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Regulating Finfluencers: A strategic move by SEBI to ensure investor protection

Updated: Feb 9

by Anandita Anand *


BACKGROUND


Over the past couple of years, we have seen tremendous technological growth. This has been accompanied by an unprecedented rise of social media users. The content creators on these social media platforms foray into almost every arena that one can imagine, and finance is no exception.

These financial influencers or ‘finfluencers’ as they are popularly known, offer free financial advice to people online. Since there is no qualification requirement for one to become a social media influencer, apart from following the community guidelines, virtually anyone can become a finfluencer and offer advice to hundreds and thousands of people, without having the requisite knowledge regarding the market. In light of this reality of social media influencers, the statement made by the Securities and Exchange Board of India (SEBI) regarding the guidelines to regulate finfluencers is a welcome move. In this blog, the author has briefly discussed the dangers that unregulated finfluencers pose and how SEBI has the perfect opportunity to bring in strict regulations in place for investor protection.

Need to regulate Finfluencers


THE MEME STOCK MARKET EVENT


An event that accurately signifies the need to regulate influencers is the ‘meme stock market event’ of early 2021 in the United States, which shook market regulators all around the world. Meme stocks are those stocks that are hyped by memes shared on various social media platforms. The retailer video game ‘GameStop Corporation’ was one such entity that saw an insane surge in its value. Soon after the phenomenon was over, the stocks were back to their ordinary value. Such instances illustrate the dangerous impact social media can have in a volatile market, like that of stocks, if not regulated properly.


PUMP-AND-DUMP SCHEMES

Another common phenomenon witnessed on social media platforms is the pump-and-dump schemes wherein these finfluencers convince their audience to invest in specific stocks which they own, so that the prices of these particular stocks soar and these influencers can ‘dump’ their own stocks by selling them at the artificially inflated price. A recent occurrence was the ‘Sadhana Broadcast Pump-and-Dump Scheme' wherein many people including famous celebrities had been placed under restrictions relating to stock trading by SEBI.


DANGERS OF UNREGULATED FINANCIAL ADVICE


The instances highlighted above are just few of the many perils that a market faces due to the lack of regulations on finfluencers. The problem with most finfluencers is that they are not registered with SEBI. Thus, there is nothing to suggest that they possess the necessary qualifications to give financial advice. More often than not, due to their lack of proper knowledge regarding the market trends, they end up providing misleading information to their large following prompting investors to make wrong choices.

Worse than an unqualified adviser is an adviser who misleads his audience and convinces them to make those choices that further his interests. For instance, it is often seen that social media influencers are paid by certain entities to promote their products. Finfluencers, without revealing it to their audience, often promote companies and stocks for commission, while the entire time, the poor viewer is under the impression that he is making an informed choice, based on the advice of a financial ‘expert’.

A two-fold problem presents itself before the market regulator due to the lack of control over finfluencers; first, virtually anyone can become an influencer and often, it is seen that people who are grossly under-qualified to provide financial advice as per SEBI requirements, find social media as an outlet to offer their unsolicited advice and earn money. Second, finfluencers can easily flout all the regulations that have been placed by SEBI on registered investment advisers (RIA) as these entities are not registered and thus, the requirements and restrictions imposed by the regulatory body on traditional RIAs does not apply to them. in the present scheme of things. Thus, there is zero accountability on finfluencers which empowers them not to adhere to the required standards of investment advisers in lieu of personal interest or gains.


OPPORTUNITY TO ESTABLISH A STRINGENT REGULATORY REGIME


With SEBI having made it clear that it is in the process of coming up with regulations for finfluencers, it is the perfect opportunity for the market regulator to work with other bodies like Advertising Standards Council of India (ASCI), Reserve Bank of India (RBI), and Ministry of Electronics and Information Technology (MeitY) to come up with comprehensive regulations or guidelines to control the excess of finfluencers.

Currently, there are guidelines framed by the ASCI, which on paper require the social media influencers to mandatorily term the content made for companies as ‘advertisement’, but effectively, there is no mechanism to ensure that these guidelines are actually followed, as ASCI does not have the power to punish the violators of the guidelines; it can merely report them.

Since finfluencers are mostly unregistered entities and they get away with flouting SEBI guidelines for advisors without any repercussions, the regulatory body has made it clear that it will not allow entities like mutual funds and brokers that are registered under it to issue advertising, etc, with these unregistered influencers, specifically those with more than ten lakh followers or subscribers on their social media handles.

This is a smart first-step by SEBI in the direction of regulating finfluencers. As the target category of finfluencers falls outside the ambit of its regulations and guidelines for now, the market regulator has placed the responsibility on regulated entities to make sure that they do not choose this easy passage of engaging unregistered finfluencers to get away with flouting of RIA requirements like compulsory certificate of registration, minimum educational qualification, and mandatory disclosure to the client in case of a conflict of interest.


RECOMMENDATIONS


As finfluencers are cropping up all around the world, market regulators of several nations have been planning to regulate, or have already laid down regulations to control finfluencers.

SEBI has its guidelines in place for investment advisors- SEBI (Investment Advisers) Regulations, 2013, (“IA Regulations”), which has placed many regulations on the functioning of RIAs. Moreover, advisers need to fulfil certain eligibility criteria in order to be a ‘SEBI-registered adviser’. All of this is in place to ensure protection of investors against misleading and unqualified advice.

However, the problem arises with the definition of ‘investment advice’ and ‘investment adviser’ given in the IA Regulations. While the definition of investment advice is wide, it specifically excludes ‘advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public’ from its ambit. Similarly, investment adviser refers to those people who offer investment advice for ‘consideration’. These elements of the definitions exclude social media influencers from the SEBI regulations as their advice is available to the public at large, and usually, they do not charge any fee for the advice they offer.

The easy way out for SEBI in this situation would be to amend these definitions in a manner that social media influencers can be brought within the ambit of the IA Regulations and require social media influencers to adhere to the same guidelines and qualification criteria as RIAs. This may virtually lead to the eradication of finfluencers who don’t meet the requirements and solve the problem.

However, a more nuanced approach would be to go a step further, and make a distinction between ‘regulated financial advice’ and ‘general financial advice’. Since the aim of SEBI is to regulate and not eradicate, it should ideally undertake the cumbersome task of distinguishing the two. This is to say that while giving general advice, where a person generally talks about the market trend should be allowed without such stringent restrictions, but once a finfluencer enters the arena of regulated advice, he advises his clients to invest in particular stocks, he must be bound by the same standard that an RIA is.

Regulated advisers on social media must necessarily be required to possess a SEBI-issued licence, to prove their credibility. They must make disclosure of any consideration they receive from particular companies, and on violation of IA Regulations, they must be penalised the same way RIAs are, to ensure fair play in the market and investor protection.


CONCLUSION


It can be stated unarguably that unregulated finfluencers pose a serious threat to the retail market across the globe. Regulation is the only way ahead, to ensure that their actions do not seriously harm investors’ interest.

It is a huge task that SEBI has undertaken to regulate the ever-increasing number of finfluencers, in such a digitalized world. However, with this responsibility, it also has the opportunity to come up with strategic guidelines that will not only protect the investors, but will also foster an economic environment where bona fide advisors will prosper, and where certain stock companies will not have any unfair advantage over others.


*Anandita Anand is a student at NLU Jodhpur at the time of publication of this blog.

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