[Siddharth and Manya are students at National Law University Odisha.]
The Securities and Exchange Board of India (SEBI) recently imposed its first-ever penalty on a financial influencer (fin-fluencer) for providing investment advice without acquiring registration under SEBI regulations. This action in itself was a very significant development that came in the backdrop of the steeply rising number of unregistered fin-fluencers.
However, soon after this announcement, a very different kind of problem has emerged. Fin-fluencers, in order to avoid being penalised by SEBI, have started renting Research Analyst (RA) licences by hiring registered RAs to their companies and including their names in all reports; the issue being that the advice is not delivered by the registered RAs but by the same person who has been providing advice without the requisite license.
Fin-fluencers have to mandatorily obtain registration under one of two SEBI regulations in order to lawfully give stock market-related advice in public forums, and renting out the licences bypasses the entire gamut of qualification and certification requirements under both sets of regulations. This can allow any person having insufficient knowledge to provide advice, following which can have a severely detrimental effect on the investors.
This article tries to identify the deep-rooted problems of ‘over-regulation’ and ‘lack of clarity’ in the SEBI regulations, which is the primary reason for several of the recent fin-fluencer-related issues. It also provides possible solutions that can be explored by SEBI in order to resolve these critical problems.
Current Regulatory Framework
Over the past 5-6 years, fin-fluencers have grown exponentially in the country, providing advisory services to potential investors primarily through social media platforms. Depending on the nature of their content, they fall under the purview of either the SEBI Research Analysts Regulations 2014 (RA Regulations) or the SEBI Investment Advisors Regulations 2013 (IA Regulations).
In India, the RA Regulations focus on RAs and the individuals employed by research entities. These analysts prepare and publish research reports and provide recommendations to the public regarding the buying or selling of securities. On the other hand, the IA Regulations govern Investment Advisors (IAs) that engage in the business of offering advice related to the purchase, sale, or dealing in securities and other investment products. IAs and RAs have very similar functions, the difference being that the former typically cater to individual clients, and their advice is not widely available to the general public.
While the IA Regulations and the RA Regulations were enacted to safeguard investor interests and disseminate financial knowledge to the public, they have become increasingly burdensome to comply with. The regulations are also a hindrance to potential earnings for the registered advisors.
Both IAs and RAs, as well as individuals employed by them, are required to meet certain criteria outlined in the SEBI (Intermediaries) Regulations 2008. Additionally, they must obtain certification from the National Institute of Securities Markets to conduct their activities within India. Both IAs and RAs must maintain a clear distinction between their trading and advisory activities. Their personal trading activities are limited and highly monitored. Further, to obtain a license under either of the IA Regulations or the RA Regulations, the applicant must have a professional qualification and at least five years of experience.
Even after complying with these requirements, in the end, complete discretion lies with the board to reject or accept the application. Complying with this plethora of requirements is impractical and burdensome for independent and small-scale IAs and RAs as the ultimate outcome is completely unpredictable.
The regulations are proving to be counter-productive, as the fin-fluencers are operating without any licenses and earning significantly higher than registered RAs and IAs. This can be seen especially after the surge in new demat accounts in 2020 where the amount of publicly available investment advice by fin-fluencers has skyrocketed while the number of registered IAs has stagnated.
While financial advisory plays an important role in the growth of a market, recommendations by unregistered entities on social media is potentially dangerous. Unregistered fin-fluencers often provide biased advice, for promotion, on buying/selling securities, without disclosing their affiliations. This can cause a detrimental effect on investors’ confidence in the market, which will discourage investments.
‘Renting’ of RA Licences
To limit the problem posed by unregistered and unqualified advisory on social media platforms, SEBI is imposing heavy penalties any violations of the RA Regulations or the IA Regulations by fin-fluencers.
Fin-fluencers argue that their attempts to register are often rejected due to vague reasons such as lack of credibility and expertise, as the registration requirements under the IA Regulations and the RA Regulations are too restrictive and lack clarity. Even after getting registered, there are various limitations on their personal trading activities and strict compliance rules which discourage registration. For example, after successful registration, the IAs have to maintain a record of every piece of advice given with the rationale behind it, along with telephone records, messages, and emails, for inspection.
SEBI has also recently come up with the Advertisement Code to strictly regulate the forms of communications through which registered IAs and RAs provide investment-related advice or research analysis.
To avoid complying with these regulatory hurdles, a new trend has emerged where fin-fluencers have started "renting" RA licenses for a fee instead of obtaining registration with SEBI. By hiring registered RAs and using their registration numbers while giving advice, these fin-fluencers can continue their activities “legally” under the disguise of a rented licence, without having to comply with SEBI’s registration requirements. The registered research analysts and entities rent licences to these fin-fluencers because of their wide reach in public and high popularity, in return they receive around 20% of their earnings as a fee. The fin-fluencers can also use their own name while giving advice along with the registered trade name, as per a SEBI Circular. This allows them to continue their advisory as usual without any changes. While this practice of license renting is not explicitly prohibited by any regulation, it undermines the very purpose of having the requirement for registration in the first place.
Possible Solutions
In India, fin-fluencers are still being regulated by the IA Regulations and the RA Regulations established by SEBI a decade ago despite these regulations being originally formulated for stockbrokers and research entities. Due to the rise in the number of fin-fluencers, there is a need for a distinct set of regulations specifically tailored to this group. To address this, SEBI can classify fin-fluencers as a separate category of intermediaries under the SEBI (Intermediaries) Regulations, which will allow SEBI to create new regulations that specifically address the unique challenges faced, and created, by the fin-fluencer community.
SEBI should also consider studying the regulatory frameworks of countries such as the UK and Australia, where the registration processes for RAs are comparatively smoother.
In the UK, similar restrictions to that in India are imposed on fin-fluencers through the Advertising Standards Authority's Influencer's Guide and the UK Government's Social Media Endorsements Guide. While the UK has similar regulations in place, the process of obtaining a RA license there is comparatively more straightforward, resulting in a higher number of new licensees each year, when compared to India, despite receiving fewer applications.
Similarly, Australian law deems conducting a financial services business without an Australian Financial Service (AFS) license illegal, as stated in the Corporations Act 2001. Regulatory Guide 244 in Australia also imposes conditions on AFS license holders that are similar to those imposed by SEBI on Indian RAs and IAs. However, despite the similarities in the regulatory frameworks, Australia experiences a higher ratio of new license holders to the total number of applications per year when compared to India due to a much simpler registration process.
The above examples clearly exhibit the problem of unnecessary hinderances and ambiguity in Indian regulations that create hurdles for obtaining registration, which cannot be attributed only to the harshness or the sheer number of restrictions imposed. To prevent the emergence of new methods of bypassing the registration process, like renting RA licences, it is crucial to address this issue. Simplifying the registration process and reducing unnecessary and vague requirements can encourage more individuals to obtain licenses through legitimate means, thus fostering a transparent and accountable fin-fluencer ecosystem in India.
Conclusion
The rise of financial influencers, or fin-fluencers, in India has presented new regulatory challenges for SEBI. The fin-fluencer community in India has a very wide reach among small cities and remote areas where there is a need for financial advisory. Therefore, it becomes crucial for SEBI to regulate financial advisory given by unregistered and unqualified individuals to a large number of potential investors.
However, the current regulatory framework, consisting of the IA Regulations and the RA Regulations, has become burdensome, restrictive and vague, discouraging potential fin-fluencers from obtaining registration. This has led to the emergence of the problematic practice of renting RA licenses, allowing unregistered individuals to provide investment advice without meeting the necessary qualifications.
By studying and implementing best practices from other regulatory frameworks such as of the UK and Australia, by removing ambiguities from the regulations and by classifying fin-fluencers as a separate category of intermediaries, SEBI can ensure that the individuals providing investment advice are qualified and accountable for their recommendations by preventing circumvention of the law, and create a regulatory environment that safeguards investor interests.