The CISI's Corporate Finance Forum discussion on the advantages and disadvantages of bulletin boards followed two helpful presentations: one by Nick Bealer, Chartered FCSI, of Cornhill Capital; the other by Tim Metcalfe, founder and MD of IFC Advisory. Nick described the problems that can be caused by contributors on bulletin boards, who often indulge in behaviour that would have a regulated practitioner banned by the Financial Conduct Authority (FCA).Tim then gave a summary of the PR approaches which companies need to adopt.
The volume of posts is now such that companies cannot hope to respond to everything, making most PR strategies reactive, not proactive. The key point was to not engage with bulletin board posters and to accept that sometimes one just has to ignore a post (bulletin boards will remove abusive posts, if asked). Nick and Tim also pointed out that bulletin boards can have a benefit by identifying investor concerns and helping frame the investor relations dialogue. Improving information flow between market participants helps remove anomalies and increases market efficiency (assuming the information is fair and accurate); but do these benefits outweigh the negatives?
Attendees to the meeting were quite vocal about their concerns, with general recognition that bulletin boards have a significant impact. Individual investors can lose out when posts result in wild price swings; companies can lose out when fundraising is destabilised, decreasing the price at which money is raised; and the market as a whole loses out, with its reputation damaged as serious investors are disadvantaged by the activities of market manipulators. Of course, not all posts are fraudulent, many are just mischievous; but the impact can be the same.
It used to be the principle that companies did not comment on market speculation and rumour, but this is no longer the case, and the issue now is that bulletin boards can spread gossip quicker than the company can react and respond to. However, it was also recognised that bulletin boards are here to stay, and can be useful and beneficial; hence action needs to be taken to counter their corrosive effects.
The view was that the actions of bloggers and subscribers to bulletin boards often constituted market abuse, with several examples being given from attendees’ direct experiences, and that the regulators should have a role to play in enforcing the rules as strictly as they would with a financial adviser. The understanding of one attendee was that the cost of taking such action would only be undertaken by the regulator if the economic impact on an individual were significant. However, such an approach, if correct, ignores the impact on a company or the market as a whole. In addition, it was noted that the regulator is not the only party with a responsibility to act, and that all market participants had a responsibility to report suspected market abuse. Is everyone doing this to the fullest extent possible? (Everyone is encouraged to read the FCA’s review of the new Market Abuse Regulations, coming into effect this summer. For more information, please see the end of this article.) The question as to whether retail brokers should start to refuse to act for individuals who they suspect of market abuse was also raised.
There was also a view that many bulletin board subscribers may not know that their actions are wrong and that more could be done to publicise good market practice. However, without any consequences for wrongful behaviour, it will continue unchecked, so there needs to be a few high profile cases to make the point. There was one suggestion that shorting should be banned for companies with a market cap of less than £10m, in order to remove the commercial incentive to manipulate the market.
The Forum was reminded of the maxim not to do anything that you wouldn’t want your grandma to read about in the press!
It was generally accepted at the meeting that anonymity was a root cause of this behaviour. Although a few websites insist on members displaying their own names and occupations, most don’t. Given the strong ethical basis required to be a regulated person (the ‘fit and proper’ test), the point was made that this should also be applied to anyone posting about a financial product. The Forum was reminded of the maxim not to do anything that you wouldn’t want your grandma to read about in the press! There was a discussion about how technology could be used to track individuals under the current system of assumed names. While it is possible, it is time consuming and it was agreed that removing anonymity would be the one step that would have the biggest impact in improving the behaviour on the bulletin boards and other social media sites.
There was also an interesting discussion as to whether bulletin boards represented a backlash against the way that retail investors have been ignored by market participants in recent years. The effect of liquidity, or the lack thereof, has an impact in exaggerating the volatility in share price movements. The question of why more house brokers do not publish notes for retail investors was raised. Increasing the availability of equity research for retail investors would help to educate and inform the investors’ debate and so isolate the wilder posts; it would also help manage expectations.
In summary, the actions of individuals on bulletin boards is a problem which is not going to resolve itself. Nor is it something that can be left to a single party, such as the FCA, to resolve. Concrete steps that could be taken are:
- Brokers could be proactive in reporting suspected instances of market abuse and, if agreeable with the regulator, agree to ‘ban’ serial offenders (see also below regarding the new market abuse regulations)
- Participants on bulletin boards could be educated as to the potential consequences of their actions and what constitutes market abuse
- The FCA could be encouraged to take action against offenders, with a series of high profile cases to act as a deterrent
- The availability of equity research for retail investors could be increased
- Anonymity could be removed.
Do you agree with these thoughts? Will these actions be effective and are they practical? Are there other steps that could be taken? Do bulletin boards need a code of conduct to govern the behaviour of their users? The CISI Corporate Forum would like to encourage a wider debate on these issues, and your views are welcomed.
You may also be interested in reading the Dec 2015 thematic review from the FCA on the new Market Abuse Regulations, due to come into effect on 3 July 2016, which will extend the current regime, covering additional markets, platforms and financial instruments. As these new regimes come in, it is likely that the FCA will monitor closely firms' efforts to comply with new requirements.
If you have any further issues or experiences you would like to put forward related to this subject, please contact PFS@cisi.org
The views represented above are thoughts gathered from the meeting and should not be taken as reflecting the official policy of the CISI.