Financial Promotions in a Digital Age

Overview


On Tuesday 11th May the Queen’s Speech was read to the UK parliament in London, this sets out the government’s legislative agenda. It included an Online Safety Bill (also known as the Online Harms white paper) which will place a duty of care on platforms to have systems and controls to keep their users safe.


We do not know yet if this will fully include financial services but the FCA and Bank of England have been lobbying loudly that it should. The BBC has suggested that that the bill will include online scams including fraudulent investment opportunities and ‘romance fraud’ but that the bill will not cover “fraud via advertising, emails or cloned websites.” These are apparently late additions so don’t be surprised if more amendments are made to the scope.



Background


UK regulators have always been concerned that adverts for financial products (aka Financial Promotions) are Clear, Fair and Not Misleading. The rules were formulated at a time when promotions were placed in print newspapers, sent through the post, or delivered on TV and Radio. Now advertising increasingly happens over the internet and can originate from anyone anywhere in the world. There are growing numbers of complaints from consumers about scams and misrepresentation. The FCA are concerned at the risks of mis selling and outright fraud from online advertising.


Historically the vast majority of adverts came from regulated firms in the UK. The arrival of the internet has changed this, and it can be hard to know where the advertiser is based, if they are regulated, and even if they are who they claim to be.


If we go back 15 – 20 years the FCA (or FSA as was) would have been focussed on the promotions regulated firms made and particularly the rates of return their adverts suggested could be made. This debate often came down to something like whether it was OK to predict annual returns of 9% rather than 6%. This is clearly important over the life of a product. Hence the FCA prescribes rates of return. However, this debate amongst the regulated community can seem quite comical when there are adverts on the internet suggesting 100% plus returns on crypto currencies.



What are the regulators concerned about?


Outright Fraud


Firstly, there is the concern that UK individuals could be targeted by various scams and other fraudulent schemes.


There are numerous gut-wrenching stories of individuals losing all or significant parts of their life savings to scam artists and fraudsters. This has probably been exacerbated by the long period of ultra-low interest rates in the UK, and other developed markets, which has led to savers searching for better returns and venturing beyond their usual risk appetite and expertise.


If a UK regulated firm has been involved and overstated the potential returns, then investors potentially have the backstop of the ombudsman and the compensation scheme. However, when unregulated or overseas firms are selling products, this backstop is often not there.


Clones


A related area of fraud is clone firms where fraudsters use the name and branding of a genuine financial institution to endorse their product.


This is an underhand way for fraudsters to persuade wary investors to hand over their money. The investor thinks that while they have never heard of the firm they must be okay because they are associated with a genuine regulated business. The FCA register is full of examples of such fraudulent or cloned firms but these warnings require investors to have enough sophistication to think to check.


Misrepresentation


Another area of concern is where a genuine product is sold in a misleading or untransparent way. For example, the benefits are extolled at the expense of the risks, or the product has opaque charges.


The FCA have tried to warn consumers for many years with the strapline ‘if it seems too be good to be true then it probably is.’ But that doesn’t appear against every single online advert and scam.


If the firm issuing the advert is in the UK (regulated or unregulated) the FCA can act against such promotions. If the advert originates from a server in Africa or Asia this is much harder for FCA to intervene.


UK regulators and most other regulators will also be concerned about overseas firms targeting UK customers, particularly retail and less sophisticated customers. Obviously, this is a breach of licensing requirements, but it can become less clear where an unregulated entity that has some association with a UK regulated firm makes a promotion on a website with global reach.


Most firms will be clear about where and to whom their services are available and where not but it is easy to blur these lines particularly if you deliberately want to give potential investors the impression they are under the UK regulatory umbrella, and therefore access to UK compensation schemes.


These cases put a disproportionate burden on the UK ombudsman and compensation schemes who have to process complaints from consumers of these non-UK entities thus driving up costs of already exceptionally costly schemes. With the funding rates of these schemes at record highs the FCA will have to crack down really hard if they are to stand a chance of reducing the costs of these schemes.



What is the approach from the platforms?


By platforms we mean in this article, Google, Facebook, Twitter etc and potentially many more firms.


FCA has been clear that they are trying to engage and getting mixed responses but broadly these firms feel its too big and difficult for them to police their own platforms. The likes of Google and Facebook clearly already have lots of experience of this and have spent considerable amounts of money policing their platforms for various types of hate speech and illegal activity such as supporting terrorism.


This is a massive headache for them as they have always wanted to portray themselves as providing a platform but with the content being the responsibility of their users. However, it is clear to an extent that this ship has already sailed as some are already suspending users and removing posts or adverts from their platforms.


Message Boards


We have written previously on Gamestop, meme stocks, RobinHood etc. This will definitely be an area of concern to regulators on both sides of the pond because of the risk of retail investors getting caught up in the excitement of the market and losing their proverbial shirts or worse, there is a link to Gontran de Quillacq’s blog below which covers this in more detail.


Going back to Gamestop some of the activity on the message boards is interesting. Let’s say a regulated person said a stock ‘was going to the moon’ this would definitely be a problem from a financial promotions perspective. If the regulated person saying it held that stock then possibly this could be seen as market misconduct such as a ‘pump and dump’ scheme.


More challenging for the regulators will be where the recommendations are coming on platforms like Reddit from unregulated persons. Possibly they can argue free speech here though the pump and dump offence could still apply.


Email Scams


Email providers is another area of possible headaches. As we know lots of scams and attempted frauds start this way. Many email providers already try to filter out spam and junk but as these email accounts for individuals are usually a free service they do not have huge incentives to do this.


If the regulators were to put a duty of care of them to protect users from malicious emails there might be an incentive to stop supporting these free accounts and ask customers to pay for a service with added security.