Social media and online networks are acknowledged as vital components of a successful crowdfunding campaign. Indeed, you'd be hard pushed to find a list of crowdfunding tips which doesn't mention Twitter, Facebook and the like.
The rise of crowdfunding goes hand in hand with the rise of digital communication - when you can talk to the crowd without barriers, you've got a much better chance of getting them to take notice.
However, social media and the financial industry have not been easy bedfellows so far and it comes as no surprise that the Financial Conduct Authority (FCA) is still trying to get to grips with it.
Last week, the FCA published its much anticipated consultation paper on social media and customer communications which outlines proposed rules on how social media should be used to avoid breaching existing financial promotion rules. Financial promotion rules are designed to catch communications which include an invitation or inducement to engage in investment activity. They are a significant set of regulations for any crowdfunding platform to navigate.
The FCA latest consultation paper is intended to:
- clarify and confirm the FCA's approach to the supervision of financial promotions in social media;
- help people understand how they can use social media and comply with the FCA's rules;
- remind people that the rules are intended to be media-neutral to ensure that consumers are presented with certain minimum information, in a fair and balanced way, at the outset of any interaction with them; and
- set out specific areas that platforms need to consider, and provide some solutions and illustrative examples.
Clive Adamson, director of supervision at the FCA, has noted "Our overall approach is that financial promotions, whether on social media or traditional media, should be fair, clear and not misleading. We have had extensive industry engagement on this issue and we believe our guidance is a sensible approach that doesn't affect industry's ability to innovate using new forms of media."
Financial promotion regulations ... in 140 characters or less
The application of financial promotion rules on social media isn't new. In 2010, the then Financial Services Authority published an update which made it clear that financial promotion rules are media neutral and apply to social networking websites like Facebook and Twitter. Given that the financial promotion rules apply to 'communication' it does make sense that the rules extend to communicating via social media platforms. However, the difficulty comes in when you consider how this works in practice and how the crowdfunding message could be diluted by compliance issues. Platforms need to ensure that they have considered these issues carefully as they could end up with a hefty fine and, more importantly, the reputational damage that comes with that.
For example, included in the FCA's examples of ensuring compliance is setting out images on a tweet so that all the disclaimers can be seen, as well as including a financial promotion hashtag. It is questionable whether such risk warnings are really what people want to see on Twitter in the context of crowdfunding, as generally, Twitter is used to deliver a punchy few words with the aim of redirecting traffic to the campaign website.
It is also hard to see how the FCA's suggestion of using software to target only particular groups will affect the crowd. How will such software sit with the commercial need to grow networks? We have seen tools like Google+ used to great success in crowdfunding campaigns, however, Google+ is a about maximizing not minimizing.
Perhaps the FCA may have to reconsider its 'media-neutral' stance given the way in which social media has transformed the way in which people communicate. Is there merit in treating all communications the same when, in fact, they're not? Social media is all about the conversation. There may be scope for applying different rules to social media posts which are more about telling your story and inviting people to find out more than direct selling. Either way, this has the potential to be a regulatory minefield.
No doubt the consultation process, which runs until 6 November, will raise all these issues and more. Maybe the democratising power of social media will even have some influence on the FCA's deliberations.
However, given that the FCA's stance on social media has been made clear for some time now, it could be the crowd that is forced to change their ways in order to comply with regulatory updates.