Regulating financial influencers in India: A global comparison

Fin-fluencers, as they are often known, are social media users with large followings who give their target audience financial advice.

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"Following the herd in investments can lead you to the slaughterhouse of regret."

This quote by American investor John Bogle says a lot about investments and is reflective of the risks of basing an investment decision on what others are doing. It serves as a cautionary tale against the lure of trying to become wealthy quickly.

Those who advise people where to invest and which stocks to buy, and suggest quick routes to wealth, seem to be everywhere. "Fin-fluencers," as they are often known, are social media (YouTube, Instagram, Telegram etc) users with large followings who give their target audience financial advice. They offer everything from stock tips to funding strategies to help people become financially successful.

Fin-fluencers must be regulated to ensure that their advice is trustworthy and that they don't deceive their followers. There have been some high-profile instances of financial influencers giving bad advice recently, and people who took the advice ultimately lost a lot of money.

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have introduced various regulations to control these influencers in India. These regulations require fin-fluencers to possess the necessary training and expertise to offer financial advice. To understand the extent of regulation in this space, let's first look at some recent cases in India.

Significant cases involving fin-fluencers in India and globally

INDIA

In 2022, the Securities and Exchange Board of India (SEBI) barred Nilesh Vajifdar for providing fraudulent and misleading information about investment products through Telegram without having a licence as an investment advisory service.
In 2023, SEBI penalised PR Sundar, a YouTube celebrity, for allegedly breaking the rules governing investment advisers. Without being licenced as an investment advisor, Sundar had broadcast videos on his YouTube account offering investment advice.
In 2023, Gunjan Verma, another fin-fluencer, was fined by SEBI for allegedly violating the rules governing investment advisors. She had been providing unregistered financial advice to customers since 2018 while not holding an investment advisor licence, which resulted in a punishment of ₹1 lakh being levied.

GLOBAL

The US Securities and Exchange Commission (SEC) has charged social media influencer Trevon James with fraud in 2018 for falsely claiming cryptocurrency returns. Kim Kardashian was fined $1.26 million for promoting EthereumMax tokens without proper declaration. Eight celebrities were also charged with illegally advertising crypto asset securities.
In February 2022, the UK Financial Conduct Authority (FCA) had prohibited the Freetrade Investment app from utilising sponsored social media adverts due to its relationship with a well-known financial influencer and its provision of deceptive financial advice.

Regulation of fin-fluencers in India

With great power comes great responsibility, and the Indian regulatory environment for financial influencers is continuously developing.

Significant laws and regulations apply to Indian financial influencers, including Section 12 of the SEBI Act of 1992, Regulation 2(c) of the SEBI (PFUTP Regulations), Section 2(42) of the Consumer Protection Act of 2019 and Clause 3(3) of the ASCI Code of Ethics.

Fin-fluencers may also be subject to self-regulation by industry organizations like the Investment Bankers Association of India (IBAI) and the Association of Mutual Funds in India (AMFI).

Recently, SEBI published a consultation paper on financial influencer regulation, suggesting solutions such as requiring fin-fluencers to identify their financial interests, refrain from making false or misleading comments and ensure their advice is appropriate for their target audience.

The Reserve Bank of India (RBI) does not have explicit regulations on financial influencers in India, but SEBI does. SEBI requires financial influencers to disclose any conflicts of interest and state they are not registered investment advisors. They may also face fraud and misleading laws.

The RBI has not taken any explicit steps to regulate financial influencers in the context of crypto assets or other digital payments. However, the banking regulator has expressed concerns about the risks associated with these products and services, stating that crypto assets pose a threat to financial stability.

A global comparison of regulations

India's regulatory landscape for financial influencers differs from that in the United States, the United Kingdom, Singapore, Malaysia and Australia. The United States has implemented restrictions through the Securities Act since 1940, while the UK's Financial Conduct Authority (FCA) regulates social media usage by fin-fluencers since 2014. Singapore's Monetary Authority issued rules in 2014, focusing on customer confidentiality, market behaviour and reputational concerns. The Malaysian Securities and Investments Commission (MAS) released new rules in 2020 to govern digital payment token intermediaries. In 2021, the Australian Securities and Investments Commission (ASIC) issued an awareness brochure for financial influencers detailing their legal duties, and those who violated these responsibilities have been subjected to enforcement action.

The common thread connecting all such legislation is the assessment of the risks associated with influencing financial decisions, which can have severe legal, financial and reputational consequences for all parties involved.

Challenges in regulating fin-fluencers

Identifying fin-fluencers: There is no commonly acknowledged definition of a fin-fluencer, thus making regulation problematic. Some regulators characterise fin-fluencers as people with a substantial social media following who routinely post about financial subjects. Others define them more narrowly as people who are paid to promote financial products or services.

Educational content and advisory content: Some people who are financially literate can claim that they provide educational content rather than personalized advice, making it difficult to regulate their activities. It is challenging to differentiate between educational content and personalized recommendations.

Transparency and disclosure: Fin-fluencers are frequently compensated by firms for advocating specific financial products or services. It is critical to provide transparency in these partnerships in order to safeguard consumers from possibly biased advice. Regulators must impose clear and visible disclosure requirements for sponsored material and affiliate partnerships.

Regulation and free speech must co-exist: Regulators must strike a balance between the need to safeguard investors from harm and the right to free expression. Fin-fluencers have the freedom to share their thoughts on financial services and goods, but they shouldn't be permitted to say anything that is untrue or deceptive.

Rapidly evolving landscape: Trends and social media platforms are evolving rapidly. Regulations may not be able to adapt as quickly as new platforms and communication methods emerge. Regulators need to keep up-to-date with these trends and be flexible in adjusting regulations accordingly.

Regulation enforcement is difficult: Fin-fluencers can work from any location and appeal to a worldwide audience. Because of this, it is challenging for authorities to impose their regulations on financial influencers who operate outside of their control. To evade detection, they can also quickly change their social media platforms or content.

Need for consumer education: Consumer education regarding the dangers of heeding influencers' financial advice is crucial, even if regulators are successful in reining them in. Consumers need to be aware that financial advisors might not be competent to offer advice, and they should always conduct their own research before making any investment decisions.

Conclusion

Currently, no explicit regulations are in place in India for fin-fluencers, but the Advertising Standards Council of India (ASCI) has published standards for influencers promoting financial products or services. SEBI and RBI are exploring restrictions to ensure that fin-fluencers do not provide inaccurate or misleading information to their followers.

Global comparisons reveal that there is no one-size-fits-all method to controlling fin-fluencers. Some countries, like the United States, have special restrictions, while the United Kingdom relies on ordinary advertising regulations. Australia has already adopted rules, while India is still drafting its strategy. Singapore prioritises client confidentiality, market behaviour and reputational issues. Malaysia has issued guidelines to manage digital payment token intermediaries.

The success of regulation will depend on the exact measures taken, enforcement mechanisms and compliance by financial influencers. SEBI's latest consultation paper is a positive step towards effective and balanced fin-influencer regulation in India, but the success of the proposed regulations remains to be seen.

Piyush Chandra is an Advocate practicing before the Allahabad High Court, Lucknow Bench.

Rushikesh Jayantrao Dharmadhikari is an Advocate practicing before the Bombay High Court, Aurangabad Bench.