[Parul is a student at National Law University Jodhpur.]
The introduction of novel financial technologies (fintech) has resulted into more than just the introduction of cryptocurrencies, blockchain, non-fungible tokens (NFTs) and other Web3 financial supplements; it has also created the rise of a notable entity, the “finfluencer”. A portmanteau of the words finance and influencer, finfluencers do exactly what you think they would do — influence the public vis-à-vis their financial decisions through various internet based endeavours including but not limited to promotions and recommendations on social media. The global phenomenon has undeniably crept up in India and is raising concerns. A concerning faction of finfluencers is self-proclaimed finance experts who proffer financial advice which is unsubstantiated not only in quality, incredulous owing to lack of qualifications required by the party making them required to make it credible, and laden with hidden promotional tie-ups and commissions. It is specifically this segment that the governments around the world, including here at home, are intending to regulate for financial safety and well-being of the general public.
The Securities and Exchange Board of India (SEBI) has started taking note of these instances, especially cases where finfluencers are offering investment and financial advice and charging for it without being registered with SEBI under the investment advisors (IA) framework first. A case in point is Gunjan Verma, who without being registered with SEBI, had been providing paid investment advice. A fine worth INR 1 lakh was imposed in addition to being asked to refunding all the money she has charged from her clients. Another case is of Syyed Shuhajauddin who earned more than INR 12 crores from running three Telegram channels and giving stock market tips to paid subscribers. SEBI ordered him and his firm, Kabir Financials, to stop dealing with securities, froze their assets and ordered impounding of the illegally earned money. Such an activity is doubly harmful — to consumers who are left at the behest of unqualified and unregulated financial advisors and to other financial advisors who are in fact registered with SEBI and follow the necessary legalities by resulting in unfair competition for them. These unregulated finfluencers pose a constant threat to the government as well since they escape participation in a necessary oversight mechanism which would make good governance possible. It then becomes glaringly obvious that regulation is the right way to go.
As necessary as the need for regulation seems, such a prospect is not without its opponents. It is argued that such regulation will (a) dis-incentivize finfluencers and innovation, (b) infringe on the freedom of speech, (c) impact the right to conduct trade / business / occupation, and (d) be unnecessary since we have sufficient regulatory instruments where these activities may be covered. As compelling as these arguments may seem prima facie, they all come crashing down upon a closer examination.
First, the idea that such regulation will dis-incentivize finfluencers has to be broken down in components. The regulation as contemplated only seeks to regulate the section of finfluencers involved in providing investment and financial advice online. The finfluencers that engage in providing general information about financial concepts or explicitly emphasise that they are engaging in providing their personal and not professional opinion are to be excluded from the regulatory lens. These sentiments echo in the statements made by Madhabi Puri Buch (Chairman, SEBI). Then, if this section becomes dis-incentivized owing to a heightened regulatory compliance mechanism, the same is, in the view of the author, undeniably appropriate as allowing it to remain otherwise will cause harm to consumers, other financial advisors and the government alike.
Second, the argument about how the impact of the regulation on the right to freedom of speech enshrined under Article 19 of the Indian Constitution also cannot withstand upon a close scrutiny. At the end of the day, potentially fraudulent, misleading and irresponsible statements impacting a wide range of stakeholders should be regulated, and such regulation serves as a justifiable exception to the right to freedom of speech considering that Article 19 is subject to reasonable restrictions including for the purpose of maintaining public order. It is this form of speech that the regulations aim to cover by mandating disclaimers, disclosures and registrations before giving such advice. This is in no way different from regulating the speech by IAs who are performing the same function, offline or online. Additionally, “controlling” speech by mandating disclaimers for endorsements and affiliations is not new by any means. Section 21 of the Consumer Protection Act 2019, and more recently, ‘Endorsements Know How’ guidelines released by the Ministry of Consumer Affairs concern the same subject matter. This insistence on differentiation between finfluencers and others on potentially the same subject matter then becomes not only incorrect but potentially violative of Article 14 of the Indian Constitution by allowing them to be treated differently by the state in the absence of regulation over the former.
Third, the argument about such a regulation adversely affecting the right to work and livelihood within the realm of Article 21 of the Indian Constitution also suffers from a profuse want of tenability upon a closer examination. As explored in the previous argument regarding free speech, the false dichotomy between IAs and finfluencers forms the operative premise for this conclusion. However, since the current regulation regarding IAs does not impinge on their right to work, there should be no concern per se regarding placing of a regulatory lens over finfluencers. There exist professional codes of conduct for almost every professional activity. Requiring finfluencers to follow consumer protection mandates and follow the IA framework and other guidelines acts as a device to put them in an organized legal framework where they engage in legal and healthy competition with the market, good-faith relationships with consumers, and correct standing with the government.
Fourth, the extant frameworks remain squarely insufficient to address this specific problem. There are general laws outlawing fraud, misrepresentation and the like, but there appears to be nothing that specially governs the operations of finfluencers. One might argue that IA framework could be used for the same purpose, but this is unlikely unless an amendment is effected in the IA regulations. The proviso to Regulation 2(1)(l) of the SEBI (Investment Advisers) Regulations 2013 ousts any advice provided by electronic medium from its definition of ‘financial advice'. However, even if the same were covered, the problem of undisclosed affiliations and promotions would still remain unaddressed. Most importantly, there needs to be effected a clear delineation as to the kind of conduct by finfluencers that is to be regulated. Without defining such conduct anywhere, a regulatory vacuum exists leading to uncertainty, confusion and heightened fears of government control. There is suggestion that viewers are informed about the classification of financial information that they are provided. For instance, a piece of information could be classified as general financial information, opinion, or professional advice. A specialised regulatory framework will not only provide clarity to consumers but also discourage governmental overreach by discouraging over-expansive interpretations of provisions that would otherwise be relied upon.
It is, therefore, the need of the hour that a regulation governing finfluencers is effected. The Indian government’s current draft discussions on the same is a step in the right direction. The mandate for regulation is becoming even more imminent owing to the rise of cryptocurrencies, NFTs and other Web3 fintech applications and their confluence with finfluencers. Owing to the concerns that such elements are raising, the Advertising Standards Council of India released guidelines that mandate a disclaimer regarding virtual digital assets to be displayed whenever an influencer engages in a discussion about them. It has to be explicitly stated to the consumer that these products are highly risky, and any loss resulting from them is completely outside the regulatory purview. This is something that ought to be addressed most importantly in respect of finfluencers who themselves are outside the purview of all regulation and are actively promoting financial instruments that elude regulation as well. One such example is of finfluencers promoting Vauld, a Singapore based cryptocurrency firm that suspended all its transactions on 4 July 2022, leaving investors stranded. Consumers remarked that finfluencers misled them, and owing to absence of regulations in this regard, the consumers were left with no recourse.
For a country aiming to have strong consumer protection laws, the situation regarding finfluencers, especially vis-à-vis fintech tools, is dismal. Leaving a whole segment unchecked leaves the consumer vulnerable, notwithstanding any other argument.