Interview with Nick Mallett

Pan Euro Direct Selling Solutions

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Richard Sletcher
Okay, before we kick off, can you just give me a little bit of a background of where you come from how you got into the MLM space and your experience?

Nick Mallett 
Yeah, by all means. Well, I'm an English solicitor I qualified way back when Margaret Thatcher was fairly fresh in 10 Downing Street and I became a corporate and commercial lawyer, which was my short term ambition. My long term ambition was to get into business. Along the way, a couple things happened. One was a client approached me from Cleveland, Ohio, called the Kirby company, which is part of Scott Fetzer, which is itself part of the Berkshire Hathaway Empire.  That was my first introduction to the direct selling industry. It wasn't MLM as such, but Kirby introduced me to the industry by taking me to U.S. DSA  events and its own events and thereby I formed good business relationships with numerous other companies in the direct selling space, most of which were MLM type companies. 

Over my practising career, which continued full time until eight years ago, I reckon about 25% to 30% of my time was spent advising companies in that sector. I ceased practising full time and I took early retirement about eight years ago to pursue business objective,  a major, one of which is Paneuropean Solutions, which is a multidisciplinary consultancy which I set up with a couple of long term friends and collaborators in order to provide a one-stop service to businesses in the direct selling sector, whether MLM, or otherwise.

Richard Sletcher 
So when you say you've semi-retired, you still actually giving advice to companies in the MLM space through Paneuropean Solutions I presume?

Nick Mallett
Absolutely, that's my role within Pan European.

Richard Sletcher
I've heard along the grapevine that when you come to the UK, there's a whole different set of rules that apply that are different from places like the US and South Africa.

Nick Mallett 
We have two principal sources for our legislation that's relevant to the direct selling sector, one being the EU, and we can't really have this conversation without talking a little bit about Brexit I suppose, and the other is, of course, our indigenous legislation, which has had its own path and which has some unique features which I haven't come across anywhere else in the world. It's not to say they don't exist elsewhere in the world, but I haven't come across these particular issues elsewhere. 

Richard Sletcher
Can you give me some idea of what those would be?

Nick Mallett
Yeah, well, the main thing is the so-called 200 pounds seven-day limit in the trading schemes legislation that's been in this country now for 22 years. It's a sort of consumer protection piece that's designed to prevent people from overextending themselves in the first flush of enthusiasm when joining a direct selling company. So they're not allowed to spend, or indeed to commit to spend more than 200 pounds within the first seven days of joining the organisation, which is a problem. Apart from those businesses, and there aren't many of them admittedly, which have a high ticket price, many businesses understandably like to have an auto-ship arrangement. So you know, if you like the washing powder, it stands to reason you're going to get through it on a regular basis, and it's fairly heavy, so you might want to organise for it to be delivered to your home indefinitely. The problem with that is if you sign up to anything that has an infinite tail on it, then clearly when multiplying something by n, it will exceed 200 pounds. So that can be regarded as a breach of the UK's unique law in this area.

Richard Sletcher
I suppose they're trying to stop front-loading, which a lot of companies encourage. They get you to buy, you know, £10,000 of the product that sits in your garage for the next six years.

Nick Mallett
That was the justification. I mean, back in the day, this legislation was introduced in reaction to some outrageous scams, where people were sold the dream, people who didn't have sufficient money to get started properly in the business and were sold the dream that you know, they could qualify for exceptionally high rates of return if only their first orders were above a certain level. The organisers of these scams, arrange money lenders to be on hand to make ridiculous loans to these people on rather attractive terms, it's almost a precursor to the subprime crisis. 

Richard Sletcher
Good heavens, that sounds totally unethical. 

Nick Mallett 
It was.

Richard Sletcher
While we on the subject of ethics, can you give me an outline of what a pyramid scheme is and how it differs from the direct selling and multi-level marketing businesses?

Nick Mallett
Well, I suppose it doesn't really differ. The problem with a pyramid scheme is that it's a virus which can attach itself to quite legitimate structures. The definition is extremely difficult. The legislation, both in this country and elsewhere, has been quite shy on creating a precise definition because the sort of people who operate pyramid schemes are among the most devious people you could wish not to come across. If you define something quite narrowly or closely, they'll simply find a way around it. I know in this country we have adopted an EU formulation which is extremely unsatisfactorily done, I have to say, because the language is full of ambiguity. It essentially focuses on where the majority of the income generated by the scheme comes from. It is similar to the way the American Federal Trade Commission seems to be going in its attack on AdvoCare, and Nerium and others, which is to say that if the majority of your revenue comes from sales to end consumers, in other words, people who are not themselves formerly participants in the scheme, like distributors like Brand Partners, or whatever you happen to call them, that if the majority of the money comes from, if like the man in the street who is simply buying the product, because he likes the product, rather than because of the earnings opportunity that may be associated with it by way of discounts or otherwise, then that makes you not a pyramid scheme. So in other words, if the majority of your sales are what can be called internal consumption, where the majority of sales are themselves signed up in some way to your organisation, then that, to the Americans at least, and on one interpretation of the European law is evidence that you are a pyramid.

Richard Sletcher
I heard somewhere along the line that it's 70%. If more than 70% of your sales are not coming from customers, in other words, people who are not part of the network, then you're deemed a pyramid in terms of the US laws.

Nick Mallett
I think that's the case in one or two states, actually, Richard, and it's also been adopted as a kind of rule of thumb, by a number of significant companies in the sector, whereby they don't say to their distributors, we would be a pyramid if less than 70% was sold outside. What they do, and I've helped them with this, is adjust the compensation plan so that the distributor, for want of a better description, will not get commission unless more than 70% of his sales are to outsiders. Policing that is a different issue but that is an example of the industry reacting to a fairly restrictive definition by some states in America and saying, well, okay, if that's good enough for you, we will incorporate this in a way that works for us and the way that we can actually operate. Clearly no one's going to say, oh, my goodness, if you went to below 70%, we're going to close down. They have to find some way of sort of acknowledging the rule without accepting the full draconian extent of it.

Richard Sletcher
Yes, it's a tough one because you've also got this massive team of independent dealers who are doing whatever it is that they want to do, and it's very difficult to keep a finger on what they doing. 

Nick Mallett
Yeah, that is an inherent problem in the industry because of the self-employed nature of the vast majority of the people out there. There's getting on for half a million people in the UK out of a population of roughly 60 million, so that half a million or so, people spend some of that time, not necessarily all of that time, in the industry. However many interactions there are between those people and outsiders, you know, potential customers, it is going to be ridiculously varied and extremely difficult to monitor. You and I could be talking about a product at the moment and I could be, hypothetically, misleading you about that product. How on earth can that be controlled, even in an employment context, but especially in a self-employed context where you cannot have the same kind of disciplinary or contractual arrangements between a direct sales organisation and its direct sellers. 

Richard Sletcher
But I think it's also who is liable, who's liable at the end of the day, and there needs to be some sort of mechanism in place that makes sure that the company can say, listen, we did tell this person what they're supposed to say and here is the proof. If they said anything different, well, they're in trouble, not us.

Nick Mallett
Yeah, I would agree with you. Definitely the responsibility issue is there and one of the features of self employment is that it's the direct seller, who is primarily responsible for whatever happens. I mean, this comes down to, you know, someone selling candles and going to a prospects house and demonstrating a candle and toppling it over accidentally or otherwise and setting fire to the house. In that context, it's undoubtedly the direct seller who's primarily responsible. However, in a PR sense, it is the business that direct sellers representing that will carry the can, big time, for that consequence in terms of public relations and goodwill reputation, call it what you will. So in that context, we thoroughly recommend to direct sales organisations that they arrange insurance for their direct sellers or that they arrange that their direct sellers should get insurance. They set in place arrangements whereby that can be done economically. 

In the more legal context, it is a bit more of a stretch, really, to see that the company will be responsible. However, in the UK, there's a very clear example of the potential responsibility of a direct sales organisation for misconduct on the part of the direct sellers. The company concerned had or has rules concerning the conduct of direct sellers, became aware of misconduct by the direct sellers and did not do enough to eradicate that misconduct by were disciplined or otherwise and was very, very nearly closed down by the UK regulatory authority because of its responsibility for creating the context in which those misrepresentations were prevalent. It was a very, very close run thing, and it made the UK industry at least and I'm sure companies in other countries sit up and take very, very serious notice of this sort of extension, what lawyers would call piercing the corporate veil. Previous there wasn't an understanding that there would be responsibility in those circumstances but clearly the courts thought otherwise. Now, companies have to take stringent steps to monitor what's happening in the field and take appropriate action where misconduct is discovered.

Richard Sletcher
So I'm presuming that in the contracts that you prepare for your clients, there is a very clear outline of what the sanctions will be in the case of somebody doing something that they shouldn't be doing?

Nick Mallett
Yes, definitely. Yeah. Yeah.

Richard Sletcher
And the other side of that, of course, is the companies sometimes are responsible for creating the narrative that is falling foul of the law, so to say. They promise you amazing returns on your investment and all you have to do is... you know that that sentence, all you have to do is, sort of pops out of their mouth very easily and they also can set the members up for failure.

Nick Mallett
Yeah, well, you know, you can only do so much but if you don't start by telling the direct sales organisation the limits of what they can say to their people, then you can be designing a structure in which given the propensity of salespeople to exaggerate, it's inevitable that there'll be problems. A sensible company will moderate its marketing materials with an element of legal advice. We certainly wouldn't want lawyers to design the marketing materials of companies because you know, that almost guarantees zero sales. They're often known as the sales prevention department, actually, one of the many rude expressions, or rather, unkind expressions about lawyer but, yeah, if you assume that people who are more or less remote from your control will exaggerate to more or less great degree, then you have to be quite careful to make sure that their exaggerations come from a fairly low base and fairly safe space. The production of marketing material, especially that's aimed at the direct sales force should be a carefully constructed, iterative process driven between the marketing people and the legal people with the proper balance being struck by the business people at the final stage.

Richard Sletcher
There was another thing that came up in South Africa. The government wanted the direct selling industry to pay unemployment, pay as you earn taxation and all of that kind of stuff because the industry in South Africa hadn't clearly defined the members as independent business owners. Do you have a similar kind of problem in the UK?

Nick Mallett
Yeah, we do. Richard, and it's not fully resolved. I mean, in law virtually nothing is ever fully resolved to be honest with you. The exact status of the direct seller will, to some degree, vary from company to company. Even if you do have a contract that as clearly as you possibly identifies the agent as an independent contractor, there will still be people, typically people who fail, not necessarily miserably but fail in the business as direct sellers, who will, you know, look back at it and the amount of time and effort they put into setting up and running their business, and say, I put in so many hours, if I divide the income I generated by the number of hours, then I come out way below any reasonable return per hour, and almost certainly below the rights applicable under the minimum wage legislation in this country at the moment, and so people have entertained claims based on that. Furthermore, some people have, not in the direct selling industry so far as I can recall, have brought claims, suggesting that although the marketing and the advertising says you will be self-employed, nonetheless, we say we're employees and therefore we're entitled to the normal rights associated with employment, like sick pay, holiday pay, maternity leave, paternity leave, minimum wage, all those various rights of an employee under Law in the West for the last, goodness knows how many years. Those cases have, to the best of my knowledge not been brought against direct sales companies, but they've been brought in contexts like Uber and Deliveroo, for example. We have to look to those cases for parallels in the underlying situation between what happens for say, an Uber driver or Deliveroo delivery person and the direct seller in the direct sales organisation context. By and large, companies in this industry are still reasonably comfortable that so long as we've done our job correctly and the company applies our advice consistently, there shouldn't be a major problem if someone does claim employment rights.

Richard Sletcher
One of the things that were highlighted here in South Africa was the companies were saying you couldn't join another network and that you had to sell the product at X amount of Rands. When the government took this to court with the DSA, they were saying that if you tell a person that they cannot join another network, then you by default are employing them. And if you tell that same person that he has to sell at a specific price, then you can't claim that he's not working for you. So those were two key issues that came out of the court case here in South Africa.

Nick Mallett
Yeah, that's sort of where the rubber hits the road, really. Those are very difficult things to put forward in your plan and avoid, you know, the argument that South African government has put forward. There are companies which have different approaches to that issue. Say the issue of the competitive product for example. Some will say, and I have sympathy with this of course, that as you get to a certain level of seniority within the company, so you become privy to information which is more confidential than the information you get when you first sign up. If you get above this particular level, then you are not allowed to do any other business in the same sector as defined by the documentation. I have a measure of sympathy with that because, you know, it's a legitimate reason to protect your trade secrets, not to allow people to work with other people because they would have a conflict of confidentiality. They might feel under an obligation to tell Company B, what company As plans are, especially if company B has a more attractive prospect for them, then they might well shift their efforts towards company B away from company A.

Richard Sletcher
And of course, take the entire network with them.

Nick Mallett
Well, yeah, that's quite likely. These people have developed the network to their downline has been reliant upon them or  grateful to them for the introduction to the company A. If I as a sponsor to say to my downline, yeah, company A was great for 2018 but here we are 2019 or 2020, going forward Company B looks a lot better, let's switch. One of the major problems of course, with the direct sales organisations, is those leaders and the downlines they control. It's one of the virtues. You're delegating an awful lot of the expense and difficulty of recruitment, but against that, because of the independence, you have less control. You can only exercise the control and keeping people by keeping them happy. Going back to the legal case I touched on a few minutes ago, the problem that the major DSA, which you know, everyone whoever listens to this podcast will have heard, had, was that the issues which were complained of by the regulatory authorities in the UK, derived from senior leaders in the organisation, many if not all, of whom were not UK residents, some of whom had been with the company virtually since its inception. Those individuals were, frankly, beyond punishment by the organisation because it couldn't afford to do that. It would have lost hundreds of thousands of people in the downlines had they imposed punitive sanctions on them. You mentioned pricing as well, Richard. That's another consequence of independence that if I buy something by large, no one can tell me what I can sell it for. Because it's mine, you know, I can sell my car for a penny or 100,000 pounds, if I can get someone to pay 100,000 pounds right, and I wish they'd come along pretty quickly.

Richard Sletcher
So look, there are other the other issues that seem to come into play as well, like for instance, if this is your own business, then it should be something that you can leave to your family or to your loved ones. And so it's something that you should be able to leave in your will. Does that come into play? 

Nick Mallett
Yeah, it does very much. It's a very pertinent aspect of the independence issue. Ultimately, when a court or any other relevant authority is asked to consider whether a direct seller is an employee or self-employed, it has to take into account all the relevant circumstances and that will include things like whether it is possible to transfer your direct selling business freely, either during your lifetime or on your death or whether it reverts to the direct sales organisation. The greater the extent to which the direct sales organisation has control over that process, and obviously, it's hundred percent if it simply reverts on death or if the direct seller purports to transfer it, then that tends towards an argument that this is just disguised employment. Whereas, if the business of the direct seller can be freely disposed of with moderate or zero interference by the direct sales organisation, then that looks more like an independent business. It doesn't make it necessarily a totally independent business and there are certain controls that a direct sales organisation can legitimately impose on that arrangement because after all, the person who acquires the business either during the lifetime or on the death of the direct seller will have certain obligations towards the direct sales organisation or it will have certain legitimate expectations of them. So certainly, they should have some measure of control over the transfer process.

Richard Sletcher
Tell me something. If I get this all wrong, and I come up with a business plan that in actual fact, through ignorance or willfully, is a pyramid scheme, how serious is the trouble I get myself into?

Nick Mallett
You could go to jail ultimately, that's the worst-case scenario. We don't have capital punishment thrown pyramid schemes.

Richard Sletcher
Thank Goodness!

Nick Mallett
That's a value judgement, Richard.

Richard Sletcher
You mean there's a couple of people you wouldn't mind sending down that road?

Nick Mallett
I take the fifth on that one, I'm afraid.

Richard Sletcher
So that's obviously that is a very good reason for somebody coming into a country like the UK who wants to set up their MLM company, that they actually consult with somebody like yourself to make sure that they're not falling foul of the law. It's easy to do, you know, you can do it without even realising that you're doing it.

Nick Mallett
Yeah, that's true Richard. Of course, let's say the promoter of the arrangement is overseas and operates in the UK and indeed elsewhere remotely, and the regulator takes the view that what they're doing is running a pyramid, whether a Ponzi scheme or whatever, over here, then that overseas-based promoter might say, okay, fine, I'm happy sitting in my remote jurisdiction with which the UK perhaps has no extradition arrangements, therefore, I'm bomb-proof and it's possible to envisage circumstances like that. But it's quite likely, in fact almost inevitable, that the people who are used in the UK to set up the scheme and to market this would themselves be regarded as promoters and would themselves be committing the offence and they would themselves be liable to prosecution and ultimately jail.   So its all very well for this nice chap in some remote jurisdiction to say well, you know I wash my hands of it, I'll just close down but he will have consigned his UK reps or at least a number of them to the potential stint in prison.

Richard Sletcher
Wow, so as an MLMer you've actually got to be really careful what business you sign up for. You have to do your due diligence as well. 

Nick Mallett
Absolutely. Right. Yeah. Yeah. 

Richard Sletcher
It's pretty scary stuff. Because when you say you go to jail. I mean, that's really constricting. 

Nick Mallett
Yeah, well it should be a normal person

Richard Sletcher
You would think so wouldn't you? 

Nick Mallett
There may be people who would welcome 12 years of Solitude on Robben Island or somewhere.

Richard Sletcher
It definitely drops you overhead somewhat.

Nick Mallett
So that's the reason for it. 

Richard Sletcher
One of the other things that I'd like to just discuss with you is what is the process in terms of the UK if you are being investigated for falling foul of some of the laws there? What is the process these guys follow?

Nick Mallett
Well, if it's a very serious case, it goes to the governmental department, and they would normally make a dawn raid. You know, they turn up one morning and if they really feel there's a serious problem they would seek as much information as they get. They would try to persuade the operators of the business to effectively close down straight away. If challenged, they will back down from that but they go in with fairly blunt edge tools and it takes a fairly good robust response to get them to go away. You can expect to receive a very long detailed questionnaire looking for data and looking for information about the way the business actually operates. 

Richard Sletcher
Would they give you the opportunity to rectify the problem or is it just, you guys are falling foul the law and we are closing you down, end of story? 

Nick Mallett
Well, they can't just close you down because there has got to be a judicial process. I mean, this is essentially a sort of police action and the more serious they think it is, the more blunt and brutal they're liable to be. They will suggest to people that in their own interest, because of the egregious nature of the offences that the regulatory authority has discovered, that it's best that you cut off the continuing breach sooner rather than later so as to make it better in the long run. What happens on the threshold will depend upon, as much as anything, the personalities of the people involved.

Richard Sletcher
So from what I understand here in South Africa, and there's been a couple of these cases, we've got the Department of Trade and industries, which will literally come into your offices and suspend trading there and then. Then they do an investigation and if they discover that you aren't falling foul of the law, they let you start trading again. The problem is, if they stop you for six months or 12 months, your business is gone. So it's quite a serious thing. You've got to be very sure of what you're doing, otherwise, you can just get shut down arbitrarily and have to take some pretty serious legal action to get your business up and running again. 

Nick Mallett
Mmmm. 

Richard Sletcher
Scary stuff!

Nick Mallett
Yeah, very scary.

Richard Sletcher
Okay, so people are going to come to our site who have got, you know, businesses in the US, in South Africa or Australia, wherever, and they want to start-up in the UK, how do they get in touch with you and what is the process that you would follow with them?

Nick Mallett
Well, we are eminently contactable. We have our own website which is planning paneurosolutions.com on which contact details appear with email addresses, telephone numbers. I welcome calls from all and sundry. Very happy to give people half an hour or whatever of my time on the telephone, on an introductory free of charge non-committal basis. And then we take it from there, you know, if they want to proceed, we discuss what they need and what we can do to help within the scope of Paneurosolutions' fairly diverse offering, and as I say, take it from there.

Richard Sletcher
That sounds amazing Nick. Thank you so much for spending this time with me. I can't tell you how much I appreciate it and I hope a lot of people are going to take you up in your offer and get in touch with you and start the MLM businesses in the UK.

Nick Mallett
Well, thank you, Richard. It's been a pleasure talking to you

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