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Published: September 14, 2023
Updated: September 14, 2023

Navigating the Finfluencer Challenge: Lessons from Global Regulators

Exploring international efforts to address the finfluencer phenomenon and what SEBI can learn.

The Rise of Finfluencers:

In today's financial landscape, retail investors, particularly millennials and centennials, are increasingly drawn into meme trading, fueled by self-proclaimed financial experts on social media. This trend involves driving up stock prices of companies, often lacking fundamental support, through social media chatter. The result? Financial disaster for many. Manipulation and fraud, orchestrated by finfluencers, are no longer covert operations, and this has become a pressing issue for regulators worldwide.

A Global Approach:

Regulators across the globe have embraced common strategies to combat the finfluencer menace. The fundamental principle: anyone offering financial advice must hold the necessary licensing.

Enforcement Measures:

Enforcement actions against finfluencers engaging in fraudulent activities have been pivotal. For instance, the Australian Securities and Investment Commission (ASIC) took legal action against a trader in May for promoting listed stocks on social media, including 'pump and dump' schemes. Australia's strict rules on unlicensed financial advice can lead to imprisonment or substantial fines. This approach has resulted in a decline in affiliate links on finfluencers' social media pages in Australia.

The US Securities and Exchange Commission (SEC) also took action, filing charges against eight social media influencers in December 2022. These influencers manipulated stock prices via social media, resulting in a $100 million scam.

India's SEBI on the Move:

In India, SEBI has cracked down on finfluencers who offered financial advice without the required licensing under SEBI Investment Adviser Regulation. These actions have resulted in significant penalties. Individuals manipulating stocks on various social media platforms have faced charges under Prohibition of Fraudulent and Unfair Trade Practices Regulations for frontrunning.

Regulatory Oversight on Social Media:

Regulators worldwide have intensified scrutiny of financial promotions on social media. The UK's Financial Conduct Authority (FCA), for example, targets promotions on social media platforms that lack sufficient risk disclosure. Providing financial advice without FCA approval can lead to criminal charges. In the US, the SEC monitors statements made via social media for potential violations of federal securities laws. The Federal Trade Commission (FTC) has updated endorsement guidelines for influencer marketing. In Australia, the Australian Competition and Consumer Commission (ACCC) takes legal action against deceptive claims made by finfluencers, requiring them to disclose paid endorsements.

SEBI's Path Forward:

SEBI can draw inspiration from these global regulators to enhance social media monitoring. Collaborating with social media platforms to incorporate warnings on investor advisory posts could bolster investor protection in the digital age. Companies and brokerages should be held accountable for their social media communications with mandatory disclosures in stock exchange filings.

SEBI's Bold Initiatives:

SEBI is actively pursuing measures to curb the finfluencer trend. Proposals include allowing market intermediaries to collaborate with registered finfluencers and displaying essential information, such as registration numbers and contact details, on their posts. Additionally, SEBI has introduced a unique fee payment platform for registered investment advisers. This innovative fee structure could set an example for regulators worldwide.

Balancing Act:

While regulating finfluencers is vital, a balanced approach is crucial. These influencers play a role in spreading financial literacy and democratizing investments. Imposing obligations on intermediaries to ensure finfluencers comply with regulations, as done by ASIC in Australia, could strike a fair balance.

Addressing the finfluencer challenge is a global concern. By adopting a proactive stance, SEBI can strengthen investor protection and create a robust digital financial ecosystem. The lessons from international regulators provide valuable insights for India's financial landscape.