[Analysis] SEBI’s Regulatory Umbrella Now Covers the ‘Financial Influencers’ – An Overview

Table of Contents

1. Introduction
2. Objective of the consultation papers
3. Unveiling the role of ‘Finfluencers’
4. How Finfluencers cast a spell on social media to enchant investors?
5. Unregistered finfluencers’ promotion and compensation practices, as of now!
6. SEBI’s bold steps to secure investor trust in a finfluencer-friendly market
7. Public Comments
8. Conclusion

1. Introduction

Lately, the spotlight’s been on financial influencers, also known as ‘finfluencers’. These unsung money maestros are dishing out snappy content, tips, and tricks on all things finance to their ever-growing follower squads. In the modern era, the actions of financial influencers (often referred to as ‘finfluencers’) have garnered significant public and media focus.

These individuals, typically not officially registered as financial entities, create engaging content, share information, and offer advice on a range of financial subjects to their numerous followers.

While a portion of these individuals might indeed be legitimate educators, a significant number of them operate as unregistered and unauthorized Investment Advisers (IAs) or Research Analysts (RAs). Let’s decode the SEBI’s consultation paper navigating the Finfluencer Landscape.

2. Objective of the consultation papers

This separate consultation paper introduces the concept of a specialized fee payment system for registered IAs and RAs. This system aims to assist investors in recognizing, differentiating, and steering clear of unregistered entities or financial influencers.

Other unregistered entities/finfluencers may be effectively enticing their followers to purchase products, services, or securities in return for undisclosed compensation from platforms or producers. This paper seeks to restrict the association of SEBI registered intermediaries/regulated entities with such unregistered finfluencers, to curb the flow of such compensation.

Besides undertaking enforcement action against unregistered finfluencers who breach SEBI regulations, this paper proposes to disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce.

Impact

The proposed specialized fee payment system for registered IAs and RAs demonstrates a forward-looking commitment to promoting transparency, accountability, and investor trust.

By empowering investors to make well-informed choices and deterring the involvement of unregistered entities, this initiative has the potential to reshape the financial ecosystem, fostering an environment that prioritizes ethical practices and investor protection.

3. Unveiling the role of ‘Finfluencers’

As per the ‘Guidelines for Influencer Advertising in Digital Media’ released by Advertising Standards Council of India, ‘influencer ’ means

“someone having access to an audience and power to affect such audiences’ purchasing decisions or opinions about a product, service, brand or experience, because of the influencer ’s authority, knowledge, position, or relationship with their audience”.

Financial influencers, commonly called ‘finfluencers ’, are persons who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social/digital media platforms/channels, and have the ability to influence the financial decisions of their followers.

4. How Finfluencers cast a spell on social media to enchant investors?

The Finfluencers often attract investors/prospective investors through their engaging stories, messages, reels and videos on various social media platforms such as Instagram, Facebook, YouTube, LinkedIn, Twitter, etc.

5. Unregistered finfluencers’ promotion and compensation practices, as of now!

Many unregistered/unregulated finfluencers directly or indirectly promote products, services or securities. They may induce clients to avail these products or services in return for:

1. Referral fee for usage of the product, channel, platform, or services that they advertise;
2. Non-cash benefits such as free usage of products or services;
3. Compensation received directly from the social media or other platform where they share their content; and
4. Profit sharing with the underlying product, channel, platform, or services.

6. SEBI’s bold steps to secure investor trust in a finfluencer-friendly market

With the present consultation papers, the SEBI has proposed actions to limit the association of SEBI registered intermediaries/regulated entities and their agents/representatives with unregistered entities (including finfluencers). Such actions include:

• SEBI registered entities and their agents will be prohibited from any association with unregistered entities (including finfluencers) for promoting their services/products, whether monetarily or non-monetarily.
• Entities registered/regulated by SEBI or stock exchanges or AMFI shall not share any confidential information of their clients with any unregistered entities.
• Finfluencers must prominently display their SEBI/stock exchange/AMFI registration number, contact information, investor grievance helpline, and necessary disclosures/disclaimers on all posts.
• Finfluencers registered with SEBI or stock exchanges or AMFI shall also fully adhere to the code of conduct under the terms of their relevant registration.
• Entities shall comply with the advertisement guidelines issued by SEBI, stock exchanges and SEBI recognised supervisory body from time to time.
• SEBI registered intermediaries/regulated entities shall not pay any trailing commission based on the number of referrals as referral fee.
• SEBI registered intermediaries shall take active measures to dissociate themselves from any unregistered entity using their name, product or service.
• Limited referrals from retail clients, and payment of fees for such limited referrals by stockbrokers shall be allowed.

7. Public Comments

The objective of this paper is to seek public comments on a proposal to restrict the association of SEBI registered intermediaries/regulated entities with unregistered ‘finfluencers ’. The SEBI has prescribed the format for the public comments. Comments/suggestions may be forwarded by email to consultationMIRSD@sebi.gov.in latest by September 15, 2023.

8. Conclusion

In conclusion, the rise of financial influencers, or ‘finfluencers’, in the modern era has brought both opportunities and challenges to the realm of financial education and advice. While some of these individuals genuinely contribute to enhancing financial literacy, the emergence of unregistered and unauthorized influencers as investment advisors or research analysts has raised concerns about investor protection and regulatory compliance.

Recognizing the significance of addressing these issues, the Securities and Exchange Board of India (SEBI) has introduced a set of consultation papers aimed at creating a more transparent and regulated environment for the interaction between financial influencers and the public.

These proposed measures encompass the requirement for clear and conspicuous disclosure of registration, contact details, and necessary disclaimers by registered finfluencers, along with prohibiting SEBI-registered entities from associating with unregistered entities in their promotional activities.