From what it seems, investments are no longer subjected to just market risk but also to what is popularly known as ‘finfluencers.’ In an effort to curb the rise of these financial influencers or finfluencers, who in the past have been seen misleading consumers, the Securities and Exchange Board of India (SEBI) has approved new guidelines. These new norms regulate misinformation through financial influencers by restricting the association of its regulated entities with any unregistered person. As per industry experts, with this SEBI aims to prevent brokers and mutual funds from associating with unregistered influencers to ensure investors are not misled. “SEBI’s recent measure proposing registered intermediaries to avoid unregistered finfluencers is just one side of the coin. This will ensure that intermediaries do not market their products through channels or persons not qualified to undertake such activities. Beyond this, if any finfluencer provides investment advice to the public and utilises the momentum created through such advice for their personal gain, SEBI can book them under the PFUTP Regulations for fraud. Moreover, suppose the unregistered finfluencer collects fees for the advice given. In that case, SEBI can proceed against them under the Investment Advisor Regulations,” Sidharth S. Kumar, senior associate, BTG Advaya, told BrandWagon Online.
Research showed that 75% financial influencers did not contain any disclosures, while only 25% included specific disclosures, such as marketing disclosures, whether the finfluencer received commissions or other forms of payment, or their professional status, as per a report by the CFA institute, a global association of investment professionals.
Safeguarding!
One of the most important restrictions by SEBI is on regulated entities restricting them from associating with finfluencers. This is believed to have a significant impact on mutual funds and brokerages in India. “This will disrupt the revenue model of unregistered finfluencers and promote transparency. Industry stakeholders recommend SEBI to define the scope of regulations clearly, create categories for finfluencers with different requirements, implement robust enforcement with clear penalties, and enhance investor education to help retail investors identify reliable financial advice sources,” Arun Thukral, professor of Practice and Lead – corporate relations, K J Somaiya Institute of Management and former MD and CEO, Axis Securities, said.
To advance the protection of investor interests in the digital era and further to the consultation paper released in August last year, SEBI in its 206th board meeting approved the approach to be adopted by regulated entities in the engagement of the finfluencers. “The consultation paper proposed to ‘ring-fence’ the SEBI-regulated entities from engaging Finfluencers (either monetarily or non-monetarily, or by the interaction of IT systems or any other association), who are not registered with SEBI in any manner (for example – Investment Advisors or RAs),” Noorul, partner, Lakshmikumaran & Sridharan Attorneys, explained.
This restriction, however, does not apply to those exclusively engaged in investor education or through ‘specified digital platforms’ that have mechanisms to take preventive and curative action. This is to ensure that no person engaged in such investor education or through such platforms provides advice, recommendation, or claims return or performance of any investment. “But it is unclear as to what constitutes ‘specified digital platforms’, and the nature of ‘preventive measures’ that may be taken by such platforms, as they typically notify users of the requirement to comply with the applicable laws,” Noorul further stated.
Industry experts opine that mutual funds and brokerages will also face restrictions from associating with these finfluencers, including a ban on referrals and sponsored content. This may also increase the compliance burden for mutual funds and brokerages, as they will need to ensure finfluencers associated with them adhere to the guidelines. “SEBI’s regulations will necessitate mutual funds and brokerage firms to adopt more stringent compliance measures. They will need to ensure that all associated influencers are registered and that their marketing strategies align with SEBI’s guidelines. This could increase operational costs due to enhanced monitoring and compliance systems. However, these regulations could also build greater investor trust and market integrity, potentially benefiting these firms in the long run,” Siddharth Chandrashekhar, advocate and counsel, Bombay High Court, said.
Now in the wake of new regulations, there is a pressing concern about balancing these rules with the need for genuine financial education and advice on social media. Industry experts highlight that a balanced approach is essential to ensure that SEBI’s new regulations for finfluencers do not stifle genuine financial education and advice. “SEBI can focus on creating a regulatory framework that distinguishes between genuine educational content and misleading promotional material by establishing clear definitions and guidelines for objective financial education versus promotional content motivated by undisclosed financial incentives. Mandating transparency and disclosure, finfluencers should be required to disclose any affiliations, sponsorships, or financial interests in the products or services they discuss,” Rayan Malhotra, a fintech expert and founder and CEO, NeoFinity, said.
Furthermore, industry stakeholders recommend implementing a tiered system of regulation to categorise finfluencers based on their reach, influence, and the nature of their content, with lighter regulations for those providing purely educational content without financial ties. “The impact that a finfluencer holds today is large. A lot of the masses tend to follow the advice as they feel more relatable and not as an ‘advertisement’. The new SEBI regulations will significantly reshape the role of a financial advisor and influencer. While the prohibition on unregistered influencers working with brokers and mutual funds may limit some partnership opportunities, there’s still room for involvement in investor education,” Prashant Bothra, founder and CEO, Fhero Accounting Solutions, said.
What finfluencers have to say!
As explained, SEBI’s new regulations are primarily concerned with financial influencers who fall under the first bucket, that is , those who give specific recommendations to invest in. “As a part of the creator community, I do feel we should be more observant of the new regulations and work for the benefit of people. To be fair, we shouldn’t forget the fact that finance influencers are also the best thing that has happened in recent years. There’s a lot of good learning material out there on the Internet. It was need of an hour, especially for a subject like finance where lack of information can be really risky,” Chandralekha M R, a finance content creator and founder, Dime, said.
Financial content creators emphasise the importance of implementing measures to ensure compliance with regulations, including clearly stating if any financial advice or recommendations are sponsored and disclosing any conflicts of interest. They underscore the necessity of meticulously checking all financial content to ensure accuracy and adherence to SEBI’s rules. “Educating the team about new regulations and best practices is essential to ensure ongoing compliance. Certified financial advisors should verify the accuracy and reliability of information before dissemination. Additionally, consulting legal experts will help ensure all content meets SEBI guidelines and keep us informed of regulatory changes,” Mohmed Abubacker Samsudeen aka TimeBillionnaire, finance and infotainment content creator, said.
Hurdles!
Industry experts opine that monitoring financial influencers presents significant challenges, especially when considering the vast number of micro-influencers, Telegram channels, and third-party advisors who operate outside traditional platforms. While macro-influencers with large followings can be tracked more easily, the dispersed nature of smaller influencers poses a substantial regulatory hurdle. “The potential decrease in earnings for some may be a concern, the increased credibility that comes with compliance will benefit serious and dedicated finfluencers,” Bothra said.
Now given the fact that social media is a mass platform with billions of users and millions of influencers, it is believed that it will be difficult for SEBI to monitor the micro influencers who give indirect links to third-party apps and websites for further pursual. Experts say that SEBI is expected to leverage advanced data analytics and Artificial Intelligence (AI) to monitor micro-influencers and non-traditional advisory channels. “Educating finfluencers about the new norms is also crucial. SEBI can organise workshops, webinars, and training sessions to ensure finfluencers understand the regulations and responsibilities. Furthermore, collaboration with social media platforms is essential for effective enforcement. SEBI can work with these platforms to develop mechanisms that facilitate reporting non-compliant content and expedite removal,” Malhotra opined.