With retail investors becoming more interested in risky products since the Covid crisis, financial regulators have grappled with how to enforce their law against social media influencers, or finfluencers. Regulators have struggled to crack down on finfluencers’ so-called “advice,” because they do not have jurisdiction over mass media. Any blanket ban on sharing financial content on social media would run counter to the individual’s right to freedom of expression.
Financial influencers, however, have exploited this leeway. Capital market players, for example, regulated by the Securities Exchange Board of India (SEBI), are expressly prohibited from offering investment advice in any form without registering as research analysts (RAs) or registered investment advisors (RIAs) and complying with established rules on fees, performance disclosures and conflicts of interest. But unregistered influencers have amassed a sizable following on social media by offering product recommendations and stock tips without any of these restrictions. Many influencers present sponsored product ads as “independent” content. Some have teamed up with sly operators to dupe retail investors by running stock dumps on dubious stocks. Despite repeated warnings from the Reserve Bank of India (RBI) about the lack of legal status of cryptocurrencies, financial influencers have been actively peddling them. SEBI may have finally found a clever workaround to rein in financial influencers.
The regulator has decreed that all market entities regulated by it should not partner or transact in money, in-kind remuneration or product endorsements, with unregulated entities providing advice or recommendations or making performance claims. This can help rein in financial influencers on three counts. First, sponsorship fees (or in-kind payments) for content creation by regulated players such as brokers, mutual funds and trading platforms are the primary source of income for financial influencers who offer ‘free’ advice on social media. Second, to circumvent SEBI’s rules on the kind of performance claims they can make and the disclaimers that must accompany them, some regulated entities are using financial influencers as a channel to sell their products. SEBI’s new exemption puts an end to this regulatory arbitrage. Third, an ecosystem is now in place for investors or third parties to forward complaints to SEBI regarding over-promotion of regulated products. The SEBI rules will, however, not apply to persons engaged exclusively in investor education.
While SEBI may have brought the activity of financial influencers in capital market products under control, the field remains wide open for mis-selling of non-capital market products such as insurance plans, insurance savings plans and activities such as offshore forex trading and crypto trading. This calls for other financial regulators such as the RBI, IRDA (Insurance Regulatory and Development Authority) and the Pension Fund Regulatory Authority to come up with similar rules, without further delay.