Facebook’s data collection policies will breach Europe’s stringent new privacy rules, threatening its ability to sell advertising based on targeted user information, according to a study that highlights the challenge faced by the social media company in adapting to the new regime.

The company’s collection of certain personal information will become illegal under the General Data Protection Regulation, which comes into force across the EU in May.

Academics at the Charles III University of Madrid used Facebook’s advertising dashboard to analyse audience numbers for ad campaigns. They found that 73 per cent of the company’s European users were targeted by marketers based on personal characteristics such as sexual orientation or political beliefs — which will be illegal under GDPR.

The new regulations forbid companies from processing data on race, ethnicity, political opinions, religious beliefs, trade union membership or sexual orientation without explicit consent.

Facebook has assembled its biggest-ever cross-departmental team to deal with the implementation of GDPR but the academic research suggests the new regulations will impact the company’s ability to attract advertisers.

“Targeted advertising requires you to have a lot of accurate user information, but if you think about what happens after the implementation of GDPR, it will become much harder to hold that information,” said Neil Campling, a technology analyst at Mirabaud Securities, which recently downgraded Facebook.

“The first innings for social media companies came because advertisers were desperate to see better forms of engagement with end users but now there are a lot of questions about returns on that investment and actual engagement.”

Facebook disputed the findings. “Like other internet companies, Facebook shows ads based on topics we think people might be interested in, but without using sensitive personal data,” a spokesperson said.

The wealth of personal data the company has enables advertisers to target relevant and specific audiences. Together with Google, Facebook dominates the digital ad market: the two companies accounted for 63 per cent of market share in the US last year, according to eMarketer, the research firm.

But while Google allows marketers to find people as they are searching for products, Facebook enables them to discover small groups of people significantly more likely to be interested in their offerings through the use of demographic data and information about the pages a user has liked.

This hyper-targeted approach is intended to bring higher engagement rates and, therefore, higher ad prices. For example, a niche business that might not have success with a television campaign or billboards would be able to find specific groups such as British expats in the US, or products for a particular type of hair.

Facebook last year launched a “value optimisation” tool that tries to help marketers reach people based on how much they are likely to spend on a product. Sheryl Sandberg, Facebook’s chief operating officer, said on the company’s earnings call last month that “this is especially important for small businesses as they have limited budgets and need to make every dollar count”.

However, the company has faced a backlash from regulators in the EU, which have accused it of violating privacy rules. In September, Spain’s data protection authority fined Facebook €1.2m for “collecting, storing and using data, including specially protected data, for advertising purposes without obtaining consent”. The French regulator fined the company €150,000 after a controversy over its use of data on sexual preferences to show targeted ads.

“People do not always understand the full information of what the company can see about them,” said Angel Cuevas, a professor at the University of Madrid who was prompted to analyse the data after he was shown ads for hostels targeted at gay men. “If they did, they might feel differently about allowing it [access].”