Cutting the Cord: Analysing SEBI’s move to disrupt unregistered finfluencers’ business model

The last decade has witnessed a digital revolution which has increased accessibility to financial knowledge, information, and opportunities by breaking down complex financial concepts for the investing public. This has led to the growing popularity of a new section of financial influencers and content creators, colloquially known as ‘finfluencers’, who specialise in providing catchy and engaging financial advice and insights to their followers on social media platforms.

While there is no denying that this trend has increased the overall financial literacy of the retail investor, there is a lingering concern regarding the accuracy and reliability of the financial advice and insights being shared publicly. Some finfluencers have also started entering into commercial arrangements with intermediaries in the financial sector which may lead to conflicts of interest and create an opaque investment ecosystem.

During the past one year, several cases of market manipulation by finfluencers have been tracked down by India’s securities market regulator and watchdog, the Securities and Exchange Board of India (SEBI), most notable of which is the ban of a popular finfluencer in October 2023. In the instant case, the finfluencer had enticed the public with clickbait-y offers such as monthly returns ranging from INR 3-6 lakhs, live market transactions and enrolment of financial educational courses that promise guaranteed returns on platforms such as YouTube, X, Telegram and WhatsApp. Through his promotional gimmicks, he had collected INR 17.2 crores by, “luring clients/investors through misleading/ false information to purchase his courses/workshops, adding them in their closed groups and inducing/influencing them to deal in securities”, as noted by SEBI in its interim order cum show cause notice dated October 25, 2023. SEBI held these earnings to be from fraudulent and unregistered investment advisory activities. Currently, in an attempt to safeguard the investors and maintain the integrity of the financial markets, SEBI has passed a cease-and-desist order against him.

In order to curb misinformation and protect the interests of retail investors, SEBI introduced the SEBI (Investment Advisers Regulations) 2013 (IA Regulations) and SEBI (Research Analysts) Regulations 2014 (RA Regulations). Both regulations ensure that only qualified registered entities can disseminate accurate, genuine, and well researched investment advice which is tailor-made for their respective clients.

The IA Regulations and RA Regulations have stipulated specific qualifications and certification requirements to act as investment advisors (IA) and research analysts (RA). Essentially, an IA is any person who, for consideration, provides investment advice while an RA’s activities primarily centre around carrying out research on securities, making 'buy/sell/hold' recommendations, or offering expert opinions on the issuance of securities, etc. Additionally, these intermediaries also have to strictly adhere to the compliance requirements, including but not limited to, disclosure of conflict of interest, maintenance of confidentiality, abiding by the code of conduct, providing reports to clients, not carrying out trades contrary to their own recommendations etc.

As noted by SEBI, most finfluencers are unregistered entities whose activities overlap with such registered entities, but they do not obtain the necessary registration as they lack the requisite qualifications and certifications or want to escape the compliance requirements that registered entities are subject to. Another common instance that SEBI has taken a note of is the association of unregistered entities like finfluencers with SEBI-registered entities in exchange for undisclosed consideration wherein they use their influence and following to impact the financial decisions of investors.

The activities of such unregistered finfluencers contravenes Sections 12-A of the SEBI Act, 1992, and regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 which provides inter alia, that no person shall directly or indirectly engage in any act, practice any course of business which is fraudulent, misleading or manipulative with respect to the stock exchange. As such, any statement which is knowingly false or misleading  and can influence investment decisions amounts to ‘manipulative fraudulent or an unfair trade practice.' These regulations also prohibit the dissemination of any investment advice or information in a ‘reckless or careless manner which is likely to influence the decision of the investors dealing in securities.’     

To regulate the revenue stream of unregistered finfluencers from SEBI-registered intermediaries, SEBI released a consultation paper on “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)” on August 25, 2023 (Consultation Paper) with an intent to garner public comments on the topic.

SEBI proposes to restrict the association of such unregistered finfluencers and similar entities with SEBI-registered intermediaries/entities by disrupting the revenue model of the former. The paper proposes creating a separate financial ecosystem for collecting fees charged by SEBI-registered IAs and RAs through a designated platform that shall be administered by SEBI or its authorized body. Such a different payment mechanism for registered entities shall also allow an investor to differentiate between a registered and unregistered entity.

The Consultation Paper provides that SEBI registered-intermediaries/ entities:

1. must limit their association, including through agents or representatives, directly or indirectly with unregistered entities (including finfluencers) in exchange for monetary consideration or otherwise, for promotion or advertisement of their products or services through unregistered entities.

2. must not share any confidential information of their clients with unregistered entities.

3. must not make any trailing commission based on the number of referrals, commonly known as, referral fee. Limited referrals from retail clients and fees for such referrals shall be permitted.

4. must take active measures to dissociate themselves from unregistered entities using their name, service, or product.

Furthermore, any finfluencer who is registered with SEBI or any stock exchange or AMFI must disclose their registration number clearly along with contact details, and investor grievance redressal helpline on their posts. Such finfluencers also have to ensure adequate disclosures and disclaimers on their posts, while adhering the code of conduct applicable to registered entities and issued in advertising guidelines.

This mandate is in line with the Addendum II to the Guidelines of Advertising Standards Council of India (ASCI) wherein influencers providing advice and/or promoting and/or commenting on merits or demerits of the goods and services pertaining to the Banking, Financial Services, and Insurance (BFSI) and health and nutrition sector must ensure that they have necessary qualifications and certifications to provide such advice to the public. For the influencer in the BFSI sector, they should obtain a registration with SEBI, or IRDAI, or be CA or CS complying with applicable laws. The necessary qualifications and registrations must be clearly provided in the posts made on the platforms such as by superimposing them on visual content, stating them on text-based content or stating them on solely audio-based content.

The Consultation Paper is a step in the right direction by SEBI to address the recent trends that have come to light wherein finfluencers have misused their position of influence for personal gains in the garb of investor education.

Given that direct enforcement action against unregistered finfluencers will be a time intensive affair, SEBI has therefore, attempted to tighten the noose by imposing restrictions on its registered intermediaries.  That said, in the long run, the attempt to regulate finfluencers should ensure that a balance is struck between investor interest and ease of doing business of at least, genuine and qualified finfluencers.

Currently, finfluencers may register themselves as IAs or RAs under SEBI and be subject to their respective regulations. However, the IA and RA regulations have a high qualification and compliance requirements that most finfluencers may find difficult to meet, thereby, disincentivising registration. A viable option could be creating an alternate regulatory ecosystem wherein registration for finfluencers with a relaxed threshold of minimum qualification or certification such as CS, CA, or MBA while including certain compliances such as mandatory disclosures on each post.

With the increase in the number of retail investors and impact that finfluencers can possibly have on the investing public, SEBI ought to take a progressive approach and oversee finfluencers’ activities in a more regulated and transparent manner so as to increase overall financial literacy of the public.

About the author: Suhana Islam Murshedd is a Partner and Namasvi Karia is an Associate at AQUILAW.