The story so far: On August 25, markets regulator Securities and Exchange Board of India (SEBI) floated a consultation paper proposing regulations to restrict the association of SEBI-registered intermediaries or regulated entities with unregistered ‘finfluencers.’ Other than undertaking enforcement action against the unregistered ‘finfluencers,’ the paper proposed measures to “disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce.” Comments to the proposal are invited until Sept 15.
What all has SEBI observed about ‘finfluencers’?
The markets regulator has defined financial influencers, commonly referred to as ‘finfluencers’, as people who provide information or advice to people on various financial topics such as investing in securities, personal finance, banking products, insurance, or real-estate investment. Present on varied social and digital platforms, the regulator notes, finfluencers “have the ability to influence the financial decisions of their followers”.
Their objective may be to entice their followers to purchase products, services, or securities in return for undisclosed compensation from platforms or producers.
Finfluencers are usually unregistered entities and differentiate themselves with their engaging and catchy content via stories, reels, posts and messages on varied social media platforms. SEBI notes that while some of them may be genuine educators, “many of them are effectively unregistered and unauthorised Investment Advisers (IAs) or Research Analysts (RAs).”
Finfluencers not registered with relevant financial sector regulators may not possess the requisite qualifications or expertise on the subject. Further, not beingsubjected to a formal code of conduct translates to not requiring to disclose any potential conflict of interest— such as their association or interest in the products, services or securities that they promote.
SEBI has floated a separate consultation paper that proposes a unique fee payment platform for registered IAs and RAs. The idea is to help investors identify and avoid unregistered entities/influencers.
Have there been any notable incidents recently?
This conundrum is however not new to SEBI or any other market regulator globally. In May, SEBI fined options trader and Youtuber P.R. Sundar Rs 6.5 crore alongside a one-year ban for violating norms pertaining to investment advisers. He was allegedly offering varied packages for advisory services through his website. The fees collected were deposited with banks accounts related to Mansun Consultancy; the Youtuber was a promoter of the company with 50% shareholding. The case was disposed of after he agreed to pay the fine, althoughthe terms of the ban still applied.
In March, SEBI barred 31 entities including actor Arshad Warsi, his wife Maria Goretti and promoters of Sadhna Broadcast from the securities market. They were found to be uploading misleading videos on YouTube channels recommending that investors buy the company’s shares. The actor later wrote on social media platform X (formerly Twitter), “Please do not believe anything you read in the news. Maria and my knowledge about stocks is zero, took advice and invested in Sharda, and like many other, lost all our hard-earned money.”
Outside the country, the U.S. Securities and Exchange Commission (U.S. SEC) in October last year charged socialite Kim Kardashian for “unlawfully touting a crypto security.” She settled the charges, paying $1.26 million in fees and penalties.
What has SEBI proposed now?
As previously stated, the idea now is to disrupt this revenue model.
Finfluencers’ incentives, as noted by SEBI, may include referral fees (commissions which could be upfront, in a trail manner and/or variable), non-cash benefits like free usage of products or services, or profit sharing with the underlying product company, channel, platform or service provider. Further, they might be receiving compensation directly from the social media or other platform where they share the content.
The regulator has also noted instances where registered intermediaries and regulated entities resort to finfluencers to promote their products and services.
Thus, it has now proposed that SEBI-registered entities would not, directly or indirectly, have any monetary or non-monetary association for promotion or advertising their products with any unregistered entity. Registered entities and intermediaries shall not pay any trailing commission based on the number of referrals as referral fee— thus, eradicating a primaryinducement for a finfluencer.
Limited referrals from retail clients, and payment of fees for such limited referrals by stockbrokers are allowed.
SEBI also mandates that registered and regulated entities (by itself or other market institutions)not share any confidential information of their clients with unregistered entities.
Finfluencers registered with the regulator, stock exchanges, or the Association of Mutual Funds in India (AMFI) must display their registration number, contact details, and a investor grievance redressal helpline. They must make appropriate disclosures and disclaimers on any posts. This builds on Advertising Standards Council of India’s (ASCI) present regulation that mandates a disclosure label identifying a post as an advertisement — even if an unbiased opinion is being expressed.
In fact, the markets regulator itself mandates that the advertisement must not contain “any promise or guarantee of assured or risk-free return to the investors”.
Citing its potential influence on investors, the National Stock Exchange (NSE) seeks that posts with referral links get prior approval from investors. They must also contain a standard warning — in both visual and voice-over form.
It also prohibits the use of terms such as ‘best’, ‘No 1’, ‘leading, ‘top adviser/research analyst’, and ‘one of the best among market leaders.’ Only factual details about any awards received by the entity can be included.
How important are the latest proposals?
Manisha Kapoor, CEO and Secretary General at ASCI, told The Hindu that there have been concerns about influencers giving out advice for which they may not necessarily be qualified. This is particularly with respect to health and finance where, she states, the risk element is high. “It is not like they may not have any experience (with the realm concerned) or they may not genuinely have advice, but the fact is that both for medical and financial (realms), you need a certain amount of rigour in terms of training and understanding the sector – which you must undertake, rather doing solely based on your own experience,” she elaborated.
According to the Secretary General, the entities being personally successful does not endorse their suitability to give advice to people from different backgrounds, financial wealth (or capacity) and risk appetite. “That rigour could only be understood through certain qualification and training,” she stated. Further, since they are not registered with relevant regulators, it is difficult to determine their expertise.
Ms Kapoor also indicated that relevant contracts (for finfluencers) may be drawn up through mechanisms outside the market regulator’s purview. “What happens is that regulated entities cannot do all of this (activities of concern), they are now going through unregulated entities. And that is what SEBI is now trying to put a stop to – circumventing of regulation,” Ms. Kapoor said.