Since the COVID-19 pandemic, financial regulators have been working to tighten regulations on social media influencers, or so-called “finfluencers,” as retail investors have increasingly turned to riskier products. Regulators have difficulty policing the so-called “advice” offered by finfluencers, as they have no jurisdiction over mass media. A blanket ban on the sharing of financial content on social media would violate individuals’ right to free speech.
However, financial influencers are exploiting this leeway. For instance, capital market participants regulated by the Securities and Exchange Board of India (SEBI) are specifically prohibited from providing any form of investment advice without registering as a Research Analyst (RA) or Registered Investment Advisor (RIA) and adhering to set rules on fees, performance claims, and conflicts of interest. However, unregistered influencers have garnered huge followings on social media by offering product recommendations and stock advice without such constraints. Many influencers present their sponsored product promotions as “independent” content. Some have teamed up with shrewd traders to run pump-and-dump schemes with shady stocks to dupe retail investors. Despite repeated warnings from the Reserve Bank of India (RBI) about the lack of legal status of cryptocurrencies, financial influencers are aggressively promoting them. SEBI may have finally found a clever workaround to rein in financial influencers.
The regulator has mandated that all regulated market entities must not enter into or engage in any transaction involving monetary, in-kind compensation or product referrals with unregulated entities providing advice or recommendations or making performance claims. This may help in curbing finfluencers in three ways. First, sponsorship fees (or in-kind payments) for content creation from regulated players such as brokers, mutual funds and trading platforms are the primary source of income for finfluencers offering “free” social media advice. Second, to circumvent the types of return claims and associated disclaimers prescribed by SEBI, some regulated entities try to use finfluencers as intermediaries to hard sell their products. SEBI’s new provisions will put a stop to this regulatory arbitrage. Third, an ecosystem has been put in place where investors and third parties can escalate complaints to SEBI about over-promotion of regulated products. However, SEBI’s provisions do not apply to those engaged solely in investor education.
While SEBI may have curbed the activities of financial influencers in capital market products, there remains a significant risk of mis-selling in non-capital market products such as insurance schemes, insurance-cum-savings plans, activities like offshore forex trading, cryptocurrency trading etc. Other financial regulators such as RBI, IRDA (Insurance Regulatory and Development Authority) and Pension Fund Regulatory Authority also need to enact similar rules urgently.
