FinTechNavigating the Influence of Fin-Fluencers in the Digital Age

INTRODUCTION

With the expansion of the digital age, the perspective towards stocks and securities is again being seen as a means to get rich quick by the common man and an increasing number of retail investors are turning to social media influencers instead of seeking advice from Securities Exchange Board of India (hereinafter referred to as “SEBI”) registered financial advisors as a means to enhance their investment returns. Such digital finance and investing gurus have become so widespread to acquire an eponymous name of their own called – “Fin-fluencers.”

In light of the rising popularity and the significant influence these Finfluencers wield SEBI has come out with a consultation paper namely “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)” on 25.08.2023.

These Fin-fluencers are individuals who utilize their reach on social networking and other online platforms to disseminate financial counsel, suggestions, and trading insights to their followers. They typically utilize platforms such as Instagram, Twitter, YouTube and blogs to generate and share content related to finance and investment.

According to the 2019 Financial Literacy and Inclusion survey conducted by the National Centre for Financial Education, India’s financial literacy rate is alarmingly low, at just 27 percent. Financial influencers, who lack both licenses and qualifications to dispense financial guidance, have created new avenues for promoting financial literacy. Therefore while many Finfluencers are dedicated to producing discretional educational content for their followers, others have raised suspicions due to their involvement in stock manipulation and their endorsement of particular products and companies for personal gain, potentially causing harm to the public.

FINFLUENCERS BUSINESS MODEL

Finfluencers that are based on social networking or social media platforms might encourage their clients to access their products or services in exchange for:

• Receiving a referral fee for the use of the product, channel, platform, or services they promote. This referral fee can take different forms, including variable payments based on usage or the number of users, fixed payments in a retainer model, or a combination of both. The commission can be provided either upfront or gradually over time.

• Gaining non-monetary benefits, such as complimentary access to products or services.

• Receiving compensation directly from social media or other platforms where they share their content.

• Engaging in profit-sharing arrangements with the underlying product, channel, platform, or services.

• Fraudulent influences may also create fake investment platforms or websites that appear legitimate. They may lure models into these platforms, convincing them to deposit money or share sensitive financial information, only to steal their funds or engage in identity theft. The main requirement is that service providers must secure consent from data subjects, which must meet criteria like being freely given, specific, informed, unconditional, and clear with positive action.

• Finfluencers may use pump-and-dump schemes where the influencer would heavily promote investment in an individual or a set of stocks or securities aggressively to create hype amongst retail investors and boost the value of the stock often with exaggerated claims. Once the price reaches a its peak profitable level, the finfluencer will sells their holdings, which are usually the largest, causing the price to plummet, and causing unsuspecting investors to suffer huge losses.

EXISTING REGULATORY FRAMEWORK

Fin-fluencers are generally required to comply with standard regulations such as Section 12-A of the SEBI Act, 1992, and regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations“).

• Section 12A of the SEBI Act prohibits any person from engaging in fraudulent, misleading, or manipulative activities related to stock exchange transactions, either directly or indirectly.

• Regulation 4 of the PFUTP Regulations defines “manipulative fraudulent or an unfair trade practice” to include knowingly false or misleading statements made to influence investors’ investment decisions. Additionally, this regulation forbids the reckless or careless dissemination of information or advice likely to impact securities investors’ decisions.

While the SEBI (Investment Advisors) Regulations, 2013, (hereinafter referred to as “IA Regulations”) oversee Registered Investment Advisers (hereinafter referred to as “RIAs”) in India, they do not include finfluencers in their ambit. The IA Regulations define an “investment adviser” as someone who provides investment advice “for consideration” to individuals or groups. Finfluencers typically offer advice freely to the public without charging their viewers, which places them outside the definition of an “investment adviser” since there is no consideration involved. However, there is still no specific law governing fin-fluencers.

SEBI’s PROPOSED REGULATIONS FOR FINFLUENCERS 

In SEBI’s consultation paper the supervisory body outlined several crucial points that it proposes to put in place to regulate fin-fluencers. The important ones of these being:

• Avoidance of Unregistered Finfluencers: SEBI-registered entities are prohibited from forming any associations with fin-fluencers who are not registered. This prohibition extends to both financial and non-financial benefits, representatives acting on behalf of registered entities, and the promotion of financial sector products and services.

• Client Information Confidentiality: SEBI-registered entities are not allowed to divulge client information to unregistered fin-fluencers or individuals within that community.

• Referral fees: SEBI-registered entities are not permitted to offer referral fees based on a trailing commission structure.

• Mandatory Registration Disclosure: Registered fin-fluencers must display their registration number, contact information, and investor grievance helpline details in their posts. The revised guidelines clarified that influencers who give financial advice must possess appropriate credentials such as a license from the Insurance Regulatory and Development Authority of India (IRDAI) or be a qualified chartered accountant, etc.

• Transparency Requirement: Registered fin-fluencers are obligated to prominently feature all disclosures in their posts to ensure transparency.

AMLEGALS REMARKS

Despite the wide-ranging freedoms it offers, social media is evolving into a platform where misinformation spreads, and finfluencers wield substantial influence over their audiences, especially in critical financial sectors, thereby increasing the potential risks of scams and financial losses. In regards to seamless cross-border communication and investments, SEBI may need to collaborate with international regulatory bodies to address influencers with global reach. SEBI’s proposed regulation of financial influencers represents a crucial move towards upholding the transparency and integrity of financial markets. Nevertheless, as financial influencers continue to gain significance in shaping investment choices and market dynamics, SEBI is likely to face several future challenges.

Team AMLEGALS assisted by – Mr. Bhavy Sharma (Intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or mridusha.guha@amlegals.com