Network marketing is a completely legitimate business. It has nothing to do with ‘pyramid selling‘ or chain-letter-type scams which have made newspaper headlines. Indeed, the worst excesses of pyramid operations have been largely stopped through legislation and consumer education.
For example, in the United Kingdom, legislation was passed in 1973 which detailed:
- what could be said in advertisements
- which promises could be made
- which information could be included in documents issued by promoters
- what the rights of distributors were
- undesirable practices such as charging for training.
- that network marketing companies were also required to buy back certain stock from their distributors on termination of any contract.
These regulations have been extremely effective in ridding the system of abuse.
In South Africa, the ‘Kubus’ scam, whereby unscrupulous operators sold a worthless milk culture for huge sums of money and supposedly for use in cosmetics, did untold damage to the direct selling industry. There was a huge public outcry as many foolish investors and speculators were fleeced, often of their life’s savings, chasing the impossible dream. As a result of this scandalous operation, many members of the general public hold negative impressions of the direct selling industry.
Very recently, legislation was proposed in this country (Government notice 772 of 1995). The Department of Trade and Industry published the Consumer Code for Direct
Selling, which is based substantially on the existing Direct Selling Association (DSA) Code of Practice. It covers all aspects of direct selling (person-to-person, party-plan, multi-level and network marketing).
This legislation attempts to govern the conduct of firms involved in direct selling as well as sales persons, be they agents, independent contractors, independent dealers, distributors or self-employed representatives.
The code clarifies what may and may not be done. It specifically deals with the following issues:
Consumer relationships
- Identification: When visiting prospective customers, direct sellers must truthfully identify themselves, their firms, their products and the purpose of their visit.
- Information: Information given about the product must be accurate and complete and there must be full disclosure of price, terms of payment, after-sales service, delivery details, and so on. All company documentation must provide addresses, telephone numbers, etc.
- Cooling-off period: This gives the customer five days to change her mind and withdraw from an order, and to obtain reimbursement for any payment.
- Guarantee or warranty: The nature and extent of this must be clearly stated in the order form or other accompanying literature.
- Literature and advertising: No claims, descriptions or illustrations should be misleading about the firm, the product, the opportunity, financial earnings potential, etc.
- Direct seller relationships
- Recruitment: The highest ethical standards should apply so that prospective distributors are not induced to join as a result of any statement which cannot be verified. A written agreement must be signed by the firm and the direct seller containing all vital details of the relationship.
- Earnings claims: These may not be overstated and must be based on established facts.
- Fees: Excessive entrance or participation fees, training fees or other financial obligations are restricted.
- Returns: Firms shall permit all direct sellers to return unsold goods (which can be resold), and they may do so as long as the goods are in good condition and they do this within 90 days of purchase. A full refund is given, less a reasonable handling fee of not more than 25 per cent of the original purchase price.
- Inventory: Firms may not require or encourage sellers to purchase product inventory in unreasonably large amounts (so-called ‘front-end loading’).
- Recruiting rewards: Compensation must be linked to sales, not to the number of persons induced to sign up.
- Training: Comprehensive training on both selling methods and product knowledge must be given. The initial and basic training must be provided free of charge.
This legislation, briefly outlined, is designed to ensure that the direct selling business is well regulated. The consumer code ensures that those ’sharks’, who wish to make a ‘fast buck’ and who bring the industry into dispute, face the full pressures of the law.
