The UK’s financial watchdog, the Financial Conduct Authority (FCA), has warned it will take a firmer stance against tech giants in the fight against fake and fraudulent financial adverts.
Earlier this month, the head of enforcement at the FCA, Mark Steward, suggested that the FCA would go as far as taking legal action against tech giants if they failed to comply with financial services market regulations in relation to advertisements.
Such advertisements - which communicate an invitation or inducement to engage in investment activity - are referred to as “financial promotions”. The restriction under section 21 of the Financial Services and Markets Act 2000 (FSMA) means that financial promotions made in the course of business may only be communicated by an authorised person, or by an unauthorised person if an authorised person has approved the content of the financial promotion for the purposes of section 21 FSMA. There are in addition a number of exemptions to the restriction which are set out in the FSMA (Financial Promotion) Order 2005 (FPO).
Social media platforms may typically be able to rely on the FPO exemption applicable to “mere conduits” where they simply provide a means of transmission for a financial promotion provided to them by third parties. However, where they provide value adding services they may not be able to rely on the exemption: following the end of the Brexit transition period there is no longer a general exemption that applies to electronic communications made from an establishment in an EEA state other than the UK.
If social media platforms cannot rely on an exemption, they will then need to have in place processes to identify financial promotions being communicated through their websites and to check whether they have been approved by or made by an authorised person. If they have not been so approved or made they should not be published.
Not only would this enable the social media platforms to comply with the section 21 restriction, but it would enable them to provide additional consumer protection as the FCA has found that a significant number of these third party financial promotions published by social media platforms are in fact scams.
Mr Steward says the FCA has made it clear it expects social media companies to take action to reduce the number of fraudulent financial advertisements that are found on their sites. Speaking at the Treasury Committee evidence session on economic crime, he told the committee that the FCA has had “good engagement” with all the social media companies.
Mr Steward went on to say that “In many respects, the problem that we've described is one that is shocking for [the social media companies] as well, and the challenge is whether they are really able to come up with a way of tackling this problem that is also consistent with their current business models.”
Fraudulent ads are becoming increasingly complex, creative and convincing, and they are still being served to users. According to the National Cyber Security Centre’s (NCSC) fourth annual report, more than 700,000 online scams (totalling 1.4 million URLs) had to be removed in the last year alone.
Some MPs and businesses had hoped the upcoming Online Safety Bill would address the issue of fraudulent adverts, making tech firms directly responsible for the material that appears on their platforms and bringing these fraudulent advertisements within Ofcom’s remit. However, the current draft Online Safety Bill does not directly encompass fraudulent advertisements, instead leaving these to the existing regulators and prosecuting authorities. The FCA is reportedly concerned that there was “no mechanism for social media to be legally obligated to do some very basic things that don’t happen now”.
In practice, the FCA wants to push responsibility for finding a solution onto the platforms themselves. Taking a similar approach to the CMA, Mr Steward said the FCA requires that the platforms "think about how [these problematic advertisements] can be interrupted by some kind of programme that identifies the very things that are going to cause damage to consumers.” He went on to say that the FCA understands there are logistical challenges, but claimed that it was fundamentally important things changed in this space. It seems the threat of action is meant to act as an incentive for the platforms to solve this problem themselves.
Tech giants’ response?
The tech giants have already been active in the fight against fraudulent ads. In 2019, Facebook launched a scam reporting tool in the UK, which allows users to quickly and easily flag potentially fraudulent adverts or posts. On a related note, Facebook and ebay have also been working with the CMA to stamp out the trade in fake and fraudulent online reviews.
Google has been working closely with the FCA and in a letter to the FCA in March this year set out numerous measures to prevent scammers utilising their platforms. A spokesperson for the company said: “Protecting consumers and legitimate businesses operating in the financial sector is a priority for us. We have been working in consultation with the FCA for over a year to implement new measures and we are developing further restrictions to financial services advertising to tackle the scale of this issue." It has implemented verification processes to identify advertisers on their platforms and have updated their unreliable claims policy to prohibit the making of unrealistic promises of large financial return at minimal risk. It has also pledged $5 million in advertising credits to support public awareness campaigns by UK industry organisations and government bodies, such as Stop Scams UK.
The platforms clearly do not want scam ads on their platforms and are communicating with various regulators to consider what can be done to eradicate them. The platforms do not benefit from them and they only serve to reduce the quality of the ecosystem in which they are served to consumers.
The UK government and national regulators are determined to make the UK one of the safest places to be online, while protecting individual rights and freedoms and ensuring that the digital economy thrives. These three goals are inextricably linked, but not always easily reconciled.
As the Online Safety Bill develops, perhaps the most interesting tussle will be between the FCA, Ofcom and the CMA, over their respective powers and remits. Oh, and don’t forget the ASA, which has been plugging away at improving advertising standards in the UK for several decades, but must be feeling a little like the smallest kid in the playground right now.
We hope the UK Government does not lose sight of their ultimate aims by rushing to resolve these issues too quickly, at the expense of clear, proportionate and workable regulation.
Special thanks go to our colleague, Wendy Saunders, Legal Director.