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POTENTIAL EFFECTS OF REGULATORY IMPOSITIONS OF FINANCIAL INFLUENCERS

Updated: Feb 9

by Avesta Vashishtha, Maanya Kocher *


Recently, the Securities and Exchange Board of India cautioned the Financial influencers, also known as the ‘Finfluencers’, about the probable release of certain regulations in the sphere of the content that can be disseminated by such advisors. The regulatory organisation would filter the realm of financial issues that the influencers will be allowed to delve into. Further, licensing requirements would be compulsorily applicable on Finfluencers for spreading any information about the Financial Sector.


These guidelines would be a result of the apprehensions caused by such online content-makers, related to Fintech frauds, risks, commercial malpractices, eroding trust of the public, etc. However, such regulations pose a threat to certain basic rights of these content-makers, including some internationally recognised liberties.


Definitional conundrum


A financial influencer (Finfluencer) can be defined as a person who gives advice regarding various financial topics ranging from investments, trading, etc., on various social media platforms. The influence and reach they have on such platforms is their main point of differentiation established between them and professional financial advisors..


It is a common assumption that influencers who exercise such reach to provide financial advice, have a background of finance, or in-depth knowledge regarding the same. However, there also exists a category of influencers who are not specialised in the financial sector, but engage in ‘occasional content’ related to finance based on sponsorships provided to them. Their inclusion in the category of financial influencer leads to a ‘definition conundrum’. For instance, several companies sponsor lifestyle influencers to promote crypto investments, etc. Such sponsored promotions blur the line between lifestyle promoters and financial influencers, which means that any and all types of influencers may take up the role of financial influencers at one odd instance.


Sponsored content and lack of credibility


The ‘lack of credibility’ cloaking such content can potentially cause detrimental effects upon the investors who rely on such information. It exists because a plethora of the content put out by Finfluencers is commercial, which means organisations pay these influencers to talk about investments that benefit their business. This results in financial advice being given to such a huge reach without the knowledge of the risks involved.


Such tactics lead to a biased form of financial investment advice being given to the people relying upon the same, which not only causes negative effects to the investments made by these investors, but can also influence the market. Investors who rely on such influencers are not ‘seasoned investors’, but rather new investors, who are vulnerable, and can fall into the trap of these sponsored advertisements, post which there lies no accountability.


However, the positive impact of influencers on the market can be seen through as the retail investors’ share in cash market turnover increased from 39% in 2019 to 45% in 2020. The relative ease and informality in which Finfluencers are able to interact with their audience means that there is also greater scope for the posting of content without the same level of editorial control applicable to other media and/or without including the relevant disclaimers or using proper terminology. Such flexibility, as provided by the UK, is especially required for new platforms like Cryptocurrency, about which people are not aware to a great extent, and such knowledge can be essential for financial development in today’s time.


International perspective


Further, an international perspective of the problem shows that less than 25% of adults are financially literate in South Asian countries according to a survey by Standard & Poor’s Financial Services LLC (S&P). China has also introduced an 18 point guideline for influencers and live streamers for not only finance but also law, education, and medicine. The guidelines require such influencers to have requisite qualifications to disseminate such information, however the guidelines present an ambiguity as to the exact qualifications required.


In recent times, New Zealand released its ‘Guide to Talking About Money Online’ guidelines for regulating the content which influencers can talk about, tips for consumers, licensing requirements, etc. While the regulations restrict the rights of such influencers, the tips can actually lead to greater awareness in the minds of customers who can become more vigilant about their financial decisions.


Further, Investment regulations were released by the European Securities and Markets Authority to ensure a supervisory role and restrict market instability. Further, the UK's Financial Conduct Authority released guidelines in 2015 for financial promotion on social media. In Australia ASIC, instead of introducing new regulations, have accommodated regulations for Finfluencers in their existing framework. Influencers who disseminate financial advice without a licence and risk 5 years of jail and hefty fines under the regulation.


However, Ar. 19 of UDHR and Ar. 10 of the ECHR provides every person with the freedom of opinion and expression and liberty to impart such information. Therefore, instead of restricting such practices, a declaratory announcement could be made mandatory for Finfluencers, which would further protect commercial autonomy. This means that Finfluencers can be obligated to specify the risks involved in financial activities discussed by them through online media, and further transfer such information under the scope of their ‘opinions’, instead of general information which is universally accepted to be the truth.


Indian constitutional outlook


In a number of cases, the courts have held that negative comments cannot be transmitted over the internet by social media influencers. But the conundrum regarding dissemination of knowledge, without harming or inflicting injury to the goodwill of any other entity still remains unresolved. While generating financial information over online platforms, Influencers exercise their Right to Freedom of Speech and Expression, as granted under Ar. 19 of the Indian Constitution without overriding any person’s rights, and cloaking restrictive practices in the name of regulatory guidelines would be violative of this liberty. Further, such practices also work as a means of livelihood for Finfluencers who utilise their knowledge for earning an income.


Such regulations undermine the consumer’s rights, since a true form of free market is where the consumer is allowed to make a decision with all sources of information present, without making any regulatory barrier. A rise in affiliate marketing has led to the advent of a new stream of commercial malpractices through which companies incentivise people to promote their products. But, advertisements are covered under Ar. 19(1)(g) under the name of ‘çommercial speech’. Certain reasonable restrictions can be applied to limit the right to commercial speech under Ar. 19(2), but only when the rights of an individual are violated, and cannot be established as a standard of restriction in every case without considering the facts and circumstances.


Way forward and analysis


Only 24% of adult Indians are financially literate, according to the survey conducted by the National Centre for Financial Education. Further, this proportion of literacy is undermined by a huge state disproportionalities, with Kerala having a total of 36% financially literate adults, while Chhattisgarh is at 4%. The overall low percentage of financially literate people and the scarcity of knowledge of investment and savings in India shows that stringent regulation of Finfluencers would be of less benefit in India unless the socio-economic environment and financial literacy of the country is worked upon. However, practices such as declaratory announcements and disclosure of requisite information by these influencers can be mandated.


Therefore, it is suggested that reasonable scrutiny be maintained instead of mandatory regulations by the SEBI which would further violate multiple rights of such Finfluencers. Maintaining reasonable scrutiny without imposing mandatory regulations by SEBI is a delicate balance between protecting Finfluencers' rights and ensuring investor protection and market integrity. Several approaches can help achieve this balance. First, encouraging self-regulation within the Finfluencer community through voluntary codes of conduct and ethical guidelines promotes responsibility and adaptability. Further, robust disclosure requirements can enhance transparency, requiring Finfluencers to disclose affiliations, conflicts of interest, and financial incentives. This empowers investors to make informed decisions. Promoting financial literacy and investor education through collaborations between SEBI and Finfluencers helps individuals evaluate financial advice critically. Also, SEBI can encourage industry best practices such as guidelines on content creation and fact-checking, ensuring the quality and accuracy of financial information. Periodic audits and monitoring by SEBI can ensure compliance with guidelines and disclosure requirements, identifying potential misconduct. Lastly, establishing regular industry collaboration and feedback loops between SEBI, Finfluencers, and investors can address concerns and adapt regulations. By employing a combination of these measures, reasonable scrutiny can be maintained while preserving the rights and freedoms of Finfluencers without the need for mandatory regulations that excessively restrict their activities. This approach recognizes the importance of investor protection while fostering a responsible and accountable Finfluencer community.


*Avesta Vashishtha and Maanya Kocher are both second year students at Dr. Ram Manohar Lohiya National Law University, Lucknow at the time of publication of this blog.




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