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This article was originally written in 1995. Some of it is still horribly relevant. Hopefully not for much longer.
I am certainly able to say that the Regulators are now very very keen on seeing the Net used to it's maximum capability and are way ahead of the product providers in their attitude.
There is a lot talk about Web Sites and Compliance, perhaps too much talk. At least too much talk within companies and not enough to the Regulators, let alone some paranoid free reading of the FSA.
You see a lot of people think that the FSA and the Regulators don't want Financial Services Web sites to be anything other than the blandest of "on-line brochure" sites. Anything else is far too dangerous and complicated. Interactivity? We'll give you some Java / Shockwave animation but serious content? Please No, not that, anything, but not that , that could be, god help us, an advert or solicitation. Cue theme from Jaws as Regulator comes slicing through the ether.....
This next section is important. Not a lot of people know this. Both the PIA and SIB have been surfing, and for some time now. Indeed the SIB has a helpful chappie who wants to see more done with the Net, albeit with caution, but the PIA has what can only be described as the closest thing this industry has to a cyberpunk. When I first started talking to him in early 1995 ( yes, that is a five, not a six ) he was lamenting that he had been asking companies to come to him with their plans and desires for the Net so that an effective system of rules could be developed that would free the industry from the legalistic procedural shackles of the paper based system for normal business.
Read that again.
Furthermore he was absolutely fed up. "I'm asking them to come and talk about the Net for a year now, and what do they come and ask me about? Direct bloody mail, that's what. I want them to get onto the Net and they think that direct mail is the best thing since sliced bread".
So this is a call to arms. The Internet offers the UK industry a chance to do some serious market stealing in the EU, what with the various directives and the Treaty of Rome. ( I'd like to see any EU Gvt - France, I am told. Ha, we remember Agincourt - manage to defend any laws that state that their citizens can only sign contracts with organisations registered with them, this is of course rather different from laws restricting adverts or marketing to recognised companies, though the two are often confused).
A web site can use many technologies to ensure that people are informed, and any sales process is both controllable and fully recordable.
That is a very powerful tool for both ensuring that a buyer has seen, and understood, what is happening, and knowing that the person has seen and understood. We all know that clients are not angels, and that on more than one occasion clients have tried to pull a fast one by claiming not to have been told things. The client who buys off an Internet site has no comeback, the log is produced and "see, you clicked OK I WANT TO INVEST on the "this is a high risk investment, you might lose a lot of your money short term, and it may be several years before you break even if things go wrong" javascript alert, not the TOO RISKY FOR ME, SHOW ME SOMETHING SAFER option. Therefore Mr Regulator, we say that the sale was correct".
No more "our staff are trained not to say that, would not have said that, and anyway the person has left the company" arguments, be they correct or not ( though honestly held of course ).
So where is the fully web based PEP purchase system, or multi lingual life insurance site selling our fellow Europeans our cheap insurance, et al? Nowhere, or very very much on the QT. ( Please let me know I'm wrong).
Some basics, refer to your copy of the FSA for more details, but the main problem ( wrt more informative sites ) is that because there is no clear definition of "advertisement" there is no clear distinction between "information" and "advertisement", with the effect that most, if not all, information can be treated as an advertisement by a paranoid compliance person, or overzealous regulator. This is a real problem, and one that the Regulators actually half recognise. They are waiting for the industry to come up with some suitable ways of dealing with the problem, ( of which more later ).
What the FSA does say is as follows:-
Section 3. "No person shall carry on , or purport to carry on , investment business in the UK unless he is an authorised person..."
Section 57(1). "..no person other than an authorised person shall issue or cause to be issued and investment advertisement in the UK....".
Section 207(3). "For the purposes of this Act an advertisement or other information issued outside the United Kingdom shall be treated as issued in the United Kingdom if it is directed to persons in the United Kingdom or is made available to them otherwise than in a newspaper, journal, magazine or other periodical publication published and circulating principally outside the United Kingdom or in a sound or television broadcast transmitted principally for reception outside the United Kingdom".
Section 207(2) An advertisement... "every form of advertising..long list...any other manner". This catches the Internet.
Section 57(2) An Investment Advertisement..."an advertisement inviting persons to enter into...and investment agreement...or containing information calculated to lead directly or indirectly to persons doing so". Which pretty much means that anything that escapes the confines of Head Office is an advert.
The SIB have said:-
1) "for the purposes of the Act , where an advertisement held anywhere on the Internet is made available to or can be obtained by someone in the UK - eg it can be pulled up on a computer screen in the UK that advertisement may be viewed as being issued in the UK."
2) After clearing most ISPs etc of involvement for simply providing space / expertise they then say "the position under the Act is less clear if an Access and/or site provider is commercially involved with an investment firm to whom they are providing access/ a site".
In personal discussions and meeting the other following points have been raised, and answers mooted. ( All verbals, from memory and notes, so treat as paraphrased).
Point 1) Under the FSA every non UK company is criminalised. This is stupid.
Response - yes they are, and it is. In practice we will only concern ourselves with those companies that cause us concern, for example they are offering services to UK subjects.
Point 2) But you will have no jurisdiction, you might be concerned, but short of saying "oh dear" there is nothing you can do.
Response - we would hope to liaise with the local regulators and reach some kind of agreement.
Point 3) Setting aside the "bugger off, if our chaps are more competitive than yours then good luck to them" and taxhaven locals, can you really see this working? For example imagine that a UK IFA sets up to sell to US citizens, and the SEC gets upset. What can you do? It is not a breach of the FSA to have a successful export business, and we'll assume that his business meets all our compliance rules.
Response - that's a good point. Perhaps we could begin to work internationally in order to keep everyone happy.
Point 4) So let's say that the SEC asks for its citizens not to be exposed to the dangerous ideas that are put on the Net by UK firms. What might you do?
Response - that's a valid concern, we could understand that. Perhaps UK sites should have filters on so that only UK people could see them...... ( this point cropped up in a public meeting, and it such a firm reaction that I don't think we will see it being mooted again by the SIB. I only mention it to show how much learning they have to do).
Point 5) I run a website. As far as I'm aware as long as I don't sell anything I'm OK. One day I would like to make the site commercial, can I sell adverts?
Response - yes, though of course such ads must meet the rules.
Point 6 ) Can I create revenue by Click Through?
Response - No. In our view this would be payment according to the rate at which people went to see a site, and you would have to be treated as an introducer for the purposes of the Act. A number of national papers came a cropper here with branded sharedealing a while ago.
( My note. Think what this might mean in the future as Web banner ads get placed more smartly. A well placed ad is worth more than a random one. As AI improves people will only shown high probability hit rate ads, and get payment for such. Does this imply a relationship? Later the time will come when the larger generalist sites will not take time or impression based accounts but only wish to be paid by click through because that's how they make the most money. Do we want the UK financial services cut off from this media?).
Point 7) Is a newsgroup post an advert?
Response - perhaps. If the newsgroup is a public area then it is likely that posts are adverts.
Point 8) The Internet is completely different to all other media. Current conduct of business rules are totally ill-suited to it. Shouldn't they be changed?
Response - agreed and yes, they should. We want the industry to come to us and tell us what they want. We can dump detailed rules at the drop of a hat, all we need to do is ensure that the principles of the FSA are maintained.
Point 9 ) What is an advert?
Response - what is, or is not , an advert, is a matter of fact to be decided by the courts.
Some options for the Industry.
1) Be aware of the fact that the Regulators will talk, the SIB want to see the Internet used.
However my experience is that they prefer not to dicuss hypotheticals, but would rather talk about something that either has been built, or can be very well described and building it is within the resources of the firm concerned.
2) Push for the limits, while always being able to point to the fact that the principles are being upheld.
How much information can you open up? Can you give account / policy holders direct access to THEIR OWN DATA, and let them make changes, see performance graphs , switch funds etc. Can they have access to company data and information?
3) Explore the idea, with the regulators, of multi-user sites. These are sites containing material which might break into several types, a lot of which would never before have been issued for the simple reason that the cost of distribution was not worth it. But the Net changes that:-
This third set of information is of course going to help , in the words of the salesman, Show not Tell, and could therefore be an advert under the Act pretty well irrespective of it's actual content, ( esp as more site designers realise that technical information on the Net is a good thing not because ordinary people understand it, but because they understand that putting it up for your competitors to see means that you must be sure you are right......).
Ask about possible options with regard to labelling information. E.g. Public, Experienced Investor, Professional, Academic, and if that can be used as a way of dealing with compliance. For example a guide note on the site might state :-
Examples of "Experienced Investor" might include the ubiquitous Market Commentary, but the unsanitised version we all know and love and the public don't see. ( And let us face it, there is a big difference between "sell" and "drop like a stone"). Of "Professional" might be IFA support literature, and of "Academic", well ( as an advert!) perhaps the math behind one of the many "protected growth bonds", or (as carte blanche and perhaps totally wrong) "Apparent variation in the results of genetic tests when processed by different labs. An error source with implications for cost effective underwriting?".
4) Explore the treatment of how helping other sites might, or might not , be used. For example I, wearing my Moneyweb hat, am talking to people with regard to the Partnership idea. In this concept a company pays a small fee and gives me access to experts to help generate good detailed content on areas not normally covered in publications. The information will NOT be pushing that companies product per se, but the association with Moneyweb as a "Partner" will be much stronger in the minds of the public than that of simply a sponsor. Having an Investment company supply me with generic info and math is no problem, but imagine if a Life Company decides to sponsor the Life Insurance section ,and provides me with mortality rates to use in a "rough guide" quote system, ( most people having no idea what life cover costs ). Is this an advert? Where is the line? The answer of course is that only by creating and asking can any decisions be reached. ( In fact I presented the Life Quote as a hypothetical to the PIA and they said "yes, an advert, but come and talk to us because we want to help make it work").
5) Seek to clarify the approach of the Regulators to International Trade.
Build a multi language site aimed at selling TA et al to the Europeans and discuss it. It should be worth its weight in gold no matter if it gets killed, ( which it should not, but I am not a lawyer).
Build a site which sells to Americans in spite of the SEC. ( This is one for the brave, and I doubt that any UK product provider will do it - except perhaps for publicity and to then wind down without actually selling any contracts-, but it could be fun for an IFA who doesn't want to visit the US. After all, it is not against the FSA to sell to American citizens, and I'm sure that the SEC would not complain if US insurers sold to us Brits, just look at all the rubbish in uk.finance).
6) Build sites that include controlled sales environments that do not duplicate paper, but meet the principles that the paper is designed to meet. We all know that nobody reads the small print. Very few read any of it. So don't put up a whole page of legal trash and "click here to continue", but use a series of , for example, javascript alerts, to make people agree and OK simple sentences such as "you have suggested investing £6000 in this PEP. Are you aware that if the market turns, or we make mistakes, it could fall to £4000 very quickly, and take a long time to recover. YES I ACCEPT THIS RISK , or NO I DON'T WANT THIS RISK", and "if you invest your suggested £48000 it will only be worth £44000 next week because of charges. YES I AGREE TO THESE CHARGES, or NO, I DON'T WANT THIS".
Go for on-line fact finds, even if self restricting on the part of the user. For example "It is always best to complete a full fact find, but if you wish to limit yourself to one area, please select below", and if they select a restricted area ( say pensions ), flash up WARNING-WE WILL ONLY HAVE LIMITED INFORMATION AND MIGHT MISS IMPORTANT AREAS. CONTINUE? Yes or NO.
7) I don't think that the Regulators yet realise that in many cases people DO NOT see the Home Page of a site first, but get dropped into the middle off of a search engine for example. They soon will, be prepared.
8) Fraud. There has not yet been much talk about fraud on the Net, (other than credit card stuff, yawn ), but it is one of the areas of most concern to the SIB. It is very simple to rip off a site, or invent one, and offer great deals, esp if doing so offshore. Once people get used to Net money transfers ( which will happen) this will be a problem. So I create Benta Banka and offer, oh 7.2% gross for £5000 on a 12 month no access deal. I fake the entire site. Should get me some cash, and be months before anyone can show that I'm a con. Or I go to a well known name, grab all the site, alter for high search engine profile, stash it on a server in a dodgy jurisdiction with a plausible sounding domain name, ( abc.ltd.uk instead of the correct abc.co.uk for example ), and collect all the money. In fact there are ways to do it that are totally legal, or at least unprovable. ( E.g. you set up multi companies offshore, with secret ownership. One is the investment company, another is a marketing company, the rest are shells to be invested in. The investment company pays high commissions to the marketing company, makes a series of bad investments with firms that default, and is then wound up. Try showing that anything wrong happened).
9) Don't think that any of this is crazy and that Regulators are not flexible. I myself with my Pensions Analyser software invented the Quartile Plot in order to provide a compliant method for displaying true charge projections ( and thereby showing which companies where good, bad , and bloody expensive )WITHOUT actually issuing a projection figure. The initial view was "that breaches the Act", but when I pointed out that the Act was all about "misleading projections" which meant "we don't like numbers because numbers could be thought of as promises", LAUTRO ( as was then ), agreed that my system was OK under the Act. The moral being that they are not trying to prevent you doing things, it's just that they don't want you ripping people off, either by accident or design. Valid ideas that protect the public interest can be brought in, even if they are contrary to the apparent standard rules.
10) Creating, recreating and brainstorming your new site.
Having read the above and got all fired up you want to proceed. Let's assume that you have the following:-
What this group of people will be very bad at is understanding each other and their problems and assumptions. They will find it hard to talk to each other.
What I suggest you do is bring in a catalyst ( myself perhaps, certainly someone who has a broad grasp of the Financial Service Industry issues, is independent of company politics, and can knock heads together; There are a few of us now ) who takes them off for a day or two's hard brainstorming, ( say over a weekend ). The aim is to get people talking and decide on a set of potential web sites, called, for the sake of argument , Brochure, Standard Web Site, and KEWL! At this point the catalyst should bow out.
Go for it.