Why Compliance Programs are Key for Direct Selling Companies
As distributors increasingly use online platforms to promote their independent businesses, direct selling companies are at higher risk from false, misleading, unsubstantiated claims made by their salesforce. Federal and state regulators expect direct selling companies to have a well-developed compliance program that fits the risk level of their business. Forming and adhering to a structured compliance program is more important than ever and will help avoid federal and state violations, protecting the company’s reputation, and increasing its overall sustainability.
This article is an overview of the basic components of a compliance program, types of claims (advertising, product, earnings and lifestyle), why it’s important to review your claims, what to avoid, and how to lower your risk.
Basic Components of a Compliance Program
- Formal policies and procedures
- Training all staff including salesforce, brand ambassadors, and distributors
- Monitoring and removing all misleading claims including those published online and through social media
There are several key authorities that enforce compliance regulations specific to the direct selling industry. The Federal Trade Commission (FTC) is the investigative authority that enforces consumer protection laws that require all advertising to be truthful and not misleading and ensures that advertisers have substantiation for all claims. In addition, the Food and Drug Administration (FDA) regulates claims for food, drugs, and cosmetics. The Environmental Protection Agency (EPA) regulates anti-bacteria products.
Types of Claims:
- Advertising claims
- Product claims
- Earning and lifestyle claims
Review Your Advertising Claims
Advertising claims involve anything a company or representative states, asserts, or uses to promote and sell products or services, either verbal or written. Regulations require that all advertising claims, expressed and implied, must be adequately substantiated and must exist before the advertising is disseminated. All reasonable interpretations must be supported — ambiguous claims have the potential for misinterpretation or double meanings that can be taken in unintended ways.
An exception to the requirement to substantiate advertising claims is when puffery is used. Puffery is a statement of opinion that is so overly hyperbolic, vague, or inflated, that no reasonable person would believe it to be true. Context is key when making advertising claims.
When it comes to substantiating claims, regulatory authorities look for statistically significant results. A company should strive to have at least 95% efficacy to satisfy compliance requirements. Along with supporting data, the type of evidence is also key. For example, the FTC rarely considers animal and invitro studies to be adequate, encouraging the use of human studies to substantiate claims.
To avoid violation of federal or state regulations, review your published advertising claims regularly to ensure you can substantiate them. Remove any false, misleading, unsubstantiated claims made by your company or your representatives.
Understand the Types of Product Claims
There are several types of product categories that regulatory authorities define when it comes to compliance practices. The following are typical categories and key product claim guidelines for direct selling businesses to maintain compliance.
- Health and Wellness Claims – no claim can promise to cure a disease
- Immunity Claims – avoid using “boost” immune systems and use “help support” instead
- Cognitive/Memory Claims – should not prey on certain age groups and require substantial medical testing
- Pain Relief Claims – cannot overstate how quickly or how long relief will last
- Safety Claims – should be backed by well-controlled scientific studies
- Weight Loss Claims – can be complicated, claiming extraordinary results is a red flag; before and after pictures with depiction of extraordinary results need to have visible disclaimers of varying results
- CBD Claims – avoid misrepresentation concerning the amount and purity of the product; also avoid claims to cure diseases
- Cosmetic Claims – Must focus on improvement of appearance and beautification; no claim can be made to help cure anything beneath the skin and must remain above the skin
Reviewing claims associated with each product on the market is an important part of your compliance program. Be sure to be able to substantiate each product claim or remove or modify the claim to maintain compliance.
About Earnings and Lifestyle Claims
Earnings claims made by direct selling companies imply that distributors will earn a certain level or range of income by joining the business. Lifestyle claims imply that distributors can make enough money to achieve a certain lifestyle. Direct selling companies must have substantiation to support any type of earnings or lifestyle claims made in their advertising.
Types of earnings claims include potential earnings, by distributors or representatives, that afford the ability to make large purchases such as homes, vehicles, vacations, etc.
Extravagant lifestyle claims may be a concern as they suggest the opportunity provides earnings substantial enough to attain the lavish lifestyle depicted when, in reality, this may not be the case for most of the individuals who sign up. The FTC prohibits claims that represent, “participation in the business venture is likely to result in a lavish lifestyle, and from using images or descriptions to represent or imply that participation in the business venture is likely to result in a lavish lifestyle.”
Direct selling businesses and their distributors should refrain from using statements such as, “quit your job”, “you will be set for life”, “earn millions of dollars”, or “unlimited income”.
The prohibition of such earnings and lifestyle claims applies regardless of whether a clear and conspicuous disclaimer is used. When using disclosures, ensure that they fulfill the regulation requirements of presentation, prominence, placement, and proximity.
Direct selling businesses must also monitor any misleading earnings or lifestyle claims made by distributors online and through social media. Even if a claim does not explicitly include language saying that an individual’s involvement with the company is the reason he or she can afford this lifestyle, the claim is implied if a distributor’s online presence regularly references the company. Smart direct selling companies institute policies and procedures for their distributors to prevent use of non-compliant earnings and lifestyle claims. Enforcement is also necessary, including termination of distributorship for those who do not abide by the established policies.
Lower Your Risk
With a strong compliance program, distributors who are trained to recognize the importance of adhering to industry regulations, and secure and compliant partners like PayQuicker, direct selling businesses can protect their brand and lower their risk profile.
PayQuicker is a secure and compliant global payout platform that protects sensitive data for direct selling businesses and their distributors. Our clients reduce their risk through our automated Know Your Customer (KYC) onboarding of distributors, PCI Level 1 certification, SOC 1 Type II auditing procedures, Global Data Privacy Policies (GDPR) and Privacy Shield framework.
PayQuicker mandates annual compliance training for all staff and is regularly audited by our global banking partners to maintain our payout programs. In addition, staff members, David Jarmusz, Chief Compliance Officer, Crystal Holtzendorff, VP of Global Sales, and Terrainna Smith, Finance and Accounting Manager, are certified by the Direct Selling Association (DSA) as Direct Selling Compliance Professionals. Participation in, and successful completion of, the DSCP-CP program demonstrates PayQuicker’s commitment to direct selling organizations by maintaining high compliance standards and a robust compliance program.
David Jarmusz
Crystal Holtzendorff
