In recent years, a new category of social media influencers has gained prominence, they are famously referred to as "finfluencers". The name indicates a combination of "financial" and "influencers." The Advertising Standards Council of India (ASCI) defines these individuals as those who use digital and social platforms to share information and guidance on various financial matters, including investment strategies, personal finance management, and insurance options.
With the increase in popularity of social media, the community of influencers in various categories has also increased. Popular segments include personal care, Health Care, Food and Beverage, Fashion and Lifestyle, Edutech etc. One such well-known category is financial education/information on which finfluencers create and publish content. A significant portion of the followers of these influencers consists of individual investors seeking easily accessible financial advice to support their investment objectives. This trend has drawn the attention of regulatory bodies like the Securities and Exchange Board of India (SEBI), who express concerns that the recommendations provided may not always stem from transparent, well-researched, or expert sources.
The Securities and Exchange Board of India (SEBI) addressed the issue of financial influencers in its 2023 consultation paper, "Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)." This document proposed regulating finfluencers through registration and disclosure requirements. It also suggested penalties for misleading claims along with guidelines for regulated entities' interactions with unregulated parties.
The 206th SEBI Board meeting this year in June 2024, approved the recommendations outlined in Consultation Paper. The approved recommendations include:
As per SEBI's definition provided under SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”), individuals who provide investment advice for a fee are investment advisers. At first glance, finfluencers might not seem to fit this category as they often don't charge their audience directly. However, the situation becomes more complex when we consider finfluencers who offer paid courses or personalized advice related to securities trading.
A recent SEBI order addressed a case involving a popular finfluencer. The individual allegedly used social media to promote paid courses promising personalized investment guidance. SEBI determined that such activities fall under the purview of investment advice IA Regulations.
SEBI aims to ensure that regulated financial entities only partner with finfluencers who are officially permitted to give investment advice. This may lead regulated entities to require registration from finfluencers they work with. Finfluencers who want to maintain sponsorship relationships with these entities will likely need to meet SEBI's regulatory standards.
The new guidelines aim to protect consumers from inefficient advice by regulating the emerging trends of finfluencers activities. However, the new requirements pose several challenges. Regulated entities may need to significantly enhance their customer onboarding processes to identify potential finfluencers which will increase due diligence requirements. In order to regulate, initially it is important to identify these finfluencers but identifying finfluencers who operate anonymously on platforms like Telegram or Reddit could be particularly difficult. Before engaging with finfluencers, entities will need to verify whether identified finfluencers are properly registered or permitted by SEBI. These additional due diligence requirements could increase operational costs for regulated entities.
The proposed regulations aim to bring finfluencers under closer regulatory scrutiny. However, the practical implementation of these rules may present significant challenges for both finfluencers and regulated financial entities. Further clarification from SEBI regarding the extent of due diligence required and methods of its implementation will be crucial for entities to navigate this new regulatory landscape effectively.