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Citizens' Relay Station, YMCA Seoul
Laws need to be revised urgently to establish market order in the network marketing business
YMCA Seoul proposed a bill for the revised Door-to-Door Sales Act at a public hearing with the focus on establishing market order through the normalization of consumption and sales with regard to network marketing services. The National Assembly, government, academia and consumer groups all agreed to the bill. YMCA Seoul's insistence has given fresh impetus to the revision process.
YMCA Seoul held a "public hearing for the revision of the Door-to-Door Sales Act" on the 5th, February, attracting the participation of experts from the National Assembly, government, consumer groups and academia. Large-scale frauds such as the JU scandal have occurred repeatedly due to fundamental loopholes in the laws regulating network marketing, and little progress has been made as the numerous discussions held so far have got bogged down in the pros and cons of market regulation itself. The public hearing was held on the social consensus that it is necessary to build order in the network marketing market by eradicating network marketing practices based on personal relationships and speculative strategies and by normalizing the ways in which network marketing services are consumed and sold.
Participants had engaging discussions on a number of subjects suggested by YMCA Seoul including: 1) ways to control the sprawling growth of new door-to-door sales businesses by redefining and setting the boundaries of network marketing; 2) drawing a clear distinction between consumers and salespersons (network marketers); 3) reducing sales pressure and the inventory burden; 4) disbanding the Mutual Aid Association and restoring the refund guarantee system; 5) strengthening the user liability of the network marketing companies and reducing the liability of inside informants; and 6) introducing class actions against network marketing companies. They reached an agreement on the urgent need to revise the laws and expressed a general consensus on the above-listed issues while offering various opinions on specific issues. YMCA Seoul plans to push for the revision in earnest by submitting the initiative for legislation to the National Assembly after the hearing and by taking other follow-up measures.
The following is a list of speakers and a summary of the panel discussion
□ Opening Speech
/ Kim Hui-kyeong, Head of the Policy Coordination Team, Citizens' Relay Station, YMCA Seoul
“Network marketing needs to be redefined. Efforts should be made to promote sales and nurture consumers. An alternative management system should be created once the Association has been dissolved".
: Originally, network marketing was designed to give back the profits generated by reduced distribution costs to consumers and manufacturers through the sale and provision of products. However, network marketing companies have lost competitiveness both in terms of their products and prices, and degenerated into a rather shady business domain that heavily depends on personal relationships and speculative strategies for sales.
In order to reduce the social costs such as damages and losses caused by network marketing, the market should be completely restructured in order to establish a new order in which normal consumption can take place. In addition, a solid safeguard system should be put in place to prevent the recurrence of similar scams involving network marketing. To make this possible, the following actions need to be taken. Firstly, network marketers should be at least 2 steps to draw a clear borderline between network marketing and door-to-door sales. Secondly, sales activities by marketers should be encouraged so that actual sales promotion and consumption can take place. In addition, marketers should be allowed to return their inventory anytime without any restrictions on time. Thirdly, the Mutual Aid Association should be dissolved as its effectiveness has been strongly questioned. Instead, the FTC should play a leading role in supervising the market with local government sharing the administrative responsibility. In this way, checks and balance can be maintained. In addition, trust and stability should be re-established by introducing a third-party guarantee system and restoring a refund guarantee. Fifthly, user liability should be imposed upon the network marketing companies and joint liability should be introduced for superior marketers so as to facilitate the industry's self-regulation. The liability of inside informants should be alleviated. Finally, class action provided by the Consumer Basic Act should be introduced across the network marketing market.
□ Discussion 1.
/ Ko Jin-hwa, Member of the National Policy Committee, the 17th National Assembly
“Something needs to be done to eradicate illegal network marketing activities that wreak havoc with the financial stability of the working class and to secure the rights of consumers by revising the Door-to-Door Sales Act”
: It is essential that the National Assembly takes action to work out fundamental solutions to the problems posed by network marketing. First, redefining network marketing is a key provision and I agree to the bill. Second, sales promotion is absolutely necessary. Third, many non-economic elements are involved due to a unique aspect of Korean culture that places a strong emphasis on personal relationships. However, there should be a clear distinction between business managers and consumers, which can protect the rights of business managers as well as the rights of consumers. Fourth, I also pointed out the inefficiency of the Association in taking remedial action after the fact during a parliamentary audit. The Association, which is incapable of distinguishing between legal and illegal businesses not to mention ensuring a sound and healthy market, should be dismantled, while the role of local government needs to be strengthened in order to meet the demands of the local community. Consumer rights are the guidelines for the national economy. Consumers should expand their role and create a cooperative scheme with the National Assembly, government and private organizations to revise the Door-to-Door Sales Act and provide a catalyst to promote overall consumer rights.
□ Discussion 2.
/ Kim Seong-cheon, Head of the Market Analysis Team, Policy Research Office, Korea Consumer Agency
“Initially, network marketing started in an abnormal setting. The relevant laws should be revised to make them forward-looking. It is necessary to enact a separate law in the long term.”
: Korean network marketing was launched on the basis of the illegal business model of Japan Life, and variations have been constantly created in spite of the Door-to-Door Sales Act. The law should be modified in a way that strengthens the enforcement power of the government. Focus should be placed on deterring similar acts of fraud, while the sprawling growth of similar companies should be controlled. ▲ It would be a very narrow view if network marketing was considered as a relative concept, compared to door-to-door sales. Distinction between the two businesses should be made based on other elements than phases. ▲ A member or a subscriber instead of a marketer or a salesperson would be a more accurate term to use, and they should get actively involved in sales promotion. Feedback is essential, and, as in Europe, the inventory burden should be an important criteria that draws a clear line between door-to-door sales and network marketing. ▲ The 3-month withdrawal rule should be abolished and marketers should be allowed to terminate the contract without any time restrictions so that the inventory burden can be lessened. ▲ An extensive evaluation should already have been conducted given that the Mutual Aid Association is now in its 4th year of operation. In-depth discussions are necessary to come up with ways to assess its function and identify areas for improvement. If the association is to be disbanded, a refund guarantee or insurance could be considered. ▲ If marketers are to be regarded as members or subscribers, it means that they have a close relationship with their superior marketers. In this respect, joint liability is necessary and I also agree that the liability of inside informants should be reduced. ▲ The introduction of a class action for chain sales is under review in Japan, and at this juncture, class action should be introduced in Korea, too. ▲ Since network marketing is regulated by the Competition Law rather than by the Consumer Law, I would like to suggest that ultimately, a separate law governing network marketing be enacted.
□ Discussion 3.
/ Kim Hong-seok, Head of the Direct Sales Team, Fair Trade Commission
“The Door-to-Door Sales Act should be revised. I agree with what others have said on this issue, but the possibility of abuse should be also considered. Further in-depth discussions are necessary.”
: First, I should begin by saying that much of what I am going to say today is based on my personal view. The Door-to-Door Sales Act has been recently revised at the suggestion of a lawmaker, and the FTC has formed a task force. ▲ I agree that network marketing should be redefined, and I also basically agree that the 2-step model should introduced. However, I am concerned that it would be a new regulation - including a 500-million-won capital requirement - if tens of thousands of door-to-door sales companies were required to register as network marketing firms. ▲ There should be a clear distinction between consumers and marketers. The cutting of retail profits would be an extremely sensitive issue for network marketing and requires a careful review. ▲ I agree that inventory burden should be decreased. Sales is the key to network marketing, and I agree that marketers should be able to terminate the contract. Nevertheless, restrictions should be made clear in order to reduce the potential for abuse or misuse. ▲ The association was organized as an alternative to the refund guarantee system, but we need to accurately evaluate whether or not the association has fulfilled its role regarding compensations amounting to more than 13 billion won. Since local governments most likely do not have the sufficient resources - including manpower - required to replace the association, the deposit system may give rise to new problems. Administrative bodies should have a solid network of human resources, and the enforcement power of local governments needs to be carefully examined. ▲ Options that could be considered for the long term include consolidating associations or converting them into non-capital special corporations or public service corporations. ▲ I agree with the user liability of companies, but it should be strictly controlled as it may be abused or misused.
□ Discussion 4.
/ Lee Seong-hwan, Professor of Law, Kookmin University
“Consumers are vulnerable and therefore should be protected. The association should be held accountable and user liability should be strengthened. The concept of package business acquisition needs to be introduced.
: What should be noted in any discussion on consumer rights is that consumers are always assumed to be reasonable and rational when in fact, it is not always the case. It would surely be erroneous if only consumers' self-regulation and responsibility was emphasized. We should not forget that consumers are vulnerable. As I think about network marketing, I feel that administrative bodies obviously lack enforcement power. Particularly, I get the impression that the industry, government, academia and lawyers are all responsible by being overly lenient. Perhaps they should consider carefully whether a cartel has been formed among themselves through contracts. Since there is a sharp conflict of interests, and views are also sharply divided among them, it was probably quite difficult to exercise strong administrative control. Mutual aid associations can either be disbanded or consolidated, or converted into non-capital special corporations. But they should be held accountable and they can be regarded as a failure in view of what they have failed to do. As for splitting the responsibilities between local governments and the FTC, enforcement power and authority should be concentrated basically upon the FTC in order to minimize the room for the central government to avoid responsibility, and works should be entrusted and accepted between government agencies. I agree with the need to introduce user liability and joint liability with regard to superior marketers. Superior marketers should take their share of the responsibility and risks for the easy money they get. I agree that collective action should be introduced. Class action should be taken to the extent that network marketing companies engaged in illegal business activities sustain financial losses. In addition, with the introduction of package business acquisition, companies should be banned strictly from changing their trade names. I suggest that an aggravated punishment be imposed in cases where labor laws or employment security laws are violated by misleading applicants to believe that a regular position is being offered to recruit marketers. Specific provisions or notices regulating the circulation of false or exaggerated information and deceptive transactions should be added to increase the effectiveness of the forbidden clauses.
□ Discussion 5.
/ Lee Taek-seon, Secretary General of the Anti-Pyramid Movement Center
“Mutual Aid Associations, the heart of the recent controversy, are barely effective. The purpose of the association needs to be reviewed. Products need to be regulated to prevent network marketing from becoming speculative.”
: The best way to solve the problems associated with network marketing is probably to entirely prohibit network marketing itself, but since it is practically impossible, the whole industry should be restructured post haste. First, I agree that network marketing by definition should involve two or more sales steps. Another possibility is that all marketing organizations with more than one sales step and that do not pay a basic salary should also be regarded as qualifying as a network marketing business. There are so many ads in the free newspapers and other mediums that can mislead job seekers into believing they are recruiting regular employees when actually they are looking for marketers. This should be regulated, too. The reason that there is no clear distinction between consumers and marketers is due to the right to withdraw from the contract. I think the term of contract should be set and the contract should be withdrawable unconditionally. Mutual benefits associations are extremely inefficient. According to 2005 data, there were 100,000 remedy cases involving 10.8 billion won, which means that the amount of compensation per case was a mere 100,000 won. This would scarcely be enough to compensate for the damages caused by network marketing scams. In fact, it would be of little help to the victims. The operating expenses of the associations range from 8 to 10 billion won. The organization is too big and so much money is being wasted. The wasted money comes from the capital of network marketing companies or fees, and it is bound to trickle down in the form of higher consumer prices. When major problems break out, would the post relief provided by the associations be effective? When a problem occurs, all they do is simply deposit money with the court of law. Then, there is little left for the victims after most of the money has gone to pay national taxes or been used for other purposes. The majority of associations do not issue a certificate of membership and, more importantly, they do not issue the certificate to consumers. The purpose of such associations is to protect consumers, but consumers cannot get a refund because they do not have a certificate. It seems to me that the associations do not know what they exist for. This problem is inherent in associations operating on capital contributed by member companies. If they fail to function as a public entity, they should cease to exist.
Products should be regulated as well. According to the FTC's authoritative interpretation, the 1.3 million won price ceiling is meaningless, and gift certificates and marketable securities can be used as well. The 2002 revision lifted the product restrictions, allowing money to make money. All intangible products should be banned in order to stop network marketing from becoming a speculative venture.
□ Discussion 6.
/ Lee Han-mu, member of the YMCA Citizens' Rights Protection Lawyers.
“A network marketing business should be an independent corporation. The practice of requiring a bulk purchase for initial transactions should be prohibited. A regulation to confiscate illegal profits is necessary.”
: I agree that the Door-to-Door Sales Act should be revised and I will focus on where I feel improvements need to be made as I have handled some lawsuits involving network marketing. First, I would like to suggest that the regulations on network marketing be included in Economic Law in the form of an anti-pyramid act. Even though network marketing issues in Korea are entirely different from consumer protection issues such as refunds, they are regulated by the Door-to-Door Sales Act. I believe the lukewarm countermeasures with a focus on consumer protection can be attributed to the current legal system. Since proving a collective illegal act under the current network marketing structure is no easy task, user liability or joint liability for marketers would be necessary. Regulation is needed to ensure that companies are not allowed to escape all liability on the pretext of special contracts. There should be a ceiling for the initial purchase that a network marketer is obliged make, because those who attend a seminar and invest a large amount of money are more likely to get involved in abnormal business transactions in an attempt to recoup their investment. Financial transactions such as consignment sales involving no transfer of products in point marketing should be strictly prohibited, and any violation should entail severe punishment. A legal device enabling the confiscation of any wealth that a network marketing company obtains as a result of illegal activities should be introduced as a strong warning for the industry. In conclusion, I believe that serious consequences may result if the current network marketing practices are left unaddressed. As such, a thorough revision of the relevant laws is urgently required
▶ For more information, call Kim Hui-kyeong, manager, Policy Coordination Team, at 725-1146. |
