Financial services facing more social media regulation

To many in the financial sector, social media looks like the wild west; too new and fast moving to be touched by real world regulations. But, the Financial Conduct Authority’s (FCA) new advice on social media and financial promotionsis a sharp reminder of the long reach of regulators. The FCA’s last advice on the topic more than four years ago, little envisaged how quickly Facebook, Twitter and other services would become mainstream. Consultation on the new FCA guidance closes on November 6th, and the industry must participate in this to get the right regulatory framework.

The guidance can only address with broad principles part of the huge range of activity that takes place online. It leaves a lot of scope for judgement by financial firms, but there are big penalties for getting it wrong. The next time advice on financial promotions is updated it may look very different, so quickly are areas such as online research and new word of mouth business models developing.

The FCA aims to end uncertainty over what is permissible on social media, setting out new guidelines. Firms have been particularly concerned about compliance on micro-blogging sites, such as Twitter. Full explanations and warnings are difficult where text is limited. There are dangers, too, in use of banner ads and images to support product invitations. In response, the FCA has given far more detailed guidance and examples than its North American counterparts. There is a set of rules on making sure each standalone communication complies. The standard is fair and clear offers that are not misleading. The FCA suggests adding #ad to make it clear that a communication is a financial promotion. Yet these hash-tags still remain rare, and can look incongruous. Firms may take more encouragement or threat to adopt this new approach.

The challenge is that firms are still finding their way in this new landscape. Surprisingly, many financial advisers have moved more quickly than investment firms. UK advisers using social media for business have seen clients grow 11% in the past year. Growth is particularly strong amongst high net worth clients under the age of 40. To date, some advisers have stood back from the new media, blaming lack of clarity on social media regulation. That excuse has now gone, and more advisers are likely to use social media to communicate with clients and promote services. But, many of those already using social media have work to do to enhance the mobile versions of their websites. For firms that are nimble it can reduce entry barriers, but in the short term intermediaries must bear the costs of running new and traditional communications.

The FCA recognises that social media channels are not a one-way broadcast, but invite interaction and conversations. Yetthere are no boundaries to the parties to these conversations.Firms lose control of a message as soon as it is released. Once posted, it can quickly become distorted or reach unintended audiences. Fortunately, firms are not responsible for alterations others may make. But here, the blurring can begin, with PR companies and other agencies often adding endorsement or spin. Responsibilities may not be so easily shed.

The real issue online is that underlying connections between those re-sending messages, may not be clear. There can be subtle commercial interests that encourage endorsement. Simply extolling the virtues of products or services can become a financial promotion, and the particular social media outlet might not permit the right warnings. The FCA has even noticed that some services can deconstruct tweets, stripping out warnings that might have been within images, for example. Policing this is a challenge for firms and regulators.

The ephemeral nature of Tweets and other messages makes it hard to document compliance. The FCA has reminded the industry to save full records of their social media activity. This is not as easy as archiving emails, and few firms are likely to have set up a basis for preserving every social media communication. New tools are needed.

A problem not directly addressed by the new guidance is the blurring of boundaries online, and frequent lack of disclosure of identities and conflicts. Funds can be promoted by anonymous “analysts”, or those hiding behind a pseudonym. Once this happens, there is no systematic way of identifying commercial interest, never mind responsibility for the advice. Many of these “research” sites operate from other jurisdictions, beyond even EU regulation.

Simply dropping branding from messages or social sites may not be enough. The FCA rightly points out that senior analysts and executives may be so closely identified with their firm that there can be risks in what they do even in an apparently personal capacity. New media has given prominence to star managers, with personal brand a factor in fund selection.

This confusion is set to become a bigger regulatory challenge as social endorsement replaces advertising in some new business models. Recommending services by word of mouth could dramatically widen involvement in promoting financial services. It is no longer just a question of endorsement by high profile names, but the potential for new businesses to involve people with significant contacts on Facebook or Twitter. Already, the FCA has acted quickly on crowd funding with workable rules that need not stifle it. But, it will be hard to keep regulation apace with digital evolution.

Regulation itself may not be the full answer to consumer protection. There is potential to get additional control of messages by making use of the ethics standards of investment professionals. These codes can reach into areas of private blogging or anonymous research, beyond easy reach of regulation. Professional bodies could play a role in requiring members to disclose identities and conflicts.

Responses to the FCA consultation are invited via Twitter using #smfca. The guidance by itself may not deliver a level playing field in social media. Intermediaries and asset managers should give feedback to ensure the regulations address all the current abuses.

A version of this article was published as an Op-Ed in Financial News on October 20 2014.

Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. The information presented in this article has been obtained from sources believed to be reliable, however, I make no representation as to their accuracy or completeness and accepts no liability for loss arising from the use of the material. Articles and information do not represent investment advice.

Image credit; Wikimedia Commons some rights reserved. By Sophiaperesoa http://commons.m.wikimedia.org/wiki/File:Social-media-for-public-relations1reduzido.jpg