Global Regulators Take Aim at Finfluencers; SEBI Considers Bold Moves

Introduction:

Retail investors, particularly millennials and centennials, are increasingly falling victim to meme trading, fueled by self-proclaimed experts on social media. Meme trading, characterized by the artificial inflation of stock prices for companies lacking strong fundamentals through social media hype, is causing significant financial harm. The exploitation of “finfluencers” for manipulation and fraud is no longer a clandestine agenda, prompting financial regulators worldwide to address this growing concern.

Common Regulatory Practices:

Regulators worldwide share a common strategy in dealing with the finfluencer menace, starting with the key principle that anyone offering financial advice must possess the necessary licenses.

Enforcement Actions:

Enforcement action against finfluencers engaging in fraudulent activities has proven effective. In Australia, for example, the Australian Securities and Investment Commission (ASIC) prosecuted a social media trader in May for promoting listed stocks and participating in “pump and dump” schemes. ASIC has imposed strict regulations against unlicensed financial advice, carrying penalties of up to five years in prison or substantial fines. This has led to a decline in affiliate links on Australian finfluencers’ social media pages. Similarly, the US Securities and Exchange Commission (SEC) filed charges against eight social media influencers in December 2022 for manipulating stock prices, resulting in a $100 million scam. In India, SEBI has taken action against finfluencers advising investors without the required licensing under the SEBI Investment Adviser Regulation.

Monitoring Social Media:

Regulators across securities markets and consumer protection agencies worldwide are closely monitoring social media promotions. In the UK, the Financial Conduct Authority (FCA) targets promotions on social media platforms lacking sufficient information to convey investment risks accurately. Promoting or providing advice on regulated financial products or services without FCA approval is considered a criminal offense. In the US, the Federal Trade Commission (FTC) updated endorsement guidelines to regulate influencer marketing. The Financial Industry Regulatory Authority (FINRA) advises firms using finfluencers to establish written supervisory practices, assess their background and previous social media activities, and maintain records of referral programs.

Australia’s Approach:

The Australian Competition and Consumer Commission (ACCC) monitors finfluencers on various social media platforms and takes legal action against deceptive claims. Finfluencers must disclose paid endorsements or affiliations to the ACCC if necessary, and the regulator educates consumers about finfluencers.

SEBI’s Response:

SEBI is considering a range of proactive measures to tackle finfluencers. These proposals include allowing market intermediaries to collaborate with registered finfluencers, ensuring detailed finfluencer information (registration number, contact details, investor grievance helpline, and appropriate disclosures) on their posts, and introducing a unique fee payment platform for registered investment advisers. On August 25, SEBI proposed a new fee collection mechanism for investment advisers and research analysts, which will be monitored by a SEBI-recognized body to prevent unregistered entities and finfluencers from misleading investors. This innovative fee structure could potentially serve as a global model for regulators.

However, the clarity of finfluencer registration remains a point of contention. A balanced approach is necessary, as finfluencers play a role in spreading financial literacy and democratizing investments. A more feasible approach might involve intermediaries conducting due diligence and ensuring that influencers comply with regulations, as prescribed by ASIC for Australian financial services licensees using influencers.

Conclusion:

As the finfluencer phenomenon continues to impact retail investors globally, regulators like SEBI are taking decisive steps to safeguard investors and ensure the integrity of financial markets. These efforts, including stringent enforcement, social media monitoring, and innovative fee collection mechanisms, could provide valuable insights for regulators worldwide grappling with the finfluencer challenge.