No Facebook please...We’re in Financial Services...

Reuters reported in their story “Facebook challenges financial regulators: FINRA” that social networking sites are raising new challenges for financial regulators in America as far as how investment banks, advisers and analysts connect and interact with customers via such services as Twitter, Facebook and LinkedIn.

I understand the main concern – that is the fact that the way these sites are designed does not allow firms to keep the kind of archives of their employees’ business communications (..or tweets…hehe) as required by compliance or regulators. And I agree that for now by prohibiting their employees from using such sites the industry will resolve the supervision and record-keeping requirements. But this is not a good long-term policy and the question needs to be asked – Where to in the future?

The Future of Internet Discussion Sites (IDS) in Australia

Jeff Jarvis, the author of “What Would Google Do?” wrote about how a powerful newspaper publisher questioned Mark Zuckerberg, the  founder of Facebook, on how he could build and own his community.

Zuckerberg replied “You can’t.”

Zuckerberg went on to explain that it’s all about “elegant organisation” – that is the communities already exist and that all that Facebook does is to allow them to become better organised, more efficient.

And there’s the rub – the financial services industry, the niche financial media industry, and the regulators must ask themselves how we can help the existing communities that have already formed and have an interest in the stock market and associated financial services do what they have been doing previously more efficiently, more organised. But at the same time ensure it is within the industry guidelines and compliance requirements. It’s important for the future of our industry (or certainly the sell side anyway).

The most recent ASX survey of shareholders quoted that when it comes to sources of advice and information current direct share owners are focusing on newspapers (50%), Internet (41%), Annual Report / Prospectus (38%), Friends and Family (36%) and Financial Planners / Advisers (34%).

So it’s not a big stretch to consider that if we take the concept of “elegant organisation” and apply what the ASX stats suggest (that is, more people look to the Internet and Friends/Family then Advisers) you can see how much of an impact that Social Media and Peer-to-Peer networks could have in this niche media industry, and that Social media is likely to be the future of IDSs in Australia.

ASIC (Australian Securities and Investments Commission) released a discussion paper in March 2009 on Internet discussion sites (IDS). The process closed in April 2009 and we are awaiting the results – but if you read the paper it appears that they are trying to define when such sites that offer commentary about financial products fall into the bracket labelled as “advice”, whether it be personal or general, and whether the need an Australian Financial Services Licsence (AFSL).

If you read the discussion it qualifies that;

the term ‘internet discussion sites’ (IDSs), we mean Internet websites, such as web-based bulletin boards, ‘blogs’, or chat rooms, that provide a forum for people who are not financial services professionals to display information, recommendations and opinions about financial products. People generally register their details with an IDS, which allows them to then ‘post’ material on the IDS that can be viewed by other people.

Unfortunately I think there is a problem here. What ASIC are reviewing (They have not revised their policy on IDSs since 2000) does not consider the nature nor the dynamics of Social Media or Peer-to-Peer networks. And if they did take Social Media into consideration they might have a different take on whether IDSs are offering general advice or not.

Since policy RG 162 was created social media has exploded. There is no reason why an investor can not share their stock buys/sells with their Facebook or Twitter network. Will ASIC consider these sites IDSs?

What ASIC really needed to, in its consideration of IDS policy, is broaden its scope to include Social Media / Peer-to-Peer networks, and to understand what difference this online technology can make. By qualifying the difference, when comparing to traditional IDSs such as forums and blogs, and understanding the advantages that they bring I would imagine it would have quite an imapct when it comes to the regulations they will very soon choose to apply.

Why is this?

Well, quite simply, the old school IDS allows for unknown persons to spruike what could be deemed “general advice” to a mass audience who has no way of qualifying who is saying what and why. It comes down to the fact that since you don’t know them how can you trust them.

Social Networks allows only the peers you invite – or those who ask to be invited – into your network. Typically they are person you know or trust, and thus the nature of Social Media means that only those within your network will here your ideas, in this case your investment ideas, and because you have a knowledge of who they are you can, to some degree, evaluate whether you trust their recommendations or not.

There is another advantage to this - not only do social networks prevent this ability to broadcast en mass, but it also allows those within the peer-to-peer network to self regulate the group because they can invite, accept and block whomever they wish. All very different technology to what ASIC has had to concern themselves with in the past.

I look forward to the results of the consultation process and sincerely hope ASIC get it right…otherwise they may find their revised policy out of date before its even enforced and to the detriment of an important niche media industry.