Social media for the Paranoid

The Financial Services Authority (FSA) in the UK is a Quango. This glorious name is an acronym for “quasi non-governmental organization”, in other words its regulation at arms length from the Member of Parliament. FINRA in the US is a private organization and only regulates Broker-Dealers while the FSA also covers banks, insurance, and mortgage providers – but the two are quite similar.

On June 15th 2010 the FSA published their opinion on social media – called “Financial promotions using new media”, that on first reading puts considerable barriers on the use of social media by the UK insurance, banking, and brokering industries. There are some ways forward as I will try and outline below.

The FSA has the laudable goal that all financial promotions are “fair, clear, and not misleading”, irrespective of the medium. There is an except for “image advertising” (basically the advertising you see that the airport which shows a picture of an elephant on a surfboard, or whatever along with the company name and web address), but this does not apply to insurance companies according to COBS 4.  (accenture is not a typical firm covered by this regulation – but their Ad is such a classic that I could not resist. How many minutes do you think it took to create this Ad in Photoshop?)

The problem with social media is that “fair, clear, and not misleading” is a pretty tall order for 140 characters – on a par with surfing elephants. But what about Facebook and LinkedIn?

Well probably the best way to analyze the problem is to use the FINRA 10-06 framework. FINRA regulates broker-dealers in the US and it has basically the same goal as FSA (stop non professional customers getting bamboozled). But FINRA makes a significant differentiation between Profiles and Communications. Profiles are the static bit of the Facebook and LinkedIn pages that say who you are, and can basically be as long as you like. Communications are basically Tweets and Status Updates.

If you consider Profiles then FINRA requires that every change is approved by a “registered principal” – which in the UK probably means the compliance department. This is doable as a firm’s Facebook page is probably very similar to its web-page. The problem comes with employees. If they state that they are employed by the insurance company, do their pages also have to be approved?

For Communications FINRA basically wants the monitoring but not pre-approval. On the face of it FSA does not see Twitter as a viable channel for regulated industries at all, but on June 15th 2010 they are quoted by The Register as saying:

“OUT-LAW asked the FSA if promotions on Twitter that provide a link to further details are likely to fall foul of its rules on stand-alone compliance. An FSA spokeswoman said the FSA would not be prescriptive on that point.”

So perhaps they would allow Tweets as long as they are linked to a disclosure page – the so called “one click” doctrine in the states (basically all the legal blurb needs to be one click away at all times)?

So what should a firm regulated by the FSA do?

Well, probably PCPAL! Panic, Catalog, Proscribe, Approve, Clarify.

Panic - clamp down on all use of social media. They have got to be seen to be taking the rules seriously if they are going to start a good faith dialogue with the regulator.

Catalog - find out what is being done – both officially and unofficially.

Proscribe - put in place a social media policy that that is in line with the FSA guidelines.

Approve - streamline the approval process so that the Profile section of social media can be rapidly updated and approved.

Clarify - start a dialogue with the regulator in order to clarify how the rules would apply in particular circumstances such as Tweets.

Is it worth it? Absolutely – recommendations by people you trust has always been the prime way to select a complex product or service. Social media is all about personal connections while you surf, and even if you are not an elephant it is a good idea to surf in style.

“Relationship banking” is a favorite  phrase in the world of banking – Citibank even offers a “Relationship Package”. I am not entirely sure what it might contain – beyond chocolates, champagne, roses, and perhaps some supplies – just in case the relationship gets a little hot. But when it comes to using social media to build a relationship, banks that sell stock and bonds to their customers have a hard time because they are chaperoned by Finra. As a result their efforts are way behind organizations such as Dell and Starbucks. If they could overcome the constraints imposed by Finra then they may well become the largest business driver of social networks because it helps maintain the relationship long after the chocolates are eaten and the champagne has gone flat.

Finra is a private company that currently self regulates 5,100 US brokerage firms. Banks do not need to join Finra unless they offer brokerage services (stocks and bonds to you and me).

On January 25,2010 Finra told its members what to do about social media (Regulatory Notice 10-06). It basically differentiates between customers and prospective customers, and between Friends and the general public.

So, for example, sending an Twitter DM (Direct Message) to a thousand customers is correspondence, while sending the same DM to 26 prospective customers is considered sales literature. Sending the same message to a private group (no public access) of 26 Followers who are customers is also considered correspondence. Unless the social media site changes its privacy settings and makes that message public, in which case it becomes sales literature.

Just to add to the confusion Finra differentiates between static and interactive parts of a social media page. So the Facebook profile is static and hence requires approval by a Registered Principal (a manager who has passed the relevant Finra exams), while the status messages, wall messages, and other interactive communications are seen to be an “interactive electronic forum” – which only need to be supervised. Supervision is a complex task in itself with a complex set of rules.

Even getting a posting by  third party on a broker’s Facebook wall can cause problems if the firm in anyway appears to endorse it.

The Finra document refers to technology solutions for all these issues. If these problems can be solved then expect alot more virtual champagne from your broker.