"Law, not likes" – the rise of social media financial promotions

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"Law, not likes" – the rise of social media financial promotions

"Law, not likes" – the rise of social media financial promotions

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October 2, 2024

Likes

As with many walks of life, social media has become a marketplace for financial products. Unlike hair care or home organisation tools though, promotions for financial instruments are heavily regulated. As the FCA have said "Promotions aren't just about the likes, they're about the law".¹

Kim Kardashian learnt this lesson when she had to pay $1.26 million in penalties and fees to the US Securities and Exchange Commission in 2022 after she failed to disclose that she was paid $250,000 by crypto company EthereumMax to publish an Instagram post about its EMAX tokens. She also agreed not to promote crypto asset securities for three years.

In May of this year the FCA brought criminal charges against nine reality TV stars or social media "finfluencers", with a combined Instagram following of circa 4.5 million people. They were charged in relation to promotions of an unauthorised foreign exchange trading scheme relating to contracts for difference (CFDs) and issuing unauthorised financial promotions. Two promoted the CFDs through their Instagram accounts, with one paying the other seven to extend the promotions to their own Instagram followers If the prosecutions are successful, the individuals may face fines and up to two years' imprisonment.

In recent weeks, Donald Trump launched his own cryptocurrency with his sons already promoting it on X/Twitter. It is clear that the trend for social media financial promotions will continue.

Law

A financial promotion is an invitation or inducement to engage in investment activity in the course of a business. Only a person authorised by the FCA or who has had the content of their financial promotions approved by an FCA-authorised person can make financial promotions (section 21 of the Financial Services and Markets Act 2000).

Financial promotions rules cover a wide range of financial products – such as deposits, investments, mortgages, insurance and consumer credit. The FCA has also extended the rules to cover crypto assets.² Inducements for crypto assets include the giving of "free" cryptocurrency as a reward for opening an account or investing in a certain amount, as well as other common marketing tools such as "refer-a-friend" bonuses, whilst invitations cover communications to the consumer where there is an element of request or persuasion.

The restriction also has a broad territorial application and applies to promotions directed towards UK investors, even if the promoter itself is based in another jurisdiction.

FCA guidance

With the increasing use of social media to market unauthorised investment schemes, earlier this year the FCA published updated guidelines on promoting financial schemes on social media and warned individuals and companies of potential enforcement action (March 2024, FCA Finalised guidance on financial promotions on social media')³ (the Guidance). Its previous guidance had been published in 2016, and since then social media advertising and methods of advertising had grown exponentially.

The Guidance sets out that not only direct promotions but also indirect promotions, such as popular forms of social media sharing such as retweeting, story sharing and direct messaging, fall under financial promotions. Each promotion must be standalone compliant – this means that each communication must comply with the rules when considered individually.

The FCA has set out how adverts across social media channels must be fair, clear and not misleading, meaning they must have balance and carry the right risk warnings so people can make well-informed financial decisions. They also note how social media will not always be the best place to promote complex products. Firms need to consider whether a platform that offers limited characters or space is the right place to do so. In 2023 they removed over 10,000 misleading adverts, up from around 8,500 in 2022.

Approach for authorised firms

The introduction of the Consumer Duty last year places an overarching duty on authorised firms to provide good outcomes for retail customers. Financial promotions must support retail customer understanding and communicate information to retail customers in a way that equips them to make effective decisions.

Firms working with affiliate marketers, such as finfluencers, should take steps to take proactive responsibility for how their affiliates communicate financial promotions. This includes having appropriate monitoring and oversight systems to ensure that they understand their responsibilities and do not communicate illegal or non-compliant promotions. Firms remain responsible for the compliance of every promotion they make or cause to be made.

Unauthorised persons, such as influencers, who promote financial products or services that are subject to regulation without the approval of an FCA-authorised person may be committing a criminal offence. Even when the influencer in question does not have a commercial relationship with a firm, their communications on social media about financial products or services may still be subject to the financial promotion restrictions and require approval to communicate.

The FCA has also collaborated with the Advertising Standards Authority (ASA) to produce information to assist influencers who are approached to promote financial products or services, with a view to encouraging them to consider whether they are the right persons to promote such products and services, and draw their attention to the risks associated with illegal financial promotions.

Sanctions

For non-compliance with the financial promotions rules, the FCA has a range of actions available to it, including:

issuing takedown requests of websites in breach;
placing firms on the FCA warning list; and
restricting firms to prevent harmful promotions.

Those who illegally communicate financial promotions to UK consumers will be committing a criminal offence, punishable by an unlimited fine and/or up to two years in prison.

What to look out for on social media

The FCA and ASA have provided clear guidance for authorised firms and content producers on social media. When presented with what appears to be a financial promotion on social media, consumers should continue to be cautious.

Does it seem too good to be true?

Does the product promise incredible returns and not appear to have any downside. Are the risks clear?

Has an authorised financial services firm promoted it?

The financial services register⁴ contains a list of all authorised financial services firms and includes contact details so that you can check whether they are a legitimate firm. They have warnings if scams have been linked to legitimate authorised firms.

Do I understand what product is being sold to me?

Crypto assets in particular are not straightforward and can be very complex.

Do I need to get independent advice?

You may wish to considering speaking to an independent financial adviser to help with any investment decisions.

Next steps

The FCA has made it clear that it will bring enforcement action where it sees its financial promotion rules being breached. With new social media channels developing and the types of potential investments growing, it is clear that this will be an area in which they continue to intervene and keep a close eye on.