This article has been written by Mahika Suri and Shaswat Kashyap, 3rd year law students at Gujarat National Law University
Introduction
Social media platforms have emerged as a pivotal tool for disseminating information, particularly in the wake of COVID-19 pandemic. This development has led to a heightened susceptibility to unregistered financial influencers, colloquially known as ‘finfluencers,’ within the financial landscape. These finfluencers purport to furnish guidance and insights pertaining to a myriad of financial subjects, making difficult financial data more comprehensible to the layperson. Consequently, individuals are increasingly diverting their reliance away from conventional sources of information proffered by duly registered financial advisors. This shift carries profound implications for the financial well-being and stability of consumers operating within the financial market.
By manipulating stocks, finfluencers have deceived investors, endangered investors’ funds, and damaged the integrity of the Indian financial markets. Such finfluencers employ a variety of commercial strategies to achieve their goals, from endorsing goods for non-cash advantages to promoting goods for manufacturers in exchange for payment. Additionally, a significant number of people that enter the market in hopes of making quick money could be vulnerable to the information supplied by these finfluencers.
In order to mitigate the escalating challenges posed by finfluencers, regulatory authorities such as the Securities and Exchange Board of India (“SEBI”) in conjunction with the Advertising Standards Council of India (“ASCI”) are in the process of formulating initiatives aimed at ensuring that everyone can avail trustworthy and unbiased financial advice.
Existing Regulatory Framework for Finfluencers
At present, finfluencers operate without the purview of distinct statutory regulations. However broadly, finfluencers must abide by a few general regulatory laws including Section 12-A of the SEBI Act. This clause prohibits anybody from directly or indirectly engaging in fraudulent, dishonest, or manipulative behavior with regard to stock market transactions. Further, Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 forbids the reckless spreading of information that could influence the choice of investors dealing in securities.
In India, Investment Advisors (“IA”) are governed by SEBI (Investment Advisor) regulations, 2013 and Research Analysts (“RA”) are governed by the SEBI (Research Analysts) Regulations, 2014. Finfluencers do not fall within the definition of either of the aforesaid provisions and thus, don’t fall within the ambit of either of the regulations.
There are several instances where this unregulated character of finfluencers has led to massive losses in the market. In the case of Sadhna Broadcast and Sharpline Broadcast Limited, in cooperation with YouTube creators, the promoters of these businesses spread deceptive information, stoking fictitious interest in the stock. The videos portrayed that the company was growing exponentially and exhorting viewers to buy shares of the company. After the investors purchased shares of the stock, the producers of the films sold their holdings at a premium. In an interim ruling, SEBI stated that the fraudulent activity caused the scrip’s price to rise artificially, allowing large owners, the promoters, and some key employees to profit significantly.
SEBI’s Proposed Framework to Regulate Finfluencers
The ASCI recently updated the Guidelines for Influencers Advertising in Digital Media (“Guidelines”) in an effort to strengthen the accountability of finfluencers. In accordance with the updated Guidelines, influencers in the banking, financial services, and insurance industries must also register with SEBI and be properly qualified before providing any investment advice. In light of these modifications, a recent trend developed wherein finfluencers began renting SEBI Registration numbers from IAs in order to comply with the ASCI requirements and avoid SEBI’s scrutiny. Consequently, SEBI on August 25, 2023, announced the Consultation Paper on the Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers) (“Consultation Paper”) to combat these frauds. The aim of this Consultation Paper is to gather comments from the public on various measures intended to clamp down on the association of SEBI-registered entities with unregistered finfluencers. These regulations include a bar on SEBI-registered intermediaries or regulated entities to associate with unregistered entities (including finfluencers) for the purpose of promoting or advertising their services or products. It further mandates complete disclosures in the form of a proper registration number, contact information, investor complaints helpline number, and suitable disclaimers. This must be displayed by influencers who are registered with SEBI, stock exchanges, or the Association of Mutual Funds (“AMFI”). In addition, entities registered with SEBI, stock exchanges, or the AMFI are not permitted to divulge any confidential client information to any unregistered entities. Finfluencers are also required to follow any instructions issued by SEBI, stock exchanges, or other related bodies recognised by SEBI in addition to the requirements outlined in their pertinent registration. Lastly, SEBI-recognized intermediaries are not allowed to charge a referral fee in the form of a trailing commission based on the volume of referrals. However, stockbrokers may accept a limited number of referrals from retail clients and may charge a fee for that small number of referrals.
Cross-Jurisdictional Analysis
Market regulators around the world are facing difficulties in regulating the activities of financial influencers. In the European Union, the European Securities and Markets Authority expanded the definition of “investment recommendation” by covering any implicit and explicit opinion or suggestion concerning investment strategy including the present or future value or price of such investments. Further, hidden marketing is prohibited by the Unfair Commercial Practises Directive, and influencers who refuse to disclose sponsored content will face civil and administrative sanctions. Moreover, finfluencers must ensure that “facts are clearly distinguishable from interpretations, estimates, opinions and other types of non-factual information” to avoid penalties.
Further, even the German authority ‘BaFin’ requires finfluencers to comply with the Act against Unfair Competition. in the context of advertising products in the market. Secondly they are also required to comply with the Market Abuse Regulation along with specific requirements from Delegated Regulations on the Market Abuse Regulations. These regulations direct any entity recommending investment or investment strategy to comply with transparency, disclosures and fairness. Non-compliance with these regulations can lead to fines and other punishments within the ambit of German Securities Trading Act.
Challenges and Considerations Before SEBI
SEBI’s efforts to hold finfluencers accountable are still in their nascent stage, and there are still unanswered problems regarding the actual practical applicability of these proposed regulations. Firstly, SEBI has stated that it will pursue legal action against any finfluencer who violates the existing regulations mandated by SEBI. However, within the ambit of the IA and RA regulation’s applicability to finfluencers, there is still some uncertainty. According to the Consultation Paper released by SEBI, finfluencers are referred to as “effectively unregistered and unauthorized Investment Advisors or Research Analysts”. However, the proviso to regulation 2(l) of the IA Regulations defining investment advice explicitly excludes “advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public” from the ambit of investment advice. This appears to raise a question regarding whether the rules governing finfluencers may be applied.
Secondly, in the current scenario, finfluencers offer financial advice on various social media platforms. There can be instances where this financial advice would be in violation of any existing or prospective regulations. There exists an ambiguity regarding the procedure as to how this type of advice released by finfluencers will be addressed. Currently, matters pertaining to internet regulations and taking down content on the internet are governed by the Information Technology Act, 2000, read with the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 and the Information Technology (Procedure and Safeguards for Blocking of Access of Information by the Public) Rules, 2009. The procedure for the same is difficult and extremely lengthy as the guidelines for removing content through this route mandate the court to issue several directions to the concerned website, the search engine, concerned intermediaries, law enforcement agencies and the aggrieved party. Further, the aggrieved party shall then furnish all available information to the law enforcement agencies. Blocking content in breach of the statutory framework through this route would be impractical and could hinder the effective implementation of the proposed regulations. By the time the required formalities and procedures are finished, it’s possible that irreparable harm will have been done in terms of influencing retail investors.
Conclusion
The widespread dissemination of unchecked investment advice by unregulated finfluencers poses a significant threat to the public. The Consultation Paper is an admirable step towards the crucial regulatory measures that are needed to limit potential harms, protect investors’ financial interests, and promote responsible financial content. Even though SEBI has made an effort to define ‘finfluencers’, it is yet to be seen whether SEBI classifies finfluencers in an already existing class or introduces a new class of intermediaries. Further, the regulatory status, registration procedures, and enforcement procedures that apply to finfluencers within India’s expanding financial influencer environment are likely to be clarified in a detailed circular. The global landscape also reflects a growing recognition of regulating finfluencers to safeguard investors and preserve the integrity of financial markets.