[Anupama and Isha are students at Gujarat National Law University.]
While the 2020s have ushered in numerous challenges - viral outbreaks, wars, and social unrest, the one thing that has remained constant is the rise in the number of retail investors in the market. This rise has been characterized by an increase in financial influencers or “finfluencers” in the investment landscape. While finfluencers have in a way democratized financial markets, their authenticity remains questionable. They often publicize their high-profit gains on various platforms like Instagram, YouTube, and X (formerly known as Twitter), influencing numerous retail investors. As a result, they have come under scrutiny of the Advertising Standards Council of India (ASCI). In 2023, the council issued revised guidelines stipulating that financial influencers operating within the banking, financial services, and insurance sector can provide investment advice only after registering with the Securities and Exchange Board of India (SEBI).
In response to this, SEBI issued a consultation paper titled Consultation paper on the Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities, including Finfluencers through which it has been endeavoring to regulate these influencers by requiring them to register themselves with the board. SEBI has established the SEBI (Research Analyst) Regulations 2014, which are aimed at ensuring accountability, transparency, and compliance with ethical standards. These measures are intended to protect investors from misleading or fraudulent advice while promoting a more transparent and trustworthy financial ecosystem. Amidst such efforts to regulate and ensure investor protection from potentially misleading financial advice, SEBI's recent enforcement action sheds light on the critical need for improved financial literacy while maintaining the integrity of the market.
The Interim Order
In its recent interim order cum show cause notice, SEBI heavily reprimanded “noticees” involving “guest experts” who appeared on the Zee Business Channel along with people who worked behind the scenes to orchestrate the operation of alleged market manipulation. Detailed analysis of call data records, WhatsApp/Telegram chats, bank statements, and trading data revealed a pattern of communication and transactions suggesting a coordinated effort to profit from advance information of stock recommendations. Several parties were notified under the order, however “guest experts” deserve attention considering the wide group of unregistered entities this covers. While issuing the order against “guest experts” who appeared on the TV channel, the board commented on the two sides of financial influencing. It acknowledged the instrumental role that finfluencers and their expansive follower base have played in augmenting financial literacy among the masses, while concurrently emphasizing the potential for such influence to be exploited to mislead innocent investors. Thereby highlighting the need for regulatory oversight in safeguarding market integrity and protecting investor interests. Further, it re-emphasized the “buyer beware” principle and the need for vigilance in the investor landscape. While the investigative efforts by the regulator are requisite and commendable, they raise concerns over the future of financial influencers.
Future Prospects and Concerns
First, SEBI’s attempted crackdown on finfluencers has implications for other regulatory bodies striving to push legislation for monitoring social media influencers. With the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 and the draft Broadcasting Services (Regulation) Bill 2023 special provisions are attempted to be implemented by the Ministry of Information and Broadcasting (MIB) in collaboration with the Ministry of Electronics and Information Technology to control online content. Section 20 of the draft bill stipulates obligations that may extend to financial influencers who would have to adhere to a new program and advertisement code, and content evaluation plus disclosure norms.
If this is moved forward, a financial influencer would have to adhere to various legislative frameworks and moderate their content accordingly. Multiple regulatory frameworks significantly impact the broader ecosystem within which finfluencers operate. The intersection of SEBI's initiatives with the Telecom Regulatory Authority of India and MIB’s regulatory frameworks underscores a complex regulatory environment where multiple authorities oversee different aspects of digital and financial content dissemination. This would also bring back the debate surrounding a person’s use of the internet and to what extent such content can be regulated. In this regard, it is yet to be seen how the ministries and sectoral regulators would work in tandem with each other to moderate this space.
Second, SEBI’s recent actions, including its consultation paper and orders against influencers, have encountered significant resistance from finfluencers, who fear that the same seems to be a regulatory overreach by the market regulator. SEBI has quashed such claims by arguing that a number of these unregistered entities do not have the relevant qualification or expertise on the subject. Moreover, given that they are not formally subject to SEBI’s code of conduct, many of them fail to disclose potential conflicts of interest, such as their association with or interest in the products, services or securities they promote.
Many unregistered or unregulated finfluencers directly or indirectly promote products, services, or securities. They may incentivize clients to avail themselves of these offerings in exchange for referral fees, non-cash benefits, compensation from social media platforms, or profit-sharing arrangements. SEBI has observed instances where registered intermediaries or regulated entities may be relying on such unregistered or unregulated finfluencers to promote their products and services.
The aforementioned factors highlight the need for SEBI to regulate finfluencers. The market regulator could adopt an approach involving these finfluencers to register themselves under the SEBI (Research Analysts) Regulations 2014. This approach has been pushed by ASCI also in its updated guidelines regarding financial influencers. Alternatively, SEBI could develop guidelines specifically tailored for such entities. The same would be crucial to safeguard investor interests, this becomes significant, particularly in the light of the increasing participation of retail investors in the market. By imposing such regulatory standards, SEBI can help enhance transparency, mitigate conflicts of interest, and uphold the integrity of the financial ecosystem.
Approach of Foreign Sectoral Regulators
The issue of authenticity of finfluencers is not one which is isolated to India, their rise and influence has been felt across jurisdictions. Regulators in Australia, the UK, the EU and the USA are proposing new rules to regulate financial product promotion on social media, targeting finfluencers. In Australia, finfluencers risk facing up to 5 years in jail, if they are found providing financial advice without a prior license. The European Securities and Markets Authority has defined what constitutes investment recommendations, how to post those advice on social media and has also spelt out penalties for any breach. Further, the UK Financial Conduct Authority plans to extend guidance to address ads on social media lacking in investment risk disclosure, particularly aimed at younger millennial consumers who trust finfluencers. In the USA, the Securities and Exchange Commission has updated marketing rules under the Investment Advisers Act to require disclosure of material risks associated with promoted financial products. The Federal Trade Commission also amended guidelines to address the rise of influencer marketing. Overall, regulators worldwide are emphasizing the significance of compliance not just for finfluencers but also for investors and financial institutions to ensure the responsible and fair promotion of investment products.
Conclusion
The board’s comments in the said order come at a pivotal moment in the digital media landscape, when several prongs of the government are gearing up to release new regulations for content moderation. This step taken by SEBI along with other regulators aligns with the stance taken by market regulators across the world. In its attempts, the board must aim to navigate the fine line between leveraging social media's vast reach for enhancing financial literacy and protecting investors from potentially misleading advice. Commenting on the same, the board highlighted a necessary responsibility of the investor to check authenticity and exercise due diligence before following financial influencers. As it navigates this evolving landscape, the future of fair use on the internet and the integrity of financial advice hinge on the meticulous handling of such cases.