Fintech developments: impact of social media

The impact of technology on business is ever increasing: insurers will have on their radar the potential operational and regulatory consequences for their insureds.

The impact of technology on business is ever increasing: insurers will have on their radar the potential operational and regulatory consequences for their insureds.

The Financial Conduct Authority (FCA), and its predecessor the Financial Services Authority (FSA), have been seeking to keep abreast of the role of social media in financial promotions for some years now.

FCA guidance

In 2014, when considering peer-to-peer (P2P) lending (i.e. loan-based crowdfunding), the FCA noted it would be updating its guidance on financial promotions offered on social media. The guidance was finalised in March 2015 and covered:

  • Blogs
  • Microblogs (e.g. Twitter)
  • Social and professional networks (e.g. Facebook and LinkedIn)
  • Forums
  • Image and video-sharing platforms (e.g. Pinterest and YouTube)

In the guidance, both the popularity of social media and the constraints (for example the length of video or number of characters in text) are discussed.

This remains a difficult area for the FCA to stay up-to-date with, given the rate at which new apps are developed. Accordingly, it has sought to alert regulated entities to the fact that any form of communication is capable of being a financial promotion. Insureds must be mindful of this when using social media. This will continue to be an evolving risk area for independent financial advisers (IFAs) and insureds in the financial sector generally, particularly as regards risk warnings and adequate record keeping.

P2P lending

Social media is now itself playing a role in P2P lending as a credit referencing tool.

A new site called FriendlyScore is advertising itself as facilitating P2P online lending and using social media to assist in credit referencing. The site performs user-permissioned checks of individuals’ LinkedIn, Twitter, Instagram and Facebook accounts and will shortly be adding PayPal to its resources. Interestingly, FriendlyScore reports that it is presently active in a variety of lending markets including the UK, Germany, Holland, Poland, Romania, Brazil, South Africa, Nigeria, India and the Philippines.

Whilst arguably these steps are just an extension of existing know your customer (KYC) obligations, it will be interesting to see what impact social media has on financial lines insureds and on how data protection is managed, in view of the increased amount of personal data that these checks may expose.

The General Data Protection Regulation (GDPR) takes effect in May 2018. Companies are preparing to ensure that they will comply with the new strict data protection regime, in large part introduced to deal with the challenges of social media. Non-compliance will result in potentially severe penalties of up to 4% of global turnover. The GDPR will apply to any company that handles EU citizens' data, even if that company is not based in Europe – which, following Brexit, will be the UK’s position.

Litigation funding

Social media is also influencing litigation more broadly, through social media driven crowdfunding of high profile cases.

Representatives for junior doctors have used the CrowdJustice platform for raising in excess of their £150,000 target to fund a legal challenge to the imposition of the new NHS contract. Meanwhile, another social funding platform, FundRazr sees the convicted UBS trader Tom Hayes seeking to fund a further appeal of his case to the Criminal Cases Review Commission, an independent organization set up to investigate suspected miscarriages of justice.

Whilst these crowdfunding sites are akin to P2P businesses, they are distinguished by the charitable nature of the appeals. In the future, however, we may see crowdfunding of shareholder class actions, which would be likely to attract regulator attention if they were structured as an investment vehicle.

Digital money

Meanwhile, digital money is increasingly moving into mainstream finance. Barclays Bank announced in August 2015 that it intended to allow charities to accept donations from its customers via bitcoin, the electronic currency. In April 2016, Barclays announced it was partnering with the American company, Circle Internet Financial Ltd, to allow it to use Barclays’ infrastructure, potentially enabling users to exchange sterling and dollars immediately and without charge.

Various financial institutions are now reported to be exploring the introduction of digital currencies to clear and settle financial trades using blockchain, the financial ledger entry system underpinning bitcoin. Banks including UBS, Citi, Deutsche Bank, Santander, BNY Mellon and Goldman Sachs are looking at using so-called cryptocurrencies to be traded and verified electronically, with the aim of reducing post-settlement clearing time and costs. The switch to these electronic currencies may come as early as 2018. This may be of interest to financial institutions underwriters when considering the risk profile of their insureds.

Comment

Technological advances are likely to continue apace as companies seek to gain and maintain a competitive edge and deliver greater customer satisfaction.

Insurers should be liaising with insureds, and their brokers placing policies, to seek to properly understand the insured’s use of technology, digital marketing and social media, and whether its data protection procedures are adequately up to date and on course to be GDPR compliant.

Insurers should also seek to clarify any involvement with crowdfunding platforms and proactively discuss digital currencies with financial institution insureds and brokers. This will help to identify risk management issues relevant to the writing, and wording, of policies.

Read other items in Professions and Financial Lines Brief - October 2016