The Office of Fair Trading (OFT) said today that it is clamping down on websites offering expensive hi-tech gadgets as 'free gifts' in return for the purchase of low-value products.
According to the government watchdog, it has accepted binding undertakings from so-called 'matrix scheme' firms promising that that they will no longer promote such offers.
The move follows growing concern over firms such as Pulsematrix.com (currently offline) and phones4everyone (at themobilematrix.com).
People are promised the chance of valuable 'free gifts' including mobile phones, iPods, games consoles, cash, laptops or even cars by purchasing a low value product costing around £20, such as a mobile phone signal booster or ring-tone CD.
Phones4everyone claimed to be "the most established and successful site of its kind" with over 18,000 members.
Participants who bought the products were added to a waiting list for their chosen 'free gift', which would be sent to them after they reached the top of the list. However, for each 'free gift' to be dispatched, a set number of new recruits had to join the scheme.
This number varied according to the value of the gift that was chosen, but could be around 50 for the latest mobile phone.
The nature of matrix schemes means that the number of members waiting for a gift always far exceeds the number of gifts awarded.
Both websites offered participants the opportunity to move themselves up the waiting list more quickly, for example by recruiting new members to the scheme, buying further products or signing up for third-party services.
But the OFT contended that a participant's success in influencing their position on the waiting list was dependent, for the vast majority of those taking part, on the actions of other participants.
The OFT stated that it considered the schemes to be unlawful under the Lotteries and Amusements Act, as participants had to pay for a chance to receive a prize or reward, were not required to exercise any degree of skill, and the distribution of the prizes/rewards was substantially outside their control.
The watchdog has obtained undertakings from Lewis Ames (of pulsematrix.com), Tom Hashemi (formerly of pulsematrix.com) and Darren Ithell (of phones4everyone) under Part 8 of the Enterprise Act 2002.
All three have undertaken not to continue, or repeat, the promotion of any scheme which constitutes an unlawful lottery.
If the undertakings are breached the OFT could seek a court injunction. Failure to obey a court injunction could result in proceedings for contempt of court.
Penny Boys, executive director at the OFT, said: "These schemes are ultimately unsustainable and will eventually collapse to the detriment of thousands of people. Very few people will ever receive the free gift they expect to get."
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