Of critical importance for any financial institution using Twitter or other social media for business marketing and promoting purposes, the Federal Financial Institutions Examination Council (FFIEC) has issued final supervisory guidance titled “Social Media: Consumer Compliance Risk Management Guidance” (the “Guidance”). The FFIEC issued proposed guidance on the subject on January 23, 2013, and received 81 official comments on the proposal.
Importantly, the Guidance does not impose any new requirements on financial institutions, but rather is intended to help financial institutions understand the applicability of existing requirements and supervisory expectations associated with the use of social media. The Guidance also points out potential areas of risk posed by social media involvement so that financial institutions can understand and successfully manage such risks.
Definition of Social Media
The Guidance defines social media as a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video. Social media can take many forms, including, but not limited to micro-blogging sites (e.g., Facebook, Google+, MySpace and Twitter); forums, blogs, customer review Web sites and bulletin boards (e.g., Yelp); photo and video sites (e.g., Flickr and YouTube); sites that enable professional networking (e.g., LinkedIn); virtual worlds (e.g., Second Life); and social games (e.g., FarmVille and CityVille). The Guidance clarifies, however, that messages sent via e-mail or text message, standing alone, do not constitute social media.
In defining social media, the Guidance makes clear that, given the dynamic and evolving nature of technology, the definitions of social media are illustrative and not exhaustive. The Guidance further notes that other forms of social media may emerge in the future that financial institutions should also consider.
Compliance Risk Management Expectations
The Guidance instructs that financial institutions should have a risk management program that allows such institutions to identify, measure, monitor and control the risks related to social media. The FFIEC does not prescribe a “one-size-fits-all” approach, but rather clarifies that the size and complexity of the risk management program should be commensurate with the breadth of the financial institution’s involvement in social media activities. For example, a financial institution that relies heavily on social media to attract and acquire new customers should have a more detailed program than one using social media only to a very limited extent.
The Guidance cautions, however, that a financial institution that chooses not to use social media should nevertheless consider the potential for negative comments or complaints that may arise within social media platforms and, when appropriate, evaluate what actions may be necessary to monitor or respond to such comments.
Components of a successful risk management program should include the following:
- a governance structure with clear roles and responsibilities through which the board of directors and senior management direct how using social media contributes to the institution’s strategic goals
- policies and procedures regarding the use and monitoring of social media and compliance with applicable laws, as well as methodologies to address risks from online postings
- a risk management process for selecting and managing third-party relationships
- an employee training program that incorporates the institution’s policies for employee use of social media
- an oversight process for monitoring information posted to social media sites administered by the institution or a contracted third party
- audit and compliance functions to ensure ongoing compliance with internal policies and all applicable laws, and
- parameters for providing appropriate reporting to the financial institution’s board of directors or senior management to enable evaluation of the effectiveness of the social media program.
Examples of Risk Areas
The Guidance identifies several risk areas that financial institutions should consider with respect to social media, including compliance and legal risks, reputational risk, and operational risk.
Compliance and Legal Risks
Compliance and legal risks arise from the potential for violations or nonconformance with laws and regulations. These risks also arise where the financial institution’s policies and procedures do not keep pace with changes in the marketplace, such as the development of social media. The Guidance points out that existing laws and regulations do not contain exceptions regarding the use of social media, and therefore a financial institution that uses social media to engage in lending, deposit services or payment activities must comply with applicable laws and regulations the same way as when it engages in these activities through more traditional media.
For example, financial institutions engaging in advertising must comply with laws and regulations, such as the Truth in Lending Act and Truth in Savings Act (e.g., Regulation DD and 12 CFR § 707 (credit unions)). For example, if an electronic advertisement displays a triggering term such as “bonus” or “APY,” then Regulation DD and Part 707 require that the institution must clearly state certain information, such as the minimum balance required to obtain the advertised APY or bonus, as is required in such regulations.
Similarly, whenever a depository institution advertises FDIC-insured products (or even nonspecific banking products, if the FDIC-insured institution’s name is used in the advertisement) the institution must include language such as “Member FDIC.” Conversely, in an advertisement of solely nondeposit products or hybrid products (products with both deposit and nondeposit features), the institution is forbidden from advertising its FDIC membership.
Social media may also pose non-traditional compliance risks and challenges. For example, the Guidance instructs that financial institutions should be aware of emerging areas of Bank Secrecy Act/Anti-Money Laundering risk emerging in social media. With the advent of virtual-world economies like Second Life and digital currencies like Bitcoin, illicit actors may use such platforms for money laundering and terrorist financing. Thus, financial institutions engaging in such platforms must monitor activities to address this risk.
Another compliance challenge posed by social media is the way financial institutions are expected to handle consumer comments about the institution through social media. For example, the Community Reinvestment Act requires a subject depository institution to maintain a public file that includes, among other items, all written comments received from the public for specified periods of time. With regard to which messages on social media institutions are required to be kept in the public file, the Guidance clarifies that depository institutions must keep on file any messages relating to the institution’s performance in helping to meet community credit needs received through social media channels that are run by or on behalf of the institution. The Guidance excludes from this requirement comments about the institution made on the Internet through sites that are not run by or on behalf of the institution.
Reputational risks arise from negative public opinion, which may harm the reputation and standing of the institution even if the institution has not violated any law. For example, the public nature of social media may present reputational risks when financial institutions do not promptly and appropriately respond to consumer questions or complaints received through social media, or when users post critical or inaccurate statements against the institution. The Guidance does not require financial institutions to monitor and respond to all Internet communications, but a financial institution is expected to take into account the results of its own risk assessments in determining the appropriate approach to take regarding monitoring of, and responding to, such communications.
The Guidance points out that an institution does not need to monitor every complaint made on the Internet, but may instead establish one or more specific channels that consumers must use when submitting complaints or disputes directly to the institution. However, the institution should also consider the reputational risks inherent in not responding to complaints and disputes received through other channels, and tailor its policies and procedures accordingly. Similarly, an institution should consider whether and how to respond to communications disparaging the financial institution on third-party social media sites, and may manage the reputational risk by monitoring forums on social media sites.
Operational risk is a risk of loss resulting from inadequate or failed processes, people, or systems, and includes risk posed by the financial institution’s use of information technology. Social media is one of the platforms vulnerable to account takeover and the distribution of malware. Financial institutions therefore should ensure that the controls they implement to protect their systems and safeguard customer information adequately address social media usage. Incident response protocols should include social media.
- The Guidance on social media use emphasizes the challenges presented by non-financial examples of risk (compliance, reputational, operational). This Guidance reinforces that the regulators expect that financial institutions’ policies and procedures adequately address all potential areas of risk, not merely financial risk related to credit risk or interest-rate risk.
- The Guidance does not change existing requirements for institutions, but rather qualifies that they apply with equal force to the use of social media. This may pose challenges and limits for financial institutions wishing to engage in informal social media platforms that do not easily lend themselves to compliance with laws and regulations. For example, the FDIC requirement that institutions advertising FDIC-insured products use appropriate designating language may be difficult to comply with for an institution wishing to advertise on Twitter, which limits all posts to 140 characters.