FTC Mandates for Direct-Selling and Ecommerce Industries

The direct selling sector has been a fertile ground for gig workers and aspiring entrepreneurs especially post the pandemic. For the flexibility, perks, rewards, and benefits that the industry offers, it is often misunderstood or misinterpreted that the direct selling industry has no hard and fast legal or regulatory compliances or criteria. But, it is the other way around. For the number of forgeries, unethical practices, and false promises that non-trustworthy brands have once made, the industry is under the strict surveillance of the respective governments of various countries and stringent mandates which are often amended and regulated by the Federal Trade Commission.

The Federal Trade Commission’s industry mandates

Right from your brand ethics and motto to what you sell and how you run the organization, the Federal Trade Commission keeps an eye on conventional direct sellers and direct selling e-commerce businesses.

The Federal Trade Commission (FTC) is the United States independent agency working towards preventing fraudulence, deception, and unfair business practices. The agency has been instrumental in promoting healthy competition among businesses, but at the same time encouraging and protecting consumers too. The agency closely watches direct selling companies to make sure that customers don’t fall into any forgery or fraudulence.

FTC mandates direct selling companies to declare an estimated earning statement to their distributors to make it easier for prospective distributors to make decisions on joining a direct selling business. According to the FTC, the direct selling companies should publish after making amendments to their income disclosure statements (IDS) every year in order to educate and protect their customers from fraudulent and deceptive claims. While developing an income disclosure statement, it is important to put in every detail to make policies and working structure clear.

Companies concentrating on being transparent with their policies and income disclosure statements are more likely to earn more distributors considering their transparency and credibility. The clearer the IDS, the better your brand’s image and credence.

Identifying real brands

As much as we say false claims and unlawful compensation structures, it could be difficult to distinguish between what is lawful and unlawful. Learn to understand whether the MLM compensation plan is based on actual sales to real customers. Pyramid schemes have caused enough damage to the industry and FTC has enforced laws that are specific and stringent in every way. And for this reason, MLM companies have to ensure that their compliance program rightly represents the business opportunity it offers through its marketing materials and other modes. MLM compensation plans should not be based on wholesale purchases or payments by the participants which could lead to unhealthy competition and false interpretation of claims.

Unfair methods of competition

Recently, in November 2022, under Section 5 of the FTC act, the commission issued a statement to rigorously enforce the federal ban on unfair methods of competition. The commission was given complete and unique authority by Congress to identify and make stringent policies against any such practices beyond what the antitrust statutes cover and any types of unjust practices to gain an advantage rather than competing on merits.

For enforcement and rulemaking, the commission will further release notice for businesses on how to fairly and legally compete in the marketplace. The commission's vote to approve the policy statement was 3-1.

Compliance automation – A new industry benchmark!

There are new rules and stringent regulations taking place in the direct selling industry every other day. Intense and aggressive regulations, public scrutiny, etc have increased tension in businesses to a great extent. With the business happening in the virtual space mostly, there is cyber vigilance and actions also to be mindful of for organizations to avoid heavy penalties and further legal actions. Since direct selling businesses aren’t restricted to a particular region, monitoring and controlling distributors and other members involved in the business and their sales activities in the digital base could be a herculean task.

Despite having compliance departments and legal advisory boards, it is an expensive and extensive task to ‘escape’ from cyber police who are everywhere trying to find any issues. So what could be the next step ahead? The new world solution to cope with this is Automated Compliance Monitoring (ACM). ACM could help direct selling businesses largely to stay compliant with government regulations of respective regions and help brands to protect their advocacy.

Like any other automation, ACM can also help improve the conventional, low-skill work of organizations and develop high-level strategy, various corporate policies, and field communications. High-end, sophisticated tools involved to enable this automation helps organizations gather, sort, and analyze any information posted in the digital space and basic searches could also be identified during the course of daily business operations. This lets you track what goes into the internet in your name and make a quick decision if it bothers you or not.

Direct selling companies often tend to ignore the fact that they are vulnerable in the vast sea called the internet where many policy violations could go undetected, eventually exposing their brand to public embarrassment, litigation, and regulatory actions. ACM helps identify, score and flag any violations across the internet mentioning or pertaining to your brand. Any mid or low-level compliance issues thus detected could be responded to appropriately, cataloged for further review, follow-up, and if required, an investigation and enforcement.

Training your distributors and members about the system could help them stay aware and also not fall prey to any fraudulent themselves. ACM is a cost-effective method that can improve the overall brand image and can be showcased as an evident example of the brand’s compliance best practices.

Conclusion

It is easy to break rules, and staying compliant is often challenging. But what matters, in the end, is a brand's ethics and motto. Staying compliant with every region-specific law not only helps you stay away from being penalized or facing legal consequences but in the long run, it improves your brand credibility and trustworthiness which is the foundation of a direct selling business.