These are challenging times for the UK’s Financial Conduct Authority. The City regulator is wrestling with how best to control the new breed of online businesses targeting investors.
One of its biggest dilemmas is how to stop social media giants from publishing and profiting from fraudulent content in the form of paid-for advertising.
Another concerns cryptocurrencies. It’s an issue that poses so many questions. Should there be more regulation introduced? How would it work? Are there any downsides of restrictions?
Charles Randell, chair of both the FCA and Payment Systems Regulator, outlined the issues being faced when he spoke this week at the Cambridge International Symposium on Economic Crime.
He said the internet had enabled businesses to innovate and grow, but this “awesome power” must be matched with responsibility.
“As we live more and more of our lives online, we can’t allow online business to operate in ways we wouldn’t tolerate with any other business,” he said.
This means greater consistency when it comes to protecting people from investment fraud and scams. “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,” he added.
Paid-for advertising needs regulation
Randell then went on to discuss the need for a “permanent and consistent” solution to the problem of online fraud from paid-for advertising. It’s an area that he believes requires legislation.
He praised search engine Google for its commitment to stop promoting ads for financial products unless they had been cleared by an FCA authorised firm but said more needed to be done.
“We now need other online platforms – Facebook, Microsoft, Twitter, TikTok - to do the right thing too,” he said. “We think that a permanent and consistent solution requires legislation.”
He also expressed disappointment that the Government’s proposed legislation about online harms didn’t cover paid-for advertising, which is the “main source of online investment scams”.
Calls for a united front
However, Randell noted that even better-targeted laws wouldn’t be enough on their own to solve all the problems and warned the internet would continue to be a very challenging space for regulators.
“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,” he said.
Such enforcement, he added, needed to be a team effort that involved the National Crime Agency, the Serious Fraud Office, police forces, and regulators like the FCA.
“Consumer awareness requires online platforms to step up,” he added. “They can give advice about scams in the moment when consumers are about to make bad decisions.”
He added that the FCA would work with online platforms that want to protect both consumers and their own brands – and pledged to call out those who aren’t playing their part.
Cryptocurrencies and possible scams
More than half of Randell’s speech was focused on cryptocurrencies.
Kim Kardashian, the US reality television star was cited by Randell after she was “paid to ask her 250 million Instagram followers to speculate on crypto tokens” via Ethereum Max tokens.
Although she disclosed it was an ad, in line with Instagram’s rules, he pointed out that she didn’t have to disclose it was a speculative digital token created a month before by unknown developers.
“Of course, I can’t say whether this particular token is a scam,” he said. “But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation.”
Randell said there “is no shortage of stories” of people who have lost savings by being lured into the cryptobubble with delusions of quick riches.
He pointed out that the FCA has repeatedly warned about the risks of holding speculative tokens.
“These tokens are not regulated by the FCA,” he said. “They are not covered by the Financial Services Compensation Scheme. If you buy them, you should be prepared to lose all your money.”
The debate about crypto regulation
Randell pointed out that the FCA doesn’t currently have “a general remit from Parliament” to regulate the issue or promotion of speculative tokens – and questioned whether it should.
“It’s difficult for regulators around the world to stand by and watch people, sometimes very vulnerable people, putting their financial futures in jeopardy, based on disinformation and fear of missing out,” he said.
However, he highlighted a number of issues with potential controls, including the fact there other speculative activities are not regulated.
Pokémon cards in unregulated markets
“You can buy gold and other commodities, foreign real estate, foreign currencies, or even old school tokens like Pokémon cards, using unregulated markets,” he said.
Randell also highlighted a conundrum on this topic. Should purely speculative digital tokens be regulated – and would this lead people to think they were bona fide investments?
He also pointed out that a business seeking authorisation with the FCA would need to bring itself firmly within reach with people to supervise and enforce 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,” he said. “That would be token regulation in the worst sense.”
The positive role of digital tokens
Another dilemma facing the FCA is striking a balance between “appropriate regulation to protect consumers” and encouraging useful new ideas.
Digital tokens, noted Randell, could have beneficial roles, such as stable coins being used to make payments outside conventional payment systems.
A second benefit could see digital tokens being used to represent regulated investments, such as shares and bonds.
Capital for businesses
These, he pointed out, could be used to raise capital for businesses and to provide alternative means of settling transactions in financial instruments.
“It will take a great deal of careful thought to craft a regulatory regime which will be effective in the decentralised world of digital tokens,” he said.
So, what did industry observers make of the speech?
FCA should do more
Ben Yearsley, investment director at Shore Financial Planning, would be in favour of tighter rules governing promotional posts and believes the FCA should be doing more.
“The amount of advertising aimed at these very speculative investments is bonkers and if they were for a normal financial company they would not be allowed,” he insists.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said referencing Kim Kardashian illustrated Randell’s level of concern about crypto assets.
“It’s highly unusual to hear the chair of Britain’s financial watchdog dedicate a big chunk of his speech to a superstar reality TV queen,” she said.
Streeter believes the FCA is “singing from the same song sheet” as many other international regulators.
“It’s worried that too many financially vulnerable people are being lured into get rich quick schemes, with 14% getting into debt to speculate in crypto assets,” she said.
She also cited the example of El Salvador. “Bitcoin is now legal tender, but is still just as volatile, as shown by the 12% price plunge in a matter of hours because so many speculators buy it in expectation of future price rises, rather than an underlying use,” she explained. “This presents a large risk to the country’s payments system.”
Streeter suggested the FCA and PSR appear to be throwing weight behind recommendations made by the influential Basel committee which brings together regulators from around the world.
“If banks and other regulated financial institutions dabble in crypto, the committee is considering making them put aside enough capital to cover 100% of potential losses,” she said.
This, she believes, could help tackle the problem.
“Giving speculative tokens a high-risk price tag is likely to make cryptocurrency dealing and investment very expensive and could limit the number of new institutional entrants into the crypto world,” she said.