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The Finfluencer Frontier: Navigating the Wild West of Information Asymmetry
- Dhruva Gupta and Riya Mishra
- May 2
- 6 min read
Updated: May 30
Overview:
On 25th August 2023, SEBI released a document “Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)”. The document sought to invite comments from the public regarding the unregulated advice by finfluencers, their burgeoning access to power, and manipulation tactics to influence the investment pattern of unwary buyers.
The catchy taglines and the cherry posts on various social media platforms induce small-time investors to buy high-risk stocks. Moreover, they charge hefty commissions while basking under the grey shade of unstinted liberty.
SEBI has called out such advice as harmful and illegal. Further, it has red-flagged 8890 instances of unlawful or misleading content across social media and notified leading platforms to pursue legal actions against those sharing aforesaid content relating to the security market.
As per the document:
SEBI has directed registered intermediaries (brokers and their agents) to take appropriate action and dissociate themselves from unregistered entities (finfluencers).
It includes transactions, client referrals, and other interactions with Information Technology systems entities and unregulated advisors.
Refraining from offering financial advisers and performance of claims without authorizations.
Exception: The regulations will not be applicable to individuals or entities solely focussed on investor education.
Provided that they refrain from advancing any direct or indirect advices, recommendations or any form of performance claims.
Rise of Finfluencers and their impact:
Financial influencers or ‘finfluencers’ have been on the rise since the early 2010s, with the onset of affordable smartphones and cheap data plans. Other externalities like the shift in the economic patterns during the COVID-19 phase acted as catalysts towards the torrential mushrooming of such services.
In the first six months of 2023, the Federal Trade Commission reported losses totaling $2.7 billion from investment-related fraudulent scams initiated on social media in the US alone; 37% of those fraud losses were reported by investors aged 20-29.
Currently, there are more than 80 million social media influencers seeking high-risk financial advice, without having the requisite knowledge and authorization. This raises concerns about quality and reliability of the information.
India’s financial literacy is abysmally low (27%). The lack of financial education and awareness creates a gap in information dissemination, which is taken advantage of by the finfluencers to attract investors in shady stocks.
Financial Influencers have massive social media following thereby accruing lucrative offers for sponsorship and affiliate marketing. Such financial incentives generate conflict of interest and many times the influencers do not adequately disclose their affiliation or the risk associated with their sponsored stocks misleading the investors.
Current Framework:
Registered Advisors | Finfluencers |
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(SEBI exempts any advice given through electronic or broadcasting medium) |
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(Leads to spreading of misleading and inaccurate information) |
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(Uncontrolled freedom without any liabilities) |
| 4) No advertisement controls or restrictions. (Amasses wide follower base as no investor would be interested in paying for financial advice if they are readily available on the internet for free) |
Concerns and the need for Legislative Oversight:
Finfluencers come under a regulatory grey area. They are not obliged to disclose their conflict of interests or their qualifications. This exposes the small-time investors to potential risks. Thus, SEBI’s intervention is required to instil a robust trustworthy investor environment and to maintain market integrity.
The Advertising Standard Council of India observed 415 instances of violations in finfluencers promotion practices. Such instances bolster the need for regulatory framework to secure the sanctity of ethical standards.
The rise of finfluencers coincided with the influx of retail investors in the market. Most of them being inexperienced and in the haste of making quick profits, under the influence of financial advisors made poor investment decisions without having a comprehensive understanding of the associated risks. This information asymmetry illustrates itself in the fall of companies like Vauld. It further reinforces the importance of unbiased and accurate knowledge dissemination to maintain market stability.
Finfluencers and Kickbacks:
Kickbacks, in finfluencing terms, is a form of unethical practice where the finfluencers receive benefits from different companies and businesses for promoting specific investment opportunities or their financial product and services. Finfluencers hold immense power and influence over their audience which they often use for their benefits in the form of paid promotions. Kickbacks, more often than not, are not disclosed by the finfluencers to the audience which eviscerates transparency and taints the genuineness of the advice. These may result in critical financial decisions to be taken by the audience where the financial gain of the influencer takes precedence over their best interests.
In March, SEBI allegedly discovered that an array of investors had reportedly promoted “misleading” videos regarding two Delhi-based broadcasting companies - Sadhna Broadcast Ltd and Sharplines Broadcast Ltd on YouTube. Such videos aim to manipulate the prices of stocks by disseminating false information regarding the companies which would result in their financial gains. These types of operations can be categorized as financial fraud popularly known as a ‘pump and dump’ scheme. Here, the prices of a stock are ‘pumped’ or unnaturally inflated through misleading or distorted information to captivate large audience through channels such as Instagram and YouTube. When the prices of the stocks are inflated, the perpetrators initiate the ‘dumping phase’ wherein they sell their shares at a higher rate which results in a drop in stock prices ultimately leading to investor’s loss. Not to mention the enormous profits availed from these malignant schemes.
The new SEBI consultation paper seeks to addresses this pressing issue. By revamping vigilance over the engagement between companies and finfluencers and preventing fraudulent and unethical activities.
In addition to the same, an update in the advertising self-regulatory body Advertising Standards Council of India (ASCI)’s code includes social media influencers as ‘celebrities’, and they have to be careful about their endorsements. The proposed rules by SEBI in its paper state that only SEBI-registered finfluencers will be in the capacity to disseminate investment advice and create agreements with companies regarding the promotion of particular investment products. All registered finfluencers, either with SEBI or the Association of Mutual Funds in India (AMFI) or stock exchanges will be required to make required disclosures such as displaying their contact details, registration numbers, and the like. Unregistered finfluencers, if found to breach SEBI regulations, will be dealt with strict action. Furthermore, the proposed rules specify clarifications from registered entities to dissociate with the unregistered entities who may be impersonating them. In addition to informing the concerned enforcement agency, cases regarding the same can be filed under Section 420 of the Indian Penal Code, 1860.
Proposed Regulatory Measures:
Defining Finfluencers:
The current Investment Advisor Regulations lacks a comprehensive definition for the term “investment advice” and gives absolute immunity to any advice proffered through social media platforms.
It neither accounts for nor establish regulatory framework for the impact of implied suggestion which influences investment behaviour.
Thus, there is a need of precise definition of “investment advices” in a manner which aligns with international standards.
Example:
European Securities Market Authority provide investment recommendations guidelines which takes cognisance of implicit and explicit opinions.
Disclosure Obligations:
The financial influencer must be obliged to disclose his/her educational qualifications and the companies which approach them to promote their products.
Setting a minimum educational qualification will aid in filtering out misleading influencers and introduce credibility in the investment market.
There must also be a dispute resolution mechanism installed to ensure reliable remedy in case of any fraud and avoid any potential conflict of interests.
Investor Education Programs:
Considering the poor financial literacy in India and the frequency of scams, SEBI must introduce education and awareness programs.
The programs should impart basic financial awareness and training regarding cyber fraud, equity management, and risk assessment.
Example:
National Financial Literacy Strategy in the United States and Financial Capability Strategy in the United Kingdom
Conclusion
In conclusion, with the rise in finfluencers, there's a great risk to market integrity as well as investors. The recent SEBI consultation paper has brought much-needed attention on the need to regulate the myriad of unbridled financial advisories that thrive on social media. With around 80 million finfluencers operating without strict oversight, they pose a greater threat to vulnerable small investors because of misleading and high-risk advice. The proposed regulations will give clear definitions, disclosure obligations, and educational initiatives that will improve financial literacy. These measures, according to SEBI, are hoped to create a safer investment environment and reduce the risks associated with information asymmetry in the financial market.
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