Introduction:
In today’s digital age, browsing through social media platforms has become an integral part of our daily routines. Among the myriad of content creators, a unique group has emerged—financial influencers, famously known as “finfluencers.” With their persuasive hooks, eye-catching graphics, and promises of financial success, these finfluencers have captivated the attention of millions, offering everything from stock tips to investment strategies. This scenario closely resembles the wisdom shared by Philip Fisher, who famously remarked that,
“The stock market is filled with individuals who know the price of everything but the value of nothing.”
However, as their influence grows, so do the risks associated with their unregulated financial advice. Recent cases, both in India and around the world, have shed light on the pressing need for regulations to safeguard the interests of investors and maintain the integrity of financial markets.
The Rise of Finfluencers
In the age of information overload, finfluencers have emerged as key players in the realm of financial advice, driven by a keen desire to capitalize on the remarkable bull market incited by the COVID-19 pandemic. These individuals wield their influence through popular social media platforms such as YouTube, Instagram, and Telegram, amassing large followings eager to absorb their insights. They offer a range of financial guidance, from stock market predictions to investment strategies, promising followers the path to financial success. However, as the saying goes,
“Following the herd in investments can lead you to the slaughterhouse of regret.”
Blindly following the advice of these finfluencers without due diligence can result in significant financial losses, as highlighted in several high-profile cases.
Financial Misconduct in India
In India, cases of financial misconduct involving finfluencers have come to the fore. Notable among these is the instance of Sadhna Broadcast Limited and Sharpline Broadcast Limited, where the promoters of these companies, in collusion with YouTube creators, disseminated false and misleading content, leading to the creation of false interest in the script. The Securities and Exchange Board of India (SEBI) has taken action, banning the promoters of Sadhna Broadcast Limited, actor Arshad Warsi, and 44 others from the securities market for manipulating the share price of Sadhna Broadcast Limited through misleading YouTube videos. The entities involved in the case seemingly used a Pump-and-Dump scheme – a financial fraud which typically involves spreading false information about a company to inflate the value of their stocks leading to pumping up of the corresponding price. Following the rise in price, the entities involved in the scam start dumping the shares at an inflated rate, causing losses to the investors.
Between 2022 and 2023, the Securities and Exchange Board of India (SEBI) has been actively addressing the issue of unregulated financial influencers. In 2022, SEBI took action against Nilesh Vajifdar, who operated on Telegram, providing fraudulent and misleading information about investment products without the necessary license as an investment advisory service. This case underscored the potential dangers posed by unregulated individuals in the financial space.
In 2023, SEBI took further action by focusing on PR Sundar, a prominent YouTube celebrity widely recognized for providing investment advice. Allegedly, Sundar violated investment advisor regulations by offering financial guidance without possessing the necessary license, underscoring the associated risks of unqualified financial influencers operating online. Additionally, Gunjan Verma, another finfluencer, faced penalties from SEBI in 2023 for purportedly dispensing unregistered financial advice since 2018, all without the requisite investment advisor license. This resulted in a fine of ₹1 lakh. These instances serve as vital reminders of the significance of regulating and closely monitoring the activities of financial influencers to shield investors from potential fraud and misinformation.
The Need for Regulation
These instances underscore the vital necessity for regulations pertaining to financial influencers, particularly in India. India faces the challenge of a financial literacy rate that lags 6% below the global average, coupled with a growing number of retail investors. This combination poses a significant risk to the financial stability of consumers. While influencers can offer valuable insights, it is imperative that they function within a framework that guarantees accountability, transparency, and expertise.
In an effort to combat the increasing challenges posed by unethical financial influencers, the Securities and Exchange Board of India (SEBI) has joined hands with the Advertising Standards Council of India (ASCI), working together to ensure that trustworthy and impartial financial guidance is accessible to every investor.
Regulations in India
There is no specific legislation governing finfluencers in India. However, broadly, finfluencers are expected to comply with general regulations, including:
- Section 12-A of the SEBI Act, 1992: This provision of the Securities and Exchange Board of India (SEBI) Act, 1992, establishes that no individual should directly or indirectly partake in any action, practice, or business conduct that is deceptive, fraudulent, or manipulative in the context of transactions on the stock exchange.
- Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”): Regulation 4 within the PFUTP Regulations defines particular behaviors as manipulative, deceptive, or unfair trade practices. This encompasses the making of knowingly false or misleading statements with the intent of influencing investment decisions and forbids the careless or reckless dissemination of information or advice likely to sway investor decisions related to securities.
Self-regulation also plays a role, with industry organizations like the Investment Bankers Association of India (IBAI) and the Association of Mutual Funds in India (AMFI) working to establish ethical guidelines.
Is the Existing Legal Framework Sufficient?
The current legal framework governing financial advisors in India faces several noteworthy challenges when it comes to effectively safeguarding the interests of investors. These challenges are mainly attributed to the unique nature of finfluencers and the dynamically changing landscape of social media and online communication.
Addressing the challenges related with regulating financial influencers, or “finfluencers,” necessitates a comprehensive approach. Firstly, a fundamental challenge lies in defining what constitutes a finfluencer. There is no unanimously accepted definition, with varying interpretations ranging from individuals with significant social media followings discussing financial topics to those who receive compensation for promoting financial products. This lack of clarity complicates regulatory efforts.
Another challenge involves distinguishing between educational content and personalized advisory services provided by finfluencers. Some claim to offer general financial education, blurring the lines of regulation when it comes to discerning between informational content and specific investment advice.
Transparency and disclosure are critical aspects of finfluencer regulation. To defend investors, it is imperative that finfluencers disclose their financial relationships, particularly when endorsing financial products or services. Regulators must enforce clear and conspicuous disclosure requirements for sponsored content and affiliate partnerships to ensure transparency.
A delicate balancing act is required in regulating finfluencers. Regulators must strike a balance between protecting investors and preserving the freedom of expression. While finfluencers have the right to express their opinions on financial services and products, they should not be allowed to disseminate false or deceptive information. Achieving this equilibrium often necessitates the activation of a “reasonable restriction” clause.
The rapidly evolving landscape of social media platforms and online communication presents another significant challenge. Regulatory frameworks may struggle to keep pace with emerging platforms and communication methods. As new technologies and platforms continue to emerge, regulatory bodies must remain agile and adaptable to effectively oversee finfluencer activities.
Enforcement of regulations poses a complex task due to the global reach of finfluencers. They can quickly adapt by changing their platforms or content to evade detection, making cross-border cooperation and enhanced enforcement mechanisms essential.
Lastly, despite vigorous regulations, consumer education is supreme. Consumers need to be aware of the risks associated with following financial influencers and the importance of conducting independent research before making investment decisions. Financial literacy is a key component in ensuring the effectiveness of these regulations.
To address these challenges effectively, a nuanced approach is required. While the current legal framework can serve as a foundation, it may need refinements to specifically cater to the distinctive characteristics of finfluencer activities. The development of a dedicated set of regulations that considers the unique nature of finfluencer engagements might be more effective in addressing these issues and providing enhanced protection for investors. Furthermore, continuous collaboration between regulatory authorities, industry organizations, and finfluencers themselves is essential to uphold ethical standards and safeguard investors’ interests in a rapidly changing digital landscape.
Consultation Paper
SEBI has taken a proactive approach by publishing a consultation paper on financial influencer regulation. Proposed solutions include mandating finfluencers to disclose their financial interests, refrain from making false or misleading statements, and ensure their advice aligns with the needs of their target audience.
The Reserve Bank of India (RBI), while lacking explicit regulations for financial influencers, mandates that they disclose conflicts of interest and clarify their registration status. Additionally, fraud and misleading laws apply to financial influencers.
India will not be the only country to regulate them, as regulatory approaches to financial influencers are present and vary worldwide. The United States has had restrictions in place through the Securities Act since 1940. In contrast, the UK’s Financial Conduct Authority (FCA) has regulated social media usage by finfluencers since 2014. Singapore’s Monetary Authority issued rules in 2014, focusing on customer confidentiality, market behavior, and reputational concerns.
In 2020, Malaysia introduced specific regulations to govern digital payment token intermediaries, while in 2021, the Australian Securities and Investments Commission (ASIC) issued an informative brochure outlining the legal responsibilities of financial influencers. Violations of these obligations have resulted in enforcement actions. India can draw valuable lessons from the experiences of other countries and utilize them to craft a well-considered regulatory framework that aligns with the country’s unique considerations and effectively fulfills its intended purpose.
In conclusion, the emergence of financial influencers has ushered in both opportunities and challenges within the realm of investment advice. While they offer valuable insights and educational content, the risks associated with unregulated or unethical practices underscore the imperative need for comprehensive regulations to safeguard investors and uphold the integrity of financial markets. While the existing legal framework serves as a foundational starting point, it confronts substantial challenges that necessitate resolution through the establishment of clear definitions, heightened transparency, and adaptable enforcement mechanisms. Collaborative efforts between regulatory authorities, industry organizations, and financial influencers are pivotal in ensuring that these influencers operate within a framework that prioritizes investor protection and the integrity of financial markets.
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Author Manjari Tripathi is second year law student at Dharmashastra National Law University, Jabalpur. Co-author for of this article is is Sujal Garg, a third year learner at DNLU, Jabalpur.
