Contingency Fees Act, 1997
R 385.00
Report 76 Business Practices Committee11. Recommendation |
Money revolving schemes, "multiplication schemes", "chain letter schemes" or "pyramid schemes" constitute harmful business practices. There are no grounds justifying these practices in the public interest. It is accordingly recommended that the Minister declares these harmful business practices unlawful in terms of Section 12(1)(8) of the Act whereby, in the course of the business -
| 1) | Any person who operates a multiplication scheme offering or promising or guaranteeing an effective annual interest rate of 20 per cent and more above the REPO rate, as determined by the South African Reserve Bank, to any investor, whether or not the investor becomes a member of the lending entity. The applicable REPO rate is that which applied at the date of the investment. The effective annual interest rate will be: |
Where:
| r | = the effective interest rate, |
| R | = the interest in rand, which is the difference between the amount paid out to the investor and the amount invested, |
| C | = the amount invested by the investor or any amount paid by a person to become a member of a scheme, and |
| T | = the period of the investment in months. |
| 2) | Any person, directly or indirectly, operates, conducts, promotes or causes to operate a chain letter scheme. A chain letter scheme is operated, conducted, promoted or caused to operate where any person (hereinafter referred to as the aforesaid persons) |
| a) | invites any other person (hereinafter referred to as the "participating person") to enter into any arrangement with any of the aforesaid persons the terms which include any provisions which have the effect that the participating person is obliged to make a payment of a financial consideration with the prospect of such participating person receiving payment or other money-related benefits, directly or indirectly, from his/her participation in the recruitment of other persons to enter into similar arrangements with any of the aforesaid persons; |
| b) | enters into any arrangement with any person the terms of which include any provision which has the effect that the participating person is obliged to make a payment of a financial consideration with the prospect of such participating person receiving payment or other money-related benefits, directly or indirectly, from his/her participation in the recruitment of other persons to enter into similar arrangements with any of the aforesaid persons. |
| c) | accepts any financial consideration from any person in terms of any arrangement which financial consideration is used in part or in full to fulfil the obligations of either party to make payment to a third party who has entered into a similar arrangement with any of the aforesaid persons; and |
| d) | makes any payment of any financial consideration or give any money-related benefit, directly or indirectly, to any person in terms of any arrangement as prohibited in terms of paragraph (b) or (c) above. |
| 3) | Any person, directly or indirectly, participates in a pyramid promotional scheme. |
"Pyramid promotional scheme" means any plan or operation by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from the person's introduction of other persons into a plan or operation rather than from the sale of products by the participant or other persons introduced into the plan or operation.
"Participant" means a person who contributes money or any other form of consideration into a pyramid promotional scheme.
"Consideration" means the payment of cash or purchase of goods, services, or intangible property. Consideration does not include: purchase of products furnished at cost to be used in making sales and not for resale, purchase of products where the seller offers to repurchase the participant's products under reasonable commercial terms and the participant's time and effort in pursuit of sales or recruiting activities.
"Compensation" means the payment of money, a thing of value, or any financial benefit or any discounts which may accrue to the participant. Compensation does not include: Payments to participants based upon sales of products purchased for actual use or consumption, including products used or consumed by participants in the plan and payment to participants under reasonable commercial terms.
"Person" means an individual, a company, a partnership, a close corporation or any association, or unincorporated organization.
"Product" means a good, a service, or intangible property of any kind.
"Promote" means any of the following: To operate, or advertise or to induce or attempt to induce another person or persons to be participants.
"Reasonable commercial terms" includes repurchases by the seller, at the participant's request, and upon termination of the business relationship or contract with the seller, of all unencumbered products purchased by the participant from the seller within the previous 90 days which are unused and in commercially resalable condition, provided that repurchase by the seller shall be for not less than ninety percent of the actual amount paid by the participant to the seller of the products, less any consideration received by the participant for purchase of the products which are being returned and less a reasonable handling charge of not more than 25 per cent of the products' original purchase price. A product shall not be deemed non-resaleable solely because the product is no longer marketed by the seller, unless it is clearly disclosed to the participant at the time of the sale that the product is a seasonal, discontinued, or special promotional product, and not subject to the repurchase obligation
"Harmful business practice" means:
| a) | offering or promising or guaranteeing to pay an annual effective interest rate exceeding the REPO rate by more than 20 per cent and/or |
| b) | operating, conducting, promoting or cause to operate a chain letter scheme and/or |
| c) | operating, conducting, promoting or cause to operate a pyramid promotional scheme. |
It is recommended that the Minister:
| 1) | declare unlawful the harmful business practices and |
| 2) | direct persons to- |
| a) | refrain from applying the harmful business practices; |
| b) | refrain at any time from applying the harmful business practices. |
The Committee will also recommend to the Minister that Regulation No R.469 of 14 March 1980, published in Government Gazette No 6880, be repealed.
Louise A Tager
Chairman: Business Practices Committee
22 April 1999
