The Social Media Dilemma for Regulated Industries

Session Description:
Social media, particularly as it relates to the financial sector, poses challenges for business and policy-makers alike. “New” policy challenges in other tech areas are remarkably familiar to those already addressed in the social media space. What have they already discovered that can trim the learning curve for others that follow behind?
Kirkpatrick: Kitty is going to change the topic to something quite different and very interesting, the social media dilemma for regulating industries. Kitty lives in London. She’s with something called the Social Media Charter Association, and she has a lot of very interesting things to say. So thanks for being here and for coming over for Techonomy Policy, Kitty.
Parry: Once again, Techonomy have gathered some seriously impressive individuals and that’s what’s exciting, because today we can really be capable of driving change. What does that mean? It’s a chance to discuss and bridge the gap between the rigors of compliance and the energy of the digital age. The problem: financial regulation based on principle, guidance, and policy lacks sufficiently detailed definition for unrestrained social media use with the rapid evolution of technology. Earlier this year, David epitomized this by talking about the significance of financial services using social media, and other industries—in snowy Davos, where many leaders were slipping around. His point was a pertinent one: financial institutions are light years behind best practice in utilizing social media to improve their customer relationships. The gap is crippling the industry, and—in the future—may prove catastrophic to firms.
Does this need to be so? We’re talking about businesses with resources, incredible talent, fantastic content, and billions of global customers. So what’s the problem? Financial regulation based on principle, guidance, and policy fails to align with the reality of social media use today. Why? Because social media throws out many unknowns, and probably as yet unknown unknowns—particularly when corporate, personal, and professional begin to merge together. Even a tweet or your personal Facebook saying that you’re meeting a friend who happens to be an acquisition lawyer can begin to tell you about professional behavior—or not, but it leads to assumptions, and that’s the dangerous stage.
So while there are some standout examples of guidance becoming clearer, i.e. FINRA [Financial Industry Regulatory Authority, Inc.]’s booklet, the majority remains ambiguous and if regulators are going to meet their objectives in governing social media use, we’ve got to change the tactics.
We’re not here to discuss the current state of regulation. We’re here to make it work for clients, customers, and industry moving forward. We should think constructively about how we can bring industry and regulators together to develop a consistent, collaborative, and importantly, globally compliant conversation. The first step, to examine the objectives of the regulators, government and industry bodies. This is where we started with Social Media Charter Association. The most common sentiments: one, healthy competition; two, innovation and regulation; and three, consumer clarity—all of which are the bedrock of our mission.
The question in practice is, What’s the framework to do this? And how do we ensure these objectives are fulfilled, and what’s your role in ensuring these regulation innovates alongside technology? It’s clear there is a need for clarity defining best practice and collaboration between all parties, and this is where we talk about the forum of the Social Media Charter Association. We’re setting a global standard for what is compliant in social media, crucially, as an independent body. It’s been our goal from the start. We began following heads of compliance, heads of digital, coming together from 15 firms from Legg Mason through to State Street and BNY Mellon, sitting with the UK regulator—the FCA—to discuss why financial services couldn’t use social media effectively. The conclusion was the lack of clarity in the current regulation. The solution: a charter that we set out, which states a set of principles sharing standards globally for compliant social media use. By signing up to this, firms are evidencing their commitment to using social media compliantly. Therefore, if an individual in a firm accidentally posts something that is potentially noncompliant, the evidence is with the employer to prove back to the regulator they’ve done everything in their power to be compliant. Particularly important when even the CFO of Twitter is able to put an accidental post stating an acquisition and knocking his share price.
Subsequently, from that we then developed guidance and fed this back to the UK regulator. They made a couple of small tweaks. Their response: “We welcome Social Media Charter. It adopts a common sense approach.” Now, in the US, your regulators are far more forward thinking, but in the UK this is quite a big deal. We’re slightly behind you all.
So we’ve now got support. What are we going to do with this support and what does the charter do? So it changes the emphasis of regulation, moving towards a more practical and mutually beneficial position. Arun [Sundararajan] spoke about regulation that was part of the industry—but again, what does the framework look like? So, one: the charter will enable the industry to be informing and active in contributing to setting the boundaries of compliance and best practice. Two: this ownership gives the industry the opportunity to better understand and follow the rules. Regulators then in turn are better equipped to meet their own objectives by allowing them to have a more proactive stance with innovative guidelines to maintain credible social media knowledge, all to ensure transparency for their customers.
So at its core the charter promotes collaboration to promote best practice by opening channels of communication between the regulators and financial services through an independent body. But this is only the start. This is a framework that we believe will be applicable across all industry if we can get it right with financial services. Why is it necessary? We’re seeing a rapidly evolving regulatory landscape where the average corporate fine from the UK regulator increased nearly sevenfold from 2010 to 2013, reflecting a global regulatory trend.
I want to give a brief example of what that really looks like. There’s a gentleman called [David] Einhorn, who runs a firm called Greenlight, many of you might know. He was the owner in a British state company. In a practice known as wall-crossing, the company asked him to sign a nondisclosure agreement. This essentially meant the company wanted to offer Einhorn a private placement to raise equity. However, Einhorn, despite explicitly stating he did not want to be privy to inside information, the company went ahead and informed him of their strategy. The FSA, the UK regulator at the time, acknowledged there was no specific sentiment of insider information. It also said investors needed to interpret comments made to them in an appropriate manner, which may sometimes mean understanding more than is explicitly said. Despite this, in January 2012, Einhorn and Greenlight were subsequently fined over $11.2 million, 7.2 million pounds. So while this may pale in significance with liable fines and so on that we’re beginning to see, this isthe last time a fine of this magnitude had been imposed on an individual was a case of blatant and planned market abuse. Clearly, this is not with Einhorn.
So where are the regulators going at the moment? They’re moving towards tighter interpretation of regulatory boundaries and this change in emphasis is taking place almost uninformed by industry dialogue or debate. The universal response to this increase we’re talking about has been to pump money into compliance, rightly so. In figures exactly, the FSA fined $1.1 billion in their total 11-year tenure, which seems okay. The FCA, in their 18 months of origin, have fined $2.5 billion dollars, and it’s an extreme growth. So HSBC has subsequently put 10% of their workforce into compliance. Twenty percent of Citibank’s profits are being spent on regulation and defending themselves to the regulator. Yet on the other side, we’ve got regulation being developed from a state of underfunded—from an underfunded side, which is utterly counterproductive for an effectively running industry.
So our proposition is an effective way of using industry resource, understanding experience to make sure this happens, so regulators today have a real chance to play a proactive role in this new age of collaborative compliance. This cannot change soon enough. Firms have already made mistakes with this rapidly expanding medium, whether it’s the CEO of Netflix making a market move with his update on how many followers a new series have happened or slightly off on JP Morgan’s issue when they set up a graduate conversation, which led to many of their staff being accused, should be sitting in jails instead of at their desks.
The issue is any online mishap not only carries the cost of reputational damage now, but also it carries the cost of a regulatory sanction. Many firms already noncompliant on social media are not even realizing it simply because this is such unchartered territory.
What are the areas many of them are uncompliant in? Firstly, client and staff testimonials. I’ve mentioned personal-professional use merging. A prime example is a LinkedIn endorsement, which proves a minefield for regulatorative firms. It’s a page which goes with an individual from firm to firm, so therefore is surely owned by the individual. However, who is responsible should something noncompliant go onto the page and who is responsible if there is a regulatory breach on it?
Secondly, archiving. To date, all data has to be archived for between six to nine years. However, the UK regulator has stated on social media that archiving isn’t necessary. Might this change, and if it is going to change how can firms keep up with the changing mindset of the regulators?
Finally, endorsing a post. Survey responses in a press release can be pulled out to choose the most positive sentiment that you’ve got to endorse your brand. However, if you do this with social media, you are influencing the sentiment around your brand, which is potentially a breach according to the UK regulator two weeks ago. I could go on.
The question is, will this heightened scrutiny of industry by the regulator do its job and help prevent another crisis? An EY survey undertaken a couple of years ago after the crisis found a mere 14% of financial professionals thought regulation would prevent a new crisis. Easy to dismiss this as industry grumbling about change that’s going to reduce its profitability, but don’t forget these people know the industry. They’re on the front line, so surely we should at least include them in the conversation. It’s why our association brings together all parties, regulators, financial institutions with opposite intentions, to bring together a collaborative conversation.
With regard to the relationship between regulators and financial services, this can’t remain the status quo. After all, the ultimate goal for both parties is consumer protection and market confidence. It’s clear the current mindset is ineffective. Instead of giving firms the opportunity to engage with policy formation, it creates a more realistic and therefore more robust guidance.
Secondly, are there other bodies currently doing what we’re trying to do? There aren’t. Yes, many excellent bodies bringing together global conversations have excellent working groups developing template policies and so on, but no one out there is proactively taking this intelligence and using it to support the industry in doing social media compliantly. Seventy-one percent of staff claim not to read social media policies or adhere to them. This isn’t going to work for social media because of the catastrophic consequences for firms. So this is where we have developed a solution for firms called the Social Media Compliance Platform, which helps firms put together the information that they can then use to defend themselves to the regulators. It’s being developed by the leading legal minds in regulation, law, and employment, software experts and social media experts. It’s enabling these firms to defend their selves to the regulators for the first time.
The platform is one example of what’s going to be a vital change to the regulation debate in the next few years and why we’re here today, technology development. Regulators are struggling to adapt to the breakneck technology change seen in private technology companies. Slowed by country boundaries, they’re missing out on the global conversation. So whilst financial services industry is being revolutionized by the power of Silicon Valley, regulation hasn’t, leaving regulators to guess what the next crisis is going to be. It’s why we must adopt an association and forum to be able to bring these two together.
How can we create innovation and forward-thinking compliance which allows regulation and firms to adapt to this new technology? How about letting the industry do the grunt work on regulation? After all, it has got the working knowledge of the day to day practical problems, and it knows where the weaknesses lie. It understands cross national borders so it can address transnational challenges. No longer can there be conflict between the FCC, between the FCA and ESMA—because if there are, then firms don’t know where they sit. So this enables regulation and policy to be part of fresh thinking, regulation, and industry working hand in hand, enabling firms to sign off on regulation and enabling industry to have a real working input on regulation. It takes us back to why the Social Media Charter Association will work to its core. It will be the catalyst for change.
I want to end on one final thought. Let’s not regulate the industry based on the next panic or policy derived from crisis. Despite the news on Friday from Greece, the economy is doing relatively well, feeling of optimism about the benefits technology can deliver to finance. So now is a time to develop a framework for regulation that makes sense for tech-driven future, a more market-based approach in a modern era that can be achieved only if industry can engage in a more global conversation with regulators about the challenges it faces, the weaknesses, and how it’s going to navigate them. This would demonstrate to the public that the regulator, that financial services is dancing to a new tune, one that expounds creativity and ethics in business, not creative ethics.