Regulatory Overview: Regulation and Consumer Protection - Asian Symposium on Direct Selling 2007

Ms. Connie Lau
Chief Executive
Hong Kong Consumer Council

Ladies and Gentlemen,

I am extremely honoured to be invited by the World Federation of Direct Selling Association and the Direct Selling Association of Hong Kong to speak at this Symposium. Direct selling industry experiences spectacular growth in Asia in recent years.  This remarkable success is attributable both to the regulatory efforts of governments and self regulation of the industry.  I am very glad to have this opportunity to share with you, from the consumer perspective, the relationship between regulation and consumer protection.

Balance between legislation and freedom of trade

The task  of achieving a balance between the amount of legislation under
which businesses must operate, and the amoun of freedom they need to exercise their  entrepreneurial spirit, will always be a difficult one.  One the one hand, businesses can rightly claim that excessive regulation might stifle innovation and place an overwhelming cost burden. On the other hand, the level of justified complaints from consumers regarding deceitful practices, and the costs imposed on them by the practices, continues to demand that some action needs to be taken.

In exercising its statutory functions under the Consumer Council Ordinance, the Council has documented a history of undesirable practices over the years.  In the absence  of any voluntary change in behavior by some of the businesses involved, the Council has worked with the Government to suggest improvements to the regulatory environment, as a means of securing some remedy in the marketplace. 

While the primary focus of the Council's work has been to assist consumers in their dealings in the marketplace, the use of regulatory sanctions can also greatlyassist legitimate businesses.   

In particular, regulations remove some of the concerns that consumers might have in their dealings with businesses, by assuring them that they have some level of protection  from fraudulent practices. The confidence in the marketplace that this brings about, and the transactions that follow, serves the interests of business just as much as consumers.

A clear regulatory process that defines unacceptable conduct and deters that conduct from occurring provides an environment where legitimate businesses are free to compete on the merits of their products, rather than having to spend time and money convincing consumers that they are legitimate and are therefore different from the fraudsters that might be freely operating in their particular business sector.

Direct Selling  

With regard to the direct selling industry, Hong Kong is similar to many other jurisdictions and has a specific prohibition against pyramid selling, found in the Pyramid Selling Prohibition Ordinance. This ordinance was introduced to prohibit typical pyramid selling schemes where the success of the schemes is dependent on the constant recruitment of members. As you would be aware, any scheme that requires the constant recruitment of members for its success is doomed to eventually collapse because it cannot expand beyond the size of the population. As such, investors, except for those who begin the scheme, and possibly some early participants, are  the only ones that benefit, leaving a trail of disgruntled victims in their wake, victims who will be extremely wary of entering into similar schemes in thefuture.

When the Pyramid Selling Prohibition Bill was introduced in Hong Kong, it was noted that pyramid selling schemes are objectionable on two grounds:  

• First, they often serve no economic purpose and contain the elements of disaster for those who participate.
• Second, the high pressure recruiting techniques adopted by some companiestend to attract the gullible and less mature who cannot be expected to protectthemselves.   

You would all be aware that a characteristic of suspect schemes is that they usually involve products or  services that have dubious benefits or have little or noresale value, have claimed affiliations or testimonials that  are bogus, and that the financial success of the scheme for participants is built around the prospect of
receiving commissions from introducing new participants into the scheme.   

In examining a scheme that involves the sale of goods or services, there are a number of features that are examined to determine whether it falls within the Pyramid Selling Prohibition Ordinance. First, the prices of goods or services on offer are examined to assess whether they are inflated compared to other similar products in the market. Second, the payment chain is examined to assess whether new members of the scheme must buy inventory from, or make sales to other members, rather than the general public.   

The Hong Kong prohibition works not only in protecting existing and potential victims of pyramid selling  schemes, but also, in the absence of any regulatory intervention against a particular direct selling scheme, acts as a means of providing a de facto tick of approval as far as a scheme's legality is concerned.   

Where consumer trust is important (as is the casewith direct selling schemeswhich require some upfront participant investment) the fact that

• a law exists to prohibit fraudulent schemes; and 
• a government body is actively enforcing the law to prevent or stop suchschemes from operating

then consumers can have a reasonable degree of confidence in participating in the industry.   

As such, both industry and consumers are beneficiaries.   

Health Claims  

The most destructive complaints that the Council has to deal with are those that directly affect the health of consumers.  In particular, false and misleading claims as to the beneficial aspects of certain foods or medical products, are a matter of ongoing Council concern.   

While there might be grounds for light handed regulation in regard to some products, there can be no compromise in regard to the promotion of foods and medical products based on bogus health claims.  The promotion of misleading claims regarding attributes given to certain foods, or false claims regarding the effect of proprietary medical products, can not only detrimen tally affect individuals, but a society as a whole.   

The argument for having stringent regulations governing claims in this respect therefore goes to the matter of maintaining good public health and order. Accordingly, Hong Kong has the Undesirable Medical Advertisements Ordinance as a means of preventing or punishing false or misleading health claims. This is a piece of legislation that requires, as a matter of utmost importance, constant vigilance interms of its ability to act as a deterrent in preventing bogus claims being made in the marketplace.

Proposed Legislative Amendments in Hong Kong

Notwithstanding the above regulatory mechanisms that exist in Hong Kong, the Council is currently proposing that further work needs to be done with regard to amending the Hong KongTrade Descriptions Ordinance. This is in order for the law to keep pace with addressing deceitful practices that have continued to occur in the marketplace, bringing detriment to consumers, and tarnishing the image of businesses generally.  I would like to briefly outline two of the proposed amendments, which can have a bearing on direct selling schemes.

Misrepresentation of sponsorship or affiliation  

Problems continue to arise regarding questionable testimonials, sponsorship or affiliation claims. The Council has proposed that regulations should be introduced to prohibit inducing consumers to make purchases based on false or misleading representations that the seller is connected to or endorsed by any individual or body.

Such claims, when they are untrue or misleading, can deceive consumers into making purchases that they would not otherwise have entered into, and can take customers away from legitimate businesses that do not  engage in the deceitful practices. In addition, the reputation of those bodies or individuals that are mentioned
in the deceitful testimonials or affiliation claims can also suffer damage. The  end result, if bogus claims are allowed to continue unabated, is that the value of testimonials and affiliation will be lost to legitimate businesses because the public will understandably be skeptical of such claims.

Misleading price indications

Certain misleading pricing indications that are currently not prohibited by regulation continue to occur in the marketplace. The existence of misleading price indications in the marketplace is more than simply being an annoyance. Where  advertised prices are incorrect,   

• consumers suffer financial loss by making inefficient purchases above the price they want to pay; and 
• other legitimate businesses that clearly and truthfully indicate their prices lose out on a sale that may have actually been cheaper than that offered by a deceitful seller.

The practice of misleading prices therefore results in inefficiency in the marketplace, damaging both consumer and legitimate business alike.

Regulations such as these are required to deter unscrupulous sellers from deceiving consumers at the point of sale. This form of deterrence will not only benefit consumers by reducing the incidence of false repres entations and make purchasing decisions more cost effective. Legitimate businesses that provide purchasers with genuine information will benefit through the remova l of unscrupulous traders from the marketplace; thus removing the threat such traders pose in taking away sales from legitimate businesses. 

Personal Privacy

Information is critical to the functioning of a competitive marketplace. The more perfect the information is on the demand side, where consumers are aware of the full range of prices, choices and service levels for goods and services; and on the supply side, where firms are aware of the needs of consumers, the more efficient the market will be.   

For many consumers however, the demands for privacy will often outweigh benefits that might be derived from the fact that firms have an extensive database of consumer information. Accordingly, Hong Kong has introduced relevant privacy laws in the form of the Personal Data (Privacy) Ordinance, and codes such as the Code of Practice on Consumer Credit Data, administered by the Office of the Privacy Commissioner for Personal Data. These laws, and codes also work to the benefit of consumers and business.   

In the absence of legislative safeguards on privacy, consumers will be more reluctant to divulge information on themselves. The necessary information link that businesses require to provide an efficient and beneficial service, and to develop their products to meet consumer demands, will therefore be lost.

I would like to note that notwithstanding the existence of privacy laws, the Council believes that businesses should not only observe the letter of the law, but as a matter of principle they should recognise persona l privacy as a right. Moreover, as individuals themselves, with respective concerns for their own privacy, business people should be aware that privacy laws also benefit their own personal interests.   

Accordingly, the Council supports the basic recommendations for business to follow that were put forward by Consumers International following that organisation's study  into  electronic  commerce ¹. The recommendations, which can apply to all businesses, are:

• Data collection should be limited to information that is necessary and reasonable for a transaction.
• Consumers must be told what information is being collected and why; and how it will be used.
• There should be a named individual within the company responsible for data protection, and consumers should be informed of this.
• Consumers must have the right to refuse further communication from the company or associated companies and must be clearly told how to exercise that right.
• Consumers must have the right to review and correct any information held about them.
• Passing of data to third parties should not be allowed unless absolutely necessary, and with the consumer's consent.  Presumption of consent is not acceptable.

Code of Practice

The existence of codes of practice, such as those employed by direct selling associations  in  Singapore  and Hong Kong are to be encouraged. Nevertheless, while codes can bring about certain beneficial chan
ges in the marketplace, they cannot be regarded as alternatives to regulation, where there is a clear need for
stringent public safeguards. The fact that undesirable practices continue to appear in the marketplace, notwithstanding the existence of various self regulatory codes, suggests that codes by themselves are not a panacea.

Codes of conduct typically can only govern the activities of members, leaving those outside the association beyond whatever influence the code and association might have.  Moreover, sanctions for breaches of codes do not generally provide the same level of deterrence as that provided by a criminal conviction, or financial penalty as found in a breach of law.   

Codes are therefore to be viewed largely as a complement to regulation, rather than a replacement.

Conclusion

The marketplace, including the direct selling industry, is constantly evolving. Different products and marketing techniques are continuously being placed before consumers.   

There is of course an element of consumer responsibility where consumers must take precautions to best inform and protect themselves. In its complaints handling work, the Council consistently emphasizes this to consumers.  However, in today's sophisticated marketplace total reliance on the principle of 'buyer beware'  is
no longer appropriate. It is therefore incumbent on governments to ensure that an appropriate level of safeguards exists through regulatory mechanisms that provide:

• protection for all members of society from fraudulent and damaging practices; and  
• an environment in which legitimate businesses canbe readily differentiated from the unscrupulous, and can thereby more easily benefit from their entrepreneurial activities.

¹ See Consumers International report 'Consumer @shopping' at http://www.consumersinternational.org