothing in return for their money.

Source: http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/whatwedo/consumers/factsheets/page38561.html

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