As social media is proving to be a very successful means of promotion, many businesses are utilising these tools without knowing and/or understanding any of the legal ramifications.  Many banks overseas have embraced the use of online social networks to assist with healing the current financial crisis/industry, develop trust with their customers and to promote their latest deals.    Lon S. Cohen describes five ways how banks overseas have embraced Web 2.0 technologies which include community building, product research, customer service, marketing and transparency.  Especially due to the current Global Financial Crisis, people have developed a healthy mistrust of banks and as a result, banks have turned to social networks to become more transparent with their customers.

To date, banks in Australia have not used social networking tools as in-depth as their overseas counterparts.  There could be several reasons as to why this is the case but primarily it could be because they work in a heavily regulated industry and as a result, the lack of adoption of these tools may be attributed to the exposure of potential legal risks.  Some of these potential legal risks the banks may face could be identified as the following:

1. Confidential Information Risk: Banking staff using Twitter or Facebook may inadvertently disclose sensitive information via Tweets or comments.
2. Misleading or deceptive conduct: Australian financial institutions must comply with the Financial Services Reform Act 2001.  The financial services provisions have clear guidelines with relation to providing factual information and advice about financial products.   All front-line staff must be trained accordingly to provide factual information and never financial advice unless they are an accredited financial planner.   Any staff members discussing financial products with customers must conform to these regulations.  This aspect of the financial services industry may be considered hard to translate into the social networking world as the perceived lack of control of information over social networking sites. There is a potential risk of  misleading or deceptive conduct occurring if unaccredited / untrained staff are engaging with customers openly on an online platform.
3. Industry Specific Risks. Social networking platforms do allow consumers to adopt any identity they choose when online.  This can cause serious issues with regard to fraudulent behaviours when engaging with Bank employees over public social networking platforms.   Further, this issue also poses significant problems for the Bank to confirm the real identities of their clients.
4. Privacy:  Financial institutions must conform to Australian Privacy laws.  As a result,  they have a number of strict processes staff must follow to identify a customer prior to disc
   ussing account details.  Owing to the social and public nature of social networking platforms, privacy can not be assured.  Therefore financial institutions can not use social networking platforms to engage with customers in a manner similar to other businesses that are not regulated by Privacy Laws.
5. Negligent Misstatement: Careless or ambiguous responses to customer inquiries over a social networking platform could expose the financial institution to being prosecuted for a negligent misstatement.
6. Reputation: Traditionally, people do not trust banks or financial institutions.  Mistrust and wariness towards financial institutions has only been reinforced by the current economic climate.   Social networking tools can either build or destroy a companies reputation in a spectacular manner.   The Commonwealth Bank’s experience with social networking is a positive example of how social networking can build a reputation.  Nestle’s Facebook bungle last year is also an example of a situation that potentially had a negative impact on the company’s reputation.

Overcoming the Risks

Unlike other industries who can experiment with social networking platforms, banks and financial institutions do not have that luxury.  This is due to the strict industry regulations banks and financial institutions must conform to when engaging with their customers.  Banks and financial institutions must have a clear strategy for using social networking platforms.  It appears that the Commonwealth Bank are becoming serious about social networking  with the appointment of a social marketing manager in February 2010.  Creating and enforcing a social media policy is another mitigation that banks can pursue to reduce the potential legal risks posed by the use of social networking platforms by employees.