Is it time to regulate financial influencers?

The rise of finfluencer

There is a lot more happening on social media platforms these days, than the sharing of messages, family photos and videos. It has grown beyond being a platform for light-hearted conversations.

Users are increasingly relying on it for news, lifestyle hacks, and particularly financial advice — the trickiest of them.

Latching on to the demand, influencer marketing has boomed with followers running into millions. The staggering rise in markets after the pandemic has also led to the rise of this new phenomenon.

The influencers, especially in finance, have a tremendous impact on an individual’s investment decisions. The main content of financial influencers includes educational videos on economy and markets, stock advice and other personal finance related advice.

A financial influencer or finfluencer may not be qualified enough or a registered investment advisor to be giving advice to the public. But millions of followers still buy into the content because of the simplicity. These influencers break down head-scratching financial jargon in simple terms and explain it to the layman.

Registered investment advisors are authorised by the markets regulator to advise clients on financial matters. India has about 1,300 registered investment advisors.

Financial influencers, although offer financial literacy to a certain extent, pose risks to individuals’ financial stability. It may be through paid partnerships, advertising, conflict of interest etc.

Brands often rope in influencers to advertise their products or services. These include mutual fund investments or crypto platforms or even IPOs, where influencers review the prospectus to attract retail attention.

Many first time investors, who enter the markets, with the idea of making money on a whim, may be vulnerable to such content from financial influencers. That is not the case with the registered investment advisors as they are required to disclose any conflicts of interest with the regulator.

The regulatory dilemma

The rise of fin-influencers has created a regulatory dilemma for the Securities and Exchange Board of India (SEBI) with a growing investor base in the country. As of September quarter this fiscal, India has about 102.6 million demat accounts. About 41 million unique investors invest in mutual funds, as of March this year.

Who regulates finfluencer?

Currently there are no regulations from Sebi that apply to financial influencers. However, the Advertising Standard Council of India (ASCI), a voluntary, self-regulatory organisation, prescribes that upfront and prominent disclosures must be made by influencers on brand collaborations, advertisements, paid partnership or sponsorships for all such posts on all platforms. It also directs influencers to follow due diligence. The ASCI guidelines are not legally binding on influencers.

Put the numbers in a chart

There has been some decline in violations by financial influencers, specifically with regards to promotional content on crypto-assets. In FY22, there were a total 415 instances of violations by influencers and celebrities in finance- and cryptocurrency-related content. Of this, 43 were finance related, while 372 were connected to cryptocurrency promotional content. In the first half of the current financial year, ASCI has observed a total of 71 violations in such cases – 15 being finance related, while 56 were on cryptocurrencies.

The rampant nature of investment advice flooding the social media has caught regulators’ attention worldwide whose hands are otherwise full already. In an increasingly digital age, according to a survey by a digital marketing institute, 70% of teens trust influencers more than traditional celebrities and 86% of women use social media for purchasing advice.

Brining finfluencers under regulatory net

According to a Business Standard report, Sebi is considering ways through which such finfluencers can be brought under the regulatory net. According to an official, the regulator is trying to find a solution whereby at least those who are cashing out by giving advice on social media are brought under the regulatory ambit. Earlier this year, Sebi cracked down on celebrity advertising for cryptos. Sebi said that no ‘prominent public figures, including celebrities, sportsmen should endorse crypto products and the advertising disclosure should also talk about possible violation of laws.

However, it is tricky to clamp down on thousands of financial creators who churn out content on a regular basis, although other countries have brought out some form of regulation.

In Australia, finfluencers could face up to five years in jail if they provide financial advice without a license. Similarly, the European Securities and Markets Authority issued a public statement on investment recommendations made on social media, clarifying the definition of investment recommendations, how to post them properly on social media, and laying out the consequences of breaching the EU market abuse regulation.

Regulators in China and Singapore have also slapped curbs on promotion of cryptocurrency-related products and issued guidelines for finfluencers.

Speaking to Business Standard, Mayank Mehta, Partner, Pioneer Legal says, it is high-time to regulate financial influencers. Sebi needs to find ways to ring fence finfluencers despite being tricky

Experts say finfluencers, despite promoting financial literacy, pose certain risks to consumers as seen in the case of crypto meltdown. The guidelines around influencer marketing are also evolving in various jurisdictions. In India too, influencers have caught the regulator’s attention. From the creators’ perspective, there could be collaborations with domain financial experts to reduce risks.