[ Pritha Lahiri and Ria Agrawal are fifth-year law students from Institute of Law, Nirma University and Symbiosis Law School, Noida respectively]
PROLOGUE: WHO ARE FINFLUENCERS
The audience on social media platforms is growing worldwide, resulting in a more varied group of people. To sustain this engagement, creating diverse content is crucial, ranging from entertaining dance videos to educational lectures and even valuable financial advice. Individuals who use their social media presence or websites to discuss financial products and services and provide investment advice are referred to as “Finfluencer”. Finfluencers often generate income and receive incentives by endorsing specific financial information or products.
Finfluencers have played a significant role in increasing financial literacy and engagement among young people. According to a survey, 33% of people aged 18 to 21 follow a financial influencer on social media, while 64% changed their financial behaviors based on finfluencer advice. However, it is crucial to recognize that every concept has both positive and negative aspects, and the rise of finfluencers is no different. Trust is a fundamental component of the influencer-audience relationship, as the audience’s trust allows the influencers to thrive. The concern arises when considering the extent to which finfluencers are maintaining the trust of their audience.
According to Regulation 2(1)(l) of the Securities Exchange Board of India (“SEBI”) (Investment Advisers) Regulations 2013, “investment advice” encompasses guidance related to securities and investment products, including recommendations on buying, selling, and managing portfolios. However, this regulation explicitly excludes advice provided by finfluencers through social media. On a similar footing, such advice is covered under the SEBI (Research Analysts) Regulations 2014, specifically under the provision of research reports as stated in Regulation 2(1)(w). Unfortunately, financial advice offered by finfluencers does not fall within the purview of these regulations since research reports can only be provided by SEBI certified research analysts who hold a postgraduate degree from the National Institute of Securities Markets, as required by Regulation 7(1)(iii). Consequently, there is currently no precise definition or specific guidelines outlined in Indian legislation regarding the financial advice provided by finfluencers.
In light of such enigma, the article explores the existing regulatory framework, identifies its limitations, and proposes potential solutions and measures to address the concerns surrounding finfluencers. The authors argue that striking a balance between financial education and safeguarding investors, a regulatory environment can be created that promotes responsible behavior among finfluencers and upholds the integrity of the financial market.
NEED FOR REGULATION
In recent times, Finfluencers have faced backlash from SEBI as well as the investor community for providing unsolicited stock recommendations on social media platforms without being registered as investment advisers. In the most recent instance, the regulatory authority punished PR Sundar, a YouTuber, for violating Investment Advisor norms by providing advisory services without obtaining the requisite registration from SEBI. Further, it had also fined a self-styled investment advisor Gunjan Verma for offering unregistered services violating the SEBI Act.
Earlier in the case of In Re: Sadhna Broadcast Limited, SEBI, under the provisions of the SEBI Act read with Prohibition of Fraudulent and Unfair Trade Practices (“PFUTP”) Regulations, had prohibited Arshad Warsi and his wife from accessing the securities market after allegations of stock manipulation through dubious and misleading youtube videos. Securities Appellate Tribunal, however, granted interim relief stating that the SEBI order was bereft of evidence.
In the case of Marico Limited v. Abhijit Bhansali, wherein “social media influencers''was regarded as a nascent category of individuals who have acquired a considerable follower base on social media and a certain degree of credibility in their space. The decision also noted the need to impose specific responsibility on such influencers, considering the power they wield over their audience and the trust placed in them by the public.
The lack of transparency regarding the finfluencers’ qualifications and expertise raises doubts about the reliability of their financial advice. Additionally, there is uncertainty surrounding any potential financial transactions between finfluencers and the entities they endorse. This situation is concerning as the regulatory gap creates an opportunity for scammers to exploit the platform and manipulate stock prices and hence there is a pressing need for stringent regulation.
A CLOSER LOOK: DISSECTING EXISTING REGULATORY FRAMEWORK
SEBI Act read with PFUTP Regulations
Through Section 12A of the SEBI Act, SEBI possesses the authority to investigate and take action against entities involved in fraudulent and unfair trade practices. This provision empowers SEBI to impose penalties and implement necessary measures to safeguard the interests of investors.
Regulations 3 and 4 of the PFUTP Regulations offer specific guidelines and rules to prevent fraudulent and unfair practices in securities trading. These regulations outline prohibited activities, such as making misleading statements, manipulating prices, and engaging in insider trading. They also establish a framework for enforcement actions, including penalties and other disciplinary measures, with the aim of ensuring compliance with fair trading practices.
SEBI’s utilization of Section 12A of the SEBI Act and the implementation of Regulations 3 and 4 of the PFUTP Regulations reflect its commitment to upholding the integrity of the securities market, protecting investors, and fostering transparency and fairness in trading activities.
The Advertising Standards Council of India (“ASCI”), on 27th May 2021, released the final ‘Guidelines For Influencer Advertising In Digital Media’ wherein it laid down specific disclosure requirements and obligations and procedures for registering a complaint in case of violation of the guidelines.
National Stock Exchange (“NSE”), in a circular dated February 2. 2023, stated that any payment made by brokers to influencers/bloggers would require prior approval of the exchange and should include specific standard disclaimers.
Further, SEBI, vide its Circular dated April 5, 2023, introduced an advertisement code for IAs and RAs wherein it has stated the mandatory contents of the advertisement along with specific prohibitions and requirements of Prior Approval from SEBI before the advertisement.
While Sebi has been discussing regulations to address the issue of financial influencers since January 2022, official guidelines have yet to be issued. In a recent Board Meeting held in June 2023, SEBI disclosed that it is in the process of finalizing a draft discussion paper that will regulate finfluencers. It is anticipated that this document will serve as guidance for SEBI-regulated firms (brokers, mutual funds, etc.) not to advertise with unregistered finfluencers.
Mandatory Disclosure Framework
A standardized disclosure framework can be implemented that requires Finfluencers to disclose their qualifications, affiliations, conflicts of interest, and any financial relationships with the products they recommend. This will enhance transparency and allow investors to evaluate the credibility and potential biases of the recommendations. In this regard, India can take cues from New Zealand, wherein a Code of Professional Conduct for Financial Advice Services was passed in 2021, which has prescribed explicit statutory duties and disclosure requirements for anyone who advises clients on financial matters.
Self-regulatory bodies within the Finfluencer industry are another possible alternative India can adopt. These bodies can develop and enforce a code of conduct, content standards, and best practices for Finfluencers. This approach will allow industry experts to regulate themselves while promoting responsible behavior. The same has been highlighted by the Department of Consumer Affairs during a round table discussion with influencers, content creators, and their agencies recently.
Collaborative monitoring involves the cooperation and coordination between regulatory authorities, industry associations, and social media platforms to effectively monitor the activities of Finfluencers. SEBI can likewise work with social media platforms to develop reporting mechanisms that allow users to flag potentially fraudulent or misleading content shared by Finfluencers. These mechanisms can include dedicated reporting buttons, forms, or channels to report suspicious activities. Further, it can conduct joint audits and investigations in collaboration with social media platforms to assess the compliance of Finfluencers with regulatory requirements. This can involve conducting regular audits, spot checks, or targeted investigations based on intelligence and reports received.
Introduction of RegTech
RegTech solutions can play a vital role in enhancing efficiency, accuracy, and effectiveness when monitoring Finfluencers. These solutions leverage advanced analytics, natural language processing, and machine learning techniques to identify potential violations and detect fraudulent activities. By analyzing historical data and learning from patterns, these tools continuously improve their detection capabilities, facilitating proactive risk management and regulatory enforcement. This proactive approach complements the oversight needed in the ever-changing Finfluencer landscape. For instance, in Australia, the Regtech tool "Artemis'' has been created to assist financial advisers in identifying compliance issues in client communication and advertisements. India, with its growing Finfluencer landscape, can also benefit from implementing similar RegTech solutions. By adopting these technologies, SEBI can improve its monitoring and regulatory efforts, ensuring compliance and protecting investors.
As India journeys towards regulating finfluencers, these measures can serve as vital complements to the ongoing regulatory efforts, fostering a responsible and trustworthy finfluencer ecosystem.
Regulating finfluencers necessitates careful consideration due to their impact on investor protection and market integrity. Current regulations, such as Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, provide a framework to address fraudulent and unfair trade practices. However, these regulations do not specifically encompass the activities of finfluencers, leaving a regulatory gap in defining and monitoring their financial advice. Efforts are underway to tackle this issue, as demonstrated by the release of guidelines by the ASCI and circulars from the NSE and SEBI. The ongoing preparation of a discussion paper by SEBI indicates progress in regulating finfluencers.
Moving forward, several strategies might be investigated to improve finfluencer regulation. Implementing mandatory disclosure strategies, creating industry-wide self-regulatory organisations, encouraging cooperation between regulators and social media platforms, and utilising RegTech tools can strengthen the finfluencer ecosystem's responsibility, openness, and investment protection.
A balance enabling financial education and safeguarding investors is crucial in regulating finfluencers. By addressing existing regulatory gaps and implementing effective oversight mechanisms, authorities can ensure that finfluencers operate responsibly and trustworthy, ultimately benefiting investors and upholding the integrity of the financial market.
 Sadhna Broadcast Limited, In Re, 2023 SCC OnLine SEBI 34.  Arshad Hussain Warsi v. Securities Board of India, 2023 SCC OnLine SAT 129.  Marico Limited v. Abhijit Bhansali, (2020(81) PTC 244(Bom)