The COVID-19 pandemic saw a significant rise in online investments and digital crimes
Several countries have tightened their financial advertising regulations to protect the public
A look at how marketing regulations have changed over the last year and how trading firms can maintain compliant, accurate and competitive marketing.
The COVID-19 pandemic enabled opportunist marketers to target vulnerable people who were spending more time online, leading to a significant rise in online investments and digital crimes, such as crypto investment schemes and money scams. Over the last couple of years, several countries have since tightened their advertising regulations in the financial sector to protect the public.
On February 1st, 2022, the Cyprus Securities and Exchange Commission (CySEC) announced its intention to enhance its marketing compliance supervisory capabilities through the use of new technologies and other tools.
Referring to the fines and settlements totalling over €1.34m, CySEC's Chairman, Dr George Theocharides stressed that the vast majority were a result of Cyprus Investment Firms (CIFs) violating MiFID II laws.
Since 2020, CySEC has imposed over €4.53m in fines, of which €3m were on CIFs. In 2021 alone, 4 CIFs had their operating licence revoked, 6 CIFS had their operating licence suspended, and more than 70 supervised entities were ordered to take fast action to fix weaknesses or omissions identified during supervisory checks.
CIFs, their affiliates and introducing brokers are all subject to ESMA and MiFID II regulations. The most basic advertising rules are as follows:
These guidelines apply to all marketing communications addressed to investors or potential investors for Undertakings for Collective Investment in Transferable Securities (UCITS) and Authorised Investment Funds (AIFs). This includes email and social media communications.
With CySEC stepping up its supervisory activities, CIFs must be more vigilant about their marketing compliance to avoid financial penalties and other sanctions.
CySEC is just one body cracking down on non-compliant marketing in the industry.
The Financial Conduct Authority (FCA) is also cracking down on social media and other forms of marketing that promise high returns and financial security or uses fake celebrity endorsements.
Freetrade had its social media activity suspended due to TikTok and Instagram influencers failing to give a fair and prominent indication of any relevant risks, violating COBS 4.5 2R of the FCA handbook. Influencers on the platforms suggested traders would 'clear their debt' and receive a 'free' share.
Social media is also under scrutiny by the FCA, as celebrities, including England football manager Gareth Southgate, Prince Harry and Meghan Markle, were forced to take legal action after their names were used in crypto scams. Email and social media accounts were used to spread fake endorsements from these celebrities, claiming they had made money using bogus Bitcoin and other cryptocurrency scams.
The FCA says this is a worrying trend and a growing problem, with more than 34,000 reports from consumers regarding suspicious and potentially fraudulent investment schemes in 2021. That compared to 8,000 in 2016. This trend and associated risk have discouraged many retail brokers from investing in social media as a way to generate traffic.
A spokesperson for the financial services regulator said: "People should be very wary when they see investment ads offering high returns, even if they appear to be endorsed by celebrities.”
According to Action Fraud, the financial year April 2020 to March 2021 saw 500 investment frauds found to be using bogus celebrity endorsements. Losses reached over £10m.
ASIC recently announced that they would actively monitor influencers for non-compliant marketing and warned brokers to monitor their marketing partners to avoid penalties.
The 2021 ASIC young people and money survey found that 33% of 18 to 21-year-olds follow at least one financial influencer on social media. A further 64% of those surveyed reported changing at least one of their financial behaviours due to following a financial influencer.
ASIC Commissioner, Cathie Armour said: "The way investors access information is changing. It is crucial that influencers who discuss financial products and services online comply with financial services laws. If they don’t, they risk substantial penalties and put investors at risk."
Noncompliance from social media influencers includes misleading or deceptive conduct, dealing by arranging and financial product advice. Companies must do their due diligence on influencers because AFS licensees who use influencers are liable for any breaches.
Penalties range from custodial sentences and financial fines to increased regulatory scrutiny and resource-intensive audits.
"ASIC monitors select online financial discussions by influencers who feature or promote financial products for misleading or deceptive representations or unlicensed advice or dealing. If we see harm occurring, we will take action to enforce the law," concluded Ms Armour.
The ASIC binary options ban has been so successful in preventing consumers from losing money trading binary options in the country that it has been extended until October 1, 2023. Before the ban, 74–77% of active retail clients lost money trading binary options, with retail client accounts making $14 million in aggregate net losses. Additionally, while loss-making retail client accounts made net losses totalling $15.7 million, profit-making retail client accounts only made net profits of $1.7 million.
The Deputy Chair of ASIC, Karen Chester said: "Binary options are harmful, high-risk financial products resulting in millions of dollars in losses for retail investors before our ban. Extending our binary options ban until 2031 ensures this important protection for retail investors will continue."
Following their announcement to extend the ban on binary options, automated monitoring technology is helping ASIC-licensed brokers to identify live violations by their affiliates or introducing brokers across websites, social media and video streaming.
From 2nd May 2022, brokers and their marketing partners promoting crypto investments must follow strict advertising regulations detailed in ASA's recent enforcement notice. Failure to do so could result in sanctions or further scrutiny and investigation.
Ads must be explicit that cryptocurrency investments:
Unregulated markets are a breeding ground for deception and fraud. Almost every country has legislation to protect consumers from false or deceptive marketing. The best way to avoid it is to arm yourself with knowledge of common tricks and falsehoods.
As it's not just consumers who can be harmed by false advertising, the European Commission's Misleading and comparative advertising directive also protects traders from misleading comparisons from competitor marketing.
With regulatory bodies such as CySEC, ASIC and FCA increasingly using new technology to monitor and supervise how regulated entities use marketing and advertising, companies must ensure they are equally well-equipped.
Innovative tools can help regulated brokers to reduce the risk of recurring such problems as missing T&Cs, disclosures, representative examples, claims mechanisms, inaccurate APRs, inaccurate offers or landing pages and using phrases prohibited by advertising regulations.
Proactive governance across the entire marketing partner lifecycle, such as screening the online content of new affiliates for suitability, will help to reduce risk as well as save time and money.
With regulations in the retail trading sector likely to become more stringent over time, particularly as the global economy falters, it will pay dividends to boost marketing compliance now and futureproof with a sophisticated system tailored to your specific requirements.
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