In the era of social media, a new kind of influencer has emerged: “Finfluencers.” These individuals exert their influence not by displaying fashion or lifestyle choices, but by providing financial guidance, investment ideas, and market information to their audience.
This article delves into the rise of Finfluencers against the backdrop of the COVID-19 pandemic, which saw a surge in retail investors seeking financial opportunities amid lockdowns. We will explore the recently proposed guidelines set forth by SEBI to regulate Finfluencers, analysing their potential impact on the Finfluence ecosystem.
From disrupting income models to mandating disclosures, SEBI aims to address concerns related to conflicts of interest, false information, and the need for investor protection.
So let’s start from scratch.
What is a Finfluencer?
A “Finfluencer” is an informal term used to refer to an influencer who provides advice on financial investments through social media and other online platforms. These individuals, by virtue of their popular or cultural status, have the ability to influence the financial decision-making process of others through promotions or recommendations on social media.
Finfluencers typically share videos covering personal experiences, tips, opinions, and advice about investing, budgeting, financial trends, and the economy, and have become a major source of financial advice for millennials and “Gen Z”.
The rise of finfluencers has led to the need for regulations to ensure transparency, protect investors’ interests, and regulate the finfluencer community, particularly those providing direct investment advice and potentially engaging in conflicts of interest.
2020 saw the entry of finfluencers into the Indian stock markets, thanks in large part to the Covid-19 outbreak and the ensuing lockdowns. Relegated to the comforts of their homes and freed from the grind of the daily commute, salaried professionals found time for side projects or market trading.
This resulted in a sharp rise in the number of retail stock market investors, who either wanted to make a quick profit or had to reevaluate their strategy in light of the unpredictability that had suddenly descended upon them.
Now the question arises, with their expanding reach and impact on the general public, one major issue arises in the minds of people. Should they be regulated by SEBI, India’s primary securities regulator?
So let’s talk about the proposed regulation, first then whether it is required or not?
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New Guidelines by SEBI for Finfluencers
The income model for unregulated finfluencers is proposed to be disrupted in the SEBI Consultation Paper. The securities market regulator aims to forbid any financial or non-financial contact between SEBI-registered businesses or their representatives and any such unregistered finfluencer for the purpose of promoting or advertising their services or goods.
Furthermore, no sensitive customer information may be shared by registered SEBI businesses, stock exchanges, or Association of Mutual Funds (“AMFI”) with any unregistered entities.
Furthermore, the payment of a trailing commission as a referral fee is prohibited by SEBI for registered businesses. Let’s say in the case of a mutual fund product acquired by a customer under the finfluence of a finfluencer via his or her referral link, the finfluencer is not eligible to receive a referral fee in the form of commission for the customer who purchased the mutual fund product.
Here, the goal of this is to attack finfluencers’ main source of income. Retail investors may still be able to recommend goods, services, etc., and the SEBI-registered companies may continue to pay referral fees in this respect.
Coming on to the finfluencers who are actually registered with SEBI or AMFI, they are mandated to have a disclaimer and the proper disclosure along with the registration number, contact information, and investor grievance redressal hotline.
The major goal of SEBI here is to eliminate all the unregulated finfluencers and consumer protection. The fact that finfluencers are frequently unregistered people who persuade customers to make purchases that are motivated by their own financial interests rather than the interests of the customers has been duly brought to SEBI’s attention.
Therefore, it seeks to protect investors from any major risks and losses by imposing a restriction on SEBI registered businesses’ ability to deal with unregulated finfluencers.
Though registration is necessary for finfluencers to interact with SEBI-regulated businesses, it’s important to remember that neither ASCI (Advertising Standards Council of India) nor SEBI have any regulations pertaining to finfluencer registration.
SEBI functions under the assumption that finfluencers can lawfully do business by registering as any of the businesses under its regulation, including RAs (Research Analyst) and IAs (Investment Advisor).
The Need for Regulation by SEBI
The absence of explicit laws pertaining to finfluencers has sparked worries about potential conflicts of interest, false information being provided, and financial items being missold. The proposed laws by SEBI are intended to improve transparency, safeguard the interests of investors, and control the influencer community—especially those who offer direct financial advice.
The necessity of this kind of regulation is emphasized by the need to safeguard investors, stop deceptive information and unethical behavior, maintain justice and openness, deal with conflicts of interest, and advance investor protection and financial literacy. But what exactly are the contentions by which a body like SEBI shall indulge itself with such a matter. Lets understand this.
1. Protecting the Investors
Finfluencers have the ability to influence the financial decision-making process of others through promotions or recommendations on social media. The lack of regulation leaves a growing amount of investment advice, primarily targeting unsophisticated retail investors, unregulated, placing individual investors at risk and threatening the integrity of the broader securities market.
Consider this scenario: you take a prominent finfluencer’s advise and spend a considerable amount of money, only to discover later that the advice was incorrect or deceptive. Your hard-earned savings are wasted. Such instance pretty common these days thanks to the widespread access of the internet in every nook and corner of the country.
For SEBI, Investor protection is critical, and regulations may assist protect people from misleading information and shady advice.
2. Lack of Expertise
Not all Finfluencers have the appropriate financial knowledge or credentials. Some people may not have a thorough comprehension of complicated financial products and markets while some may have their own biases while giving out their “advice”.
The regulations aim to enhance transparency, protect investors’ interests, and regulate the finfluencer community, particularly those providing direct investment advice and potentially engaging in conflicts of interest.
This is essential to ensure that quality advice reaches investors and to protect them from potential harms and risks associated with finfluencing. With the involvement of SEBI, a minimum qualification and knowledge requirement standards can be set for providing sound and effective financial advice.
3. Conflicts of Interest
A conflict of interests occurs when an individual’s personal interests -family, financial or social factors- could compromise his decision and judgment making abilities in the workplace. Many Finfluencers frequently collaborate with businesses and may be compensated or rewarded for pushing certain financial products to their audience.
Such activities lead to conflict of interest. By SEBI imposing disclosure requirements for such finfluencers to shed light on any such affiliations, can enable the investors to make a more informed decision among themselves.
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Balancing Regulations with Innovation
While the necessity for Finfluencer regulation is obvious, striking the appropriate balance is important. It is difficult to reach an equilibrium between safeguarding investors and preserving free speech and business. Regulatory bodies, such as SEBI, should consider introducing Finfluencer standards, registration requirements, disclosure rules, and codes of behaviour.
These policies can address concerns without restricting genuine financial education or innovation. As the power of Finfluencers grows, the need for SEBI regulation becomes evident.
In the realm of finance, investor protection, market integrity, and preserving confidence are all necessary. SEBI can guarantee that Finfluencers contribute positively to financial literacy while protecting the interests of investors by enacting suitable restrictions. This will benefit both individual investors and the integrity of India’s financial markets.
It is possible that SEBI will treat finfluencers as a distinct class of people and create special registration, disclosure, and other legal obligations for them. Influencers are becoming a vital distribution channel for many firms as trade activity increases nationwide.
In its quest to isolate finfluencers, SEBI may fall short in its efforts to fairly and openly raise public financial knowledge by not fully using the power of digital media. As we move closer to regulating the finfluencers, we believe SEBI will be able to tackle this emerging sector with a more forward-thinking perspective.
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Authored by Pratham Tiwari, a 1st year Law Student at National Law University Odisha.