SEBI's Oversight Gap: Fin-influencers and the Need for Regulation
[Uddhav and Prakhar are students at NALSAR University of Law.]
The rise of digital media and access to information on the internet has resulted in the emergence of financial influencers (fin-influencers), who provide information and advice on financial topics such as investing, cryptocurrency, and stock market trading. Using social media platforms like YouTube, Twitter, and Instagram, they post videos in various languages. Fin-influencers aim to simplify the policies, legalities, and practices of stock market investing for their followers. They have multiple income streams, including collaborations, partnerships, and online advertisements, which can generate significant earnings. The rise of fin-influencers was powered by the cryptocurrency market surge in 2017 and the COVID-19 pandemic, which caused the stock market to reach unprecedented heights and appeal to more novice investors. New investor registrations in India hit a record one and a half million in June 2021, more than double the six hundred thousand in June 2020. The share of retail investors in the cash market turnover jumped from 33 % in FY16 to 45 % in FY20, with the same level recorded in FY21, according to data from the National Stock Exchange. The benchmark Standard & Poor's Bombay Stock Exchange Sensex touched a record high of 52,641.53 points by the mid of 2021. However, all this was exposed when the golden bull run ended. Many transgressions were reported, including the Vauld crisis, whereby multiple fin-influencers were allegedly compensated handsomely (in lakhs) to endorse their crypto products. Furthermore, there were allegations of companies paying these influencers to influence stock prices through their advice. This demonstrates that these fin-influencers manipulated investors by taking advantage of the aforementioned developments in the market, which necessitates us to delve further into the world of fin-influencers, analysing the regulations that may be drawn, to see what really lies behind this cloaked veil.
SEBI Regulations for Investment Advisers and Research Analysts: Limitations and Challenges
The existing regulations in India mandate registration as research analysts (RAs) or investment advisers (IAs) to provide advisory services for listed securities in compliance with Securities and Exchange Board of India (SEBI) regulations. However, these framework regulations may not be suitable to address unique challenges posed by fin-influencers, leading to complications explored in greater detail below.
Regulation 7 of the SEBI Research Analysts Regulations 2014 (SEBI RA Regulations) outlines the minimum qualifications and certification requirements (issued by the National Institute of Securities Markets) for individuals registered as RAs, those employed as RAs, and partners engaged in preparing and publishing research reports or analyses.
Despite possessing knowledge and a substantial following, fin-influencers are not necessarily equipped with the required certification and training to get registered with SEBI as RAs. Thus, according to SEBI RA Regulations, they are not authorized to provide investment advice or research reports and may not necessarily be classified as RAs.
The SEBI Investment Advisers Regulations 2013 (SEBI IA Regulations), under the proviso to Regulation 2(l), state that "investment advice given through a newspaper, a magazine, or any electronic, broadcasting, or telecommunications medium that is widely available to the public shall not be considered investment advice for these regulations."
Fin-influencers disseminate their financial advice through social media, an electronic medium widely available to the public. Therefore, their advice cannot be considered investment advice under the SEBI IA Regulations. Thus, fin-influencers cannot be regulated under the ambit of an IA.
Designing Regulatory Framework for Fin-influencers
SEBI's current regulatory framework is not equipped to handle the challenges posed by fin-influencers. Nevertheless, it is reassuring to note that several authorities have taken steps to tackle this issue. The Department of Consumer Affairs (DCA) in India has issued guidelines, and Australia and the United Kingdom (UK) have also implemented certain regulations to regulate fin-influencers. To establish effective regulations for fin-influencers, SEBI can evaluate the effectiveness of Australian regulations in particular, as well as the guidance provided by the DCA in India and the English authorities. This article aims to provide valuable insights to help develop new regulations based on global standards that could effectively regulate fin-influencers in India.
The DCA guidelines
Fin-influencers are frequently paid to promote products or services, which is why their advice is often considered an advertisement. The DCA in India has issued “Endorsement Know-Hows” guidelines to ensure transparency in the financial relationship between fin-influencers and companies. These guidelines require fin-influencers to disclose any "material" interests, such as gifts, equity, awards, and discounts, when endorsing products or services. Failure to do so may result in legal action, including a ban on endorsements. However, the guidelines do not address the accuracy or quality of the advice given by fin-influencers. Given that fin-influencers hold considerable sway over the public's investment choices, enforcing robust regulations for transparency and investor protection is crucial. To address this concern, a specialized body like SEBI should be entrusted with the regulation of fin-Influencers to safeguard the integrity of capital markets, as per Section 11 of the SEBI Act 1992 (SEBI Act). SEBI has the jurisdiction to regulate intermediaries and can incorporate the DCA's guidelines into its regulatory framework to create a more comprehensive and effective regulatory regime for fin-influencers.
Global Regulations for Fin-influencers
SEBI can draw inspiration from other countries with a relatively successful and robust framework for designing a framework in this regard.
The UK's “CAP Code” outlines rules for legality, honesty, accuracy, and transparency in marketing communications, including social media marketing. The Advertising Standards Authority's Influencer's Guide and the UK Government's Social Media Endorsements Guide provide further guidance to influencers on how to clearly disclose sponsored content to their followers. Recently, the UK Financial Conduct Authority issued a warning to fin-influencers who promote financial products, advising them to be clear about their obligations when advertising on social media channels to avoid breaking the law, which can also result in a criminal investigation if necessary.
Australia provides us with more comprehensive regulations than the UK. Therefore, we shall focus on Australia for the SEBI to take cognisance in designing a framework for the fin-influencers.
The Australian Securities and Investments Commission has published “Information Sheet 269” to provide guidance to fin-influencers and Australian Financial Service (AFS) licensees who may authorize fin-influencers to provide financial services under their AFS license. In Australia, there are primarily two obligations for influencers: licensing and good practices, and disclosure.
Under Australian law, carrying on a financial services business without an AFS license is illegal, as specified in the Corporations Act 2001. The law imposes severe penalties for non-compliance, including fines in millions of dollars and imprisonment for up to five years. Regulatory Guide 36 (RG 36) provides guidelines for obtaining an AFS license. According to RG 36.57 and RG 36.58, individuals and organisations offering financial services must hold an AFS license unless an exemption under Section 911A(2) (or regulations made for the purposes of that provision) applies. For instance, a representative of a licensee can provide financial services without an AFS license. Failure to comply with these requirements may result in a violation of the law.
Regulatory Guide 234 (RG 234) provides guidance on advertising financial products and services, including credit, to avoid breaching consumer protection and financial services laws, including the Design and Distribution Obligations, which took effect in October 2021. It is essential to use caution when disclosing returns, features, benefits, and risks (RG 234.33–RG 234.46), providing warnings, disclaimers, qualifications, and fine print (RG 234.47–RG 234.53), and avoiding certain terms and phrases (RG 234.91–RG 234.104).
Regulatory Guide 244 is a regulatory guide for financial advisors to provide quality information and advice about financial products to retail clients. It covers information, general advice, and scaled advice. Factual information about a financial product's features or terms and conditions can be provided, but presenting it in a way that implies a recommendation to invest or not invest in the product could violate the law. For instance, a financial influencer's video titled "Buy and hold these 3 stocks as they'll perform well" likely constitutes giving financial product advice.
Fin-influencers arranging financial product transactions should provide truthful and accurate statements supported by evidence and disclose potential risks. For instance, claiming that holding shares for a long period is like depositing funds in a bank account without mentioning risks is misleading.
SEBI's Approach: Invoking Relevant Provisions
Having understood the regulatory framework by taking inputs from diverse authorities that oversee financial influencers, SEBI must decisively adopt and enforce these corresponding regulations with similar standards to establish its own regulatory framework to maintain the credibility of financial advice disseminated by influencers in India.
To achieve this, SEBI can classify fin-influencers as a new category under the definition of an intermediary as outlined in Regulation 2(g) of the SEBI (Intermediaries) Regulations 2008, thereby bringing them under SEBI's regulatory purview. To do so, SEBI can use its authority under Section 11 of the SEBI Act, which empowers it to make regulations for the protection of investors and the securities market. By developing a new set of guidelines, including licensing, registration, minimum qualifications, ethical standards, disclosure requirements, and penalties for non-compliance, SEBI can ensure that only qualified and experienced individuals or entities provide financial advice to the public, enhancing the quality of the advice and protecting investors' interests.
As the stock market scales unprecedented heights and novice investors flood the scene, the rise of "fin-influencers" in India has become a pervasive trend. However, the lack of a clear regulatory framework governing these influential voices is concerning. Despite India's consistent efforts to safeguard investors from fraudulent practices, the unique challenges posed by fin-influencers are yet to be fully addressed. In this rapidly changing financial landscape, India must adapt and evolve its regulatory approach to ensure that the aspirations of its investors continue to thrive. Therefore, SEBI must evaluate current regulations and establish a robust framework to monitor fin-influencers, ensuring an improved regime for safeguarding investors.