RegulationSep 6 2021

FCA in renewed push for regulation of online ads

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FCA in renewed push for regulation of online ads

The Financial Conduct Authority has again said online financial adverts should be regulated, alongside a warning against the need to regulate the promotion of crypto tokens. 

Speaking at the Cambridge International Symposium on Economic Crime today (September 6), FCA chairman Charles Randell outlined the need for a permanent and consistent solution to the problem of online fraud from paid-for advertising.

He said: “People used to think of the internet as a free space, outside the law, impossible to regulate. And while there’s no doubt that it has enabled businesses to innovate and grow in ways that serve us well, their awesome power must be matched with responsibility. 

“As we live more and more of our lives online, we can’t allow online businesses to operate in ways we wouldn’t tolerate with any other business. The tide of regulation is turning all over the world, and online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses. Same risk, same regulation.

“That includes rules which protect people from investment fraud and scams.”

When he last spoke at the Symposium in 2019, he urged search and social media giants to step up and stop publishing and profiting from fraudulent content. 

“Since then, we have seen some progress,” he said. “Google has committed to stop promoting advertisements for financial products unless an FCA authorised firm has cleared them. Google is doing the right thing and we will monitor the impact of its changes closely. 

“We now need other online platforms – Facebook, Microsoft, Twitter, TikTok - to do the right thing too. And we think that a permanent and consistent solution requires legislation.”

His speech comes last month, FCA chief executive officer Nikhil Rathi, reiterated in a podcast that the regulator was keen for ads to be included in the Online Safety bill, which is currently going through parliament, in line with calls from the industry.

The government’s proposed legislation about online harms covers some financial harms but paid-for advertising, one of the main sources of online investment scams, is still not covered. 

Randell emphasised the FCA considers it should be.

He said: “Even with better targeted laws, the internet will continue to be a very challenging space for regulators. Hercules rerouted two rivers to wash the stables out, and we’ll need two streams to tackle the problem of online financial scams: appropriate regulation, including self-regulation by online platforms and robust enforcement by the authorities; and greater consumer awareness about online scams.

“Enforcement must be a team effort, involving the National Crime Agency, the Serious Fraud Office, police forces and sectoral regulators like the FCA, coordinating with international partners. All these players need to have the right focus and resources.”

Since the government has stopped short of including fraud via advertising in its bill, industry members and MPs have hit back urging it to include these amendments in the bill.

But so far the government has rejected these calls. Instead, it said there would be a consultation on online advertising regulation later in the year.

However, the industry has not given up as towards the end of July, a coalition of consumer groups, charities and financial services industry bodies came together to increase pressure on the legislators.

'It may not end well'

Elsewhere in the speech, Randell warned against the promotion of crypto tokens as he referenced Instagram influencer Kim Kardashian, referring to her post as “the financial promotion with the single biggest audience reach in history”.

Kardashian was recently paid to ask her 250m Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community‘.

In line with Instagram’s rules, she disclosed this was an advert but she didn’t have to disclose that Ethereum Max – not to be confused with Ethereum – was a speculative digital token created a month before by unknown developers – one of hundreds of such tokens that fill the crypto-exchanges. 

Randell said: “Of course, I can’t say whether this particular token is a scam. But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all. 

“There are no assets or real world cashflows underpinning the price of speculative digital tokens, even the better known ones like Bitcoin, and many cannot even boast a scarcity value. These tokens have only been around for a few years, so we haven’t seen what will happen over a full financial cycle. We simply don’t know when or how this story will end, but – as with any new speculation – it may not end well.”

Randell explained the hype around these products generated a fear of missing out from some consumers who may have little understanding of their risks. 

He said the FCA has repeatedly warned about the risks of holding speculative tokens, explaining that they are not regulated by the FCA, nor are they covered by the Financial Services Compensation Scheme. 

But around 2.3m Britons currently hold this type of token and around 14 per cent of them also use credit to purchase them, thereby increasing the exposure to loss, he said.

Approximately 12 per cent of them, around a quarter of a million people, seem to think that they will be protected by the FCA or the FSCS if they go wrong, he added.

“So the potential level of consumer harm that these purely speculative tokens bring raises the question of whether the activity of creating and selling the tokens themselves should be brought within FCA regulation,” Randell said.

The FCA currently has a limited role in registering UK-based cryptoasset exchanges for anti-money laundering purposes. 

However, it doesn’t have a general remit from Parliament to regulate the issue or promotion of speculative tokens. 

Randell said because of the decentralised way that these speculative tokens are created, any effective system of regulation would require a business seeking registration or authorisation with the FCA to bring itself firmly within its reach, with people and resources that could be accessed in order to supervise and enforce its requirements. 

“We are not going to award FCA registration or authorisation to businesses which won’t explain basic issues, such as who is responsible for key functions or how they are organised. That would be token regulation in the worst sense.”

He said in considering regulating crypto, legislators need to consider three issues: how to make it harder for digital tokens to be used for financial crime, how to support useful innovation and the extent to which consumers should be free to buy unregulated, purely speculative tokens and to take the responsibility for their decisions to do so.

sonia.rach@ft.com

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