Lessons for India: How foreign authorities are dealing with the phenomena of finfluencers

Lessons for India: How foreign authorities are dealing with the phenomena of finfluencers

Regulators from the United States to Australia have enacted strict rules to reign in finfluencers. We look at what some overseas regulators have done and how these steps might help SEBI in its attempts to combat the issue.

Retail investors, particularly millennials and centennials, are falling to meme trading peddled on social media by self-proclaimed gurus. Meme trading is the practice of driving up the stock prices of specific firms that are not supported by fundamentals via social media. Many individuals will face financial ruin as a result of this involvement. Using finfluencers to commit manipulation and fraud is no longer a secret plan. As a result, dealing with the ‘finfluencer threat’ has been a top priority for financial authorities worldwide.

To combat the finfluencer threat, all regulators throughout the globe have adopted some similar methods. First and foremost, authorities throughout the world emphasize the golden rule: anybody offering financial advice must be licensed.

Taking Initiative

A regulatory tool has been enforcement action against finfluencers for fraudulent actions. For example, in May, the Australian Securities and Investment Commission (ASIC) charged a trader with engaging in ‘pump and dump’ operations on social media. ASIC has enacted strict restrictions against unauthorized financial advising, which may result in five years in jail or huge penalties. This regulatory obligation has been successful, leading in a decrease in affiliate connections on the social media sites of Australian finfluencers.

In December 2022, the US Securities and Exchange Commission (SEC) brought civil and criminal charges against eight social media influencers. These influencers manipulated stock prices using their social media profiles, resulting in a $100 million swindle.

In India, SEBI has arrested a few finfluencers who were counseling investors without the necessary registration under the SEBI Investment Adviser Regulation. These finfluencers have been severely punished. Some stock manipulators who recommended stocks using different social media accounts were prosecuted with frontrunning under the Prohibition of Fraudulent and Unfair Trade Practices Regulations.

Social media promotion is closely scrutinized by authorities of both the financial markets and consumer protection. The Financial Conduct Authority (FCA) of the United Kingdom, for example, targets advertising on social media sites that lack enough wording to appropriately represent investment risks. Promoting or giving advise about regulated financial goods or services without FCA clearance is a criminal offense. Brokerages, mutual funds, and other intermediaries in the United Kingdom must carefully supervise the process to ensure that new investors are not mislead.

In the United States, the Securities and Exchange Commission (SEC) has made it plain that remarks posted on social media may result in investigations and charges for possible violations of federal securities laws. In the United States, the Federal Trade Commission (FTC) has revised endorsement criteria to oversee influencer marketing. To mitigate reputational risks, the Financial Industry Regulatory Authority (FINRA), a government-authorized not-for-profit organization that oversees US broker-dealers, has advised firms using finfluencers to establish written supervisory practices and evaluate their background and prior social media activities. Companies have also been encouraged to keep track of referral programs through finfluencers and to educate them while establishing allowed and banned standards of behavior.

In Australia, the Australian Competition and Consumer Commission (ACCC) monitors finfluencers on different social media sites and takes legal action if false statements are discovered. If appropriate, finfluencers must declare sponsored endorsements or connections to the ACCC. Additionally, the regulator monitors social media and educates customers about finfluencers.

SEBI might follow in the footsteps of these worldwide authorities and enhance its supervision of social media sites. To be sure, social media is a vast universe, and monitoring will be difficult; hence, it may be worth considering holding companies/brokers responsible for their social media statements via mandated disclosures in stock market filings. Perhaps the SEC might look at collaborating with social media sites to include warnings on investment advisories-related content. This proactive measure would improve investor safety in the digital age.

The SEBI in action

SEBI has proposed aggressive actions to tighten the noose around finfluencers in various consultation papers.

Allowing market intermediaries to promote products/services via registered finfluencers, displaying finfluencer details (such as the appropriate registration number, contact details, investor grievance redressal helpline, and appropriate disclosures/disclaimers on any posts), and introducing a unique fee payment platform for registered investment advisers are among the proposals.

SEBI recommended a new fee collection method for investment advisors (IA) and research analysts (RA) on August 25. All payments made by customers would be supervised by a SEBI-recognized entity under this method to avoid unregistered IAs and RAs from deceiving investors. This closed environment for collecting fees would assist investors gain trust and prevent them from being deceived by unregistered businesses and finfluencers. Indeed, this novel pricing system has the potential to serve as a model for regulators throughout the globe.

However, the issue about registering finfluencers is unclear and has to be clarified. Just as an advertising code is applicable to every product, intermediaries for finfluencer involvement should be given some latitude. Finfluencers are contemporary advertising models and celebrities who use simple and engaging communication tactics to teach financial literacy and democratize investing. However, given the financial risks involved, a calculated approach is required. Perhaps a better approach would be to force intermediaries who use finfluencers to do due diligence and to hold them (the influencers) accountable to legislation. ASIC has made this a requirement for Australian financial services licensees that utilize an influencer.

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