By Sandeep Parekh
On August 25, 2023, Sebi released a consultation paper outlining proposed measures to address growing concerns regarding the association of registered intermediaries and regulated entities with unregistered entities, including finfluencers. The key objective of these proposed measures is to mitigate potential conflicts of interest and disrupt the revenue model for the latter. Financial products, unlike other consumer products, require a different and an enhanced level of scrutiny. The guiding principle is that a product shall be chosen on its merits and suitability, rather than endorsements. Celebrity or influencer endorsements can create a misleading sense of trust and reliability.
As it stands, there are no specific guidelines governing finfluencers and their activities in India. The Advertising Standards Council of India (ASCI) has issued guidelines on disclosure requirements for influencers, requiring that sponsored posts be clearly marked as advertisements. Recent ASCI guidelines impose certain restrictions on influencers in the BFSI sector. Such influencers must possess the requisite qualifications, be registered with Sebi, and prominently display their registration numbers. They must also adhere to disclosure requirements mandated by financial sector regulators. However, as ASCI is a self-regulatory body, these guidelines are not mandatory and there are no consequences if they are violated.
Sebi also prohibits celebrity endorsements for specific schemes of mutual funds. Similarly, for stockbrokers, Sebi guidelines dictate that no celebrities should be part of advertisements. The department of consumer affairs also issued guidelines for celebrities and influencers, necessitating the disclosure of material connections that may affect the credibility of endorsements.
In the UK, the Financial Conduct Authority (FCA) is addressing similar concerns through a consultation paper on social media promotions. The paper clarifies how the principle of “required information” will be applied to various social media platforms, ensuring that essential information is presented consistently and transparently across different channels. The paper also introduces the concept of the ‘Consumer Duty’ that places an obligation on firms to ensure that the financial promotion of products done by the finfluencer so engaged is not misleading.
In Australia, the ASIC regulations offers guidance on advertising financial products and services, emphasising compliance with consumer protection. It cautions against misleading disclosures, emphasising the need for transparent warnings and disclaimers. Thus, while providing factual information about product features is allowed, recommendations to invest are not.
In the US Supreme Court case of SEC vs. Capital Gains, an individual who was offering stock recommendations was simultaneously trading in those stocks just before issuing the recommendations to customers and investors. The Court held that it is imperative in such scenarios to disclose personal interests before making recommendations, especially when the individual is trading ahead of their clients even where the analyst truly believed in the recommendation. This underscored the significance of full disclosure of potential conflicts of interest to maintain trust in financial transactions.
While India’s proposed regulations for finfluencers share common objectives with regulations in other regions—promoting transparency, disclosing conflict of interests, and preventing misleading information—there exists certain differences in the specific requirements and approaches taken in each jurisdiction. India’s focus on qualifications, registration and disassociation from unregistered entities distinguishes its approach from some foreign jurisdictions.
The proposed measures in Sebi’s paper include prohibiting registered entities from engaging with unregistered entities for promotional purposes, barring payment of trailing commissions as referral fees, thus permitting limited referrals and mandating the disassociation of registered intermediaries from entities misusing their name or services.
The proposals in the paper strike a reasonable balance between regulation and freedom of speech and expression for finfluencers. The fundamental right to speech and expression is not absolute, and reasonable restrictions can be imposed in the interest of protecting investors and preventing misselling.
Finfluencers can significantly impact investors and their investment decisions, and thus, regulating their activities is essential for market integrity. These regulations are proportionate and justifiable as they aim to safeguard investors from potential conflicts of interest, misleading information, and market manipulation.
Broadly, the regulations fall in three categories—educational, investment advice or research analysis, and other sorts of advice. While educational social media content may be conflicted or paid, it would be subject to disclosure and other norms of ASCI. Anything which squarely falls within the domain of investment advice or research analysis would require such a person to register with Sebi before providing such services. A lot of other content may or may not fall within registered activities. Those falling outside Sebi’s direct domain will require them being registered as influencers.
In a time where finfluencers are on the rise and their impact on retail investors cannot be underestimated, Sebi’s proposals are a welcome step in the right direction. They prioritise investor protection and market integrity while respecting the freedom of speech and expression. By ensuring that finfluencers are qualified, transparent and accountable, these proposals aim to foster a more trustworthy financial ecosystem, ultimately benefiting the retail investors of the country.
As the paper requires registered finfluencers to display their registration number and contact details, it may be seen whether Sebi introduces a new class of intermediaries or classifies finfluencers in an existing class. A detailed circular is expected to address these, providing clarity on the regulatory status, registration processes, and enforcement mechanisms applicable to finfluencers within India’s evolving financial influencer landscape.
The global landscape also reflects a growing recognition of the need for regulations in this sphere. Steps taken by financial regulators of different countries demonstrate the global significance of regulating finfluencers to protect investors and maintain the integrity of financial markets. Sebi’s proposed regulations are in line with this global trend and position India as a responsible participant in the evolving landscape of financial influencer oversight. However, the regulator cannot be responsible if they deal with unregistered entities and suffer fraud. Beyond a point, investors can’t be stopped by the regulator from burning their money with dubious schemes.
The writer is managing partner, Finsec Law Advisors
Coauthored with Mihir Deshmukh and Shivaang Maheshwari, respectively, senior associate and associate, Finsec Law Advisors
