Social media, the FCA and providing investment advice

By Craig Weston and Alexandra Marchant

Just days ago Kim Kardashian joined the growing number of social media users online encouraging others to invest, when she shared an Instagram story to her 228m followers about the benefits of investing in Ethereum Max, a form of cryptocurrency. Whilst Kim’s advertisement may have raised this topic to an even wider audience, it follows a recent upward trend in the surging popularity of online trading platforms during the Covid-19 pandemic, with the BBC recently reporting on individuals losing millions of pounds after investing with unlicensed and unregulated traders.

Although US-based Kim Kardashian’s post does not fall within the scope of the FCA, regulators in the UK are preparing to deal with this live issue and are cracking down on this potentially high risk advice. In a speech at FinTech week earlier this year, FCA CEO Nikhil Rathi warned social media sites that they may take action where advertisements or investment advice does not comply with the financial promotions rules or where it strays into undertaking a regulated activity. This comes shortly after the FCA published research findings into understanding young investors who engage in typically higher-risk investments such as cryptocurrency, and voiced its concern that this newer group of ‘self-investors’ are more reliant on social media and YouTube for investment advice.

On the back of this research, Rathi told his audience that ‘Online search and social media firms need to take greater responsibility for their role in connecting consumers with these investment offers’. When the UK left the EU, the exemption from the financial promotions regime enjoyed by online platforms was removed. The FCA now believes that consumers should not be subject to greater risks because they find an investment on social media platforms. Rathi continued ‘we see no reason why different standards should apply to a search engine or social media compared to a newspaper. If these platforms choose to display and profit from adverts for risky – and in some cases fraudulent – investments, they should also comply with financial promotions rules.’ Clearly the FCA wishes to level the playing field between firms who adhere to the rules and those that do not.

This article seeks to provide guidance on what activities are caught within FCA regulations, the rules on compliance and the consequences for not doing so.  If you are in need of individual legal advice you can contact Irwin Mitchell’s team here.

Financial promotions and other regulated activities 

Financial promotions are governed by s.21 FSMA 2000 and are defined to include any ’invitation or inducement to engage in investment activity, communicated by a person in the course of business’. FCA guidance is clear that any form of social media communication is capable of being a financial promotion, and therefore regulated, depending on if it includes an invitation to engage in a financial activity.  The communication would also need to be made ‘in the course of business’, which requires a commercial interest on the part of the communicator.

According to the FCA website, a website, Facebook post or tweet etc. that fits the criteria above is caught.  Financial promotions can form a significant part of a consumer’s product knowledge and can influence a consumer’s decision making when choosing a product, so it is vital that these promotions are fair, clear and not misleading in order for consumers to make informed decisions.

Additionally, if you’re receiving money/deposits to invest on someone else’s behalf you can be sure that you are conducting a regulated activity and will need to adhere to the regulations.

FSMA – the rules on conducting a regulated activity

Under s19 FSMA 2000, no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is either an authorised person or an exempt person. An activity is considered a regulated activity if it is an activity of a specified kind which is carried on by way of business and relates to an investment of a specified kind.

Providing investment advice, for example by suggesting that someone invests in a particular investment, particularly when commenting on the advantages and disadvantages, potential returns or the percentage increase in value of the investment is likely to amount to regulated investment advice and require you to be authorised by the FCA to provide it. 

Accepting money/deposits from people and trading on their behalf is also a regulated activity and requires authorisation.

A financial promotion is another example of a regulated activity.

According to rules set by the Treasury, in general, a person cannot communicate a financial promotion unless that person is, or the content of the promotion is approved by, a firm which is authorised to carry on a regulated financial services activity. Where an unauthorised person wishes to communicate a financial promotion, the promotion must be approved by an authorised firm; the rationale behind this requirement is that through authorised firms, the FCA can ensure that the financial promotion meets certain minimum standards, so that consumers are able to make well-informed decisions appropriate to their financial circumstances.

It is important to adhere to the regulations

The consequences of undertaking regulated activity without authorisation are severe; any person who carries on a regulated activity without authorisation to do so is committing a criminal offence, for which the maximum penalty is two years’ imprisonment and an unlimited fine.

Additionally, where an individual makes an intentionally dishonest promotion, for example posting an advertisement promising X returns when they know that this is unlikely to happen, they could be guilty of Fraud by False Representation under s.2 FA 2006. This is also a criminal offence, punishable by a fine and/or imprisonment of up to 10 years depending on the offender’s culpability and level of harm caused.

As well as adhering to the rules above, it is important that anyone advertising in relation to financial advice online is also complying with standards set out by the Advertising Standards Agency, which require all marketing communications are obviously identifiable as ads.

Conclusion

It is vitally important to ensure that you or your business is not unintentionally falling within the scope of the FCA by engaging in a regulated activity. Where you are setting out to provide a regulated activity, it is important that you are authorised to do so.

Any potential investors reading should exercise caution when relying on investment advice found on social media until they are sure the advertiser is reputable, and may wish to enquire as to whether a business is FCA regulated – further information can be found here.

Irwin Mitchell has lawyers that specialise in both regulatory advice and social media. If you are interested to learn more on the above or are in need of legal advice, please contact our team here.