[Ms. Alka Nanda Mahapatra is a 3rd year B.A., LL.B. (Hons.) student at National Law University Jodhpur]
Introduction
The Securities & Exchange Board of India (SEBI) has recently announced that it is working on a discussion paper for regulating financial influencers and stock market gurus. Colloquially called “finfluencers,” these people offer investment and market related advice and suggestions to the general public on online social media platforms without the pain of being registered with the securities market watchdog.
In a recent press conference, Chairperson Madhabi Buch mentioned three primary things that the finluencers would need to keep a check on after the regulations are put in place. Firstly, regulated entities such as exchanges, brokers, mutual funds, etc. shall not be connected to unregistered entities via any mediums such as advertising, equity, etc. Secondly, inducing the public to trade in the securities market with the false hope of earning millions in a year or two shall be considered fraudulent and inappropriate. And thirdly, an entity, in order to give such financial advice, must be registered as a Registered Investment Advisor (RIA) under SEBI.
It is high-time to take action to regulate the social media finfluencers and increase investor awareness in India, and this becomes evident in the context of recent developments and surrounding circumstances as elaborated below:
1. Credibility of information
The announcement of SEBI has come right after the Income Tax department sent notices to thirty-five of such finfluncers for tax evasion of up to crores and for engaging in fraudulent practices, which emphasises the crippling need to regulate this area. Additionally, P.R. Sundar, a very popular finfluencer has been recently barred from the securities market for providing advice without proper registration and has been charged with multiple allegations of tax fraud. With the rise of social media, these people have earned a cult status with millions of followers hanging onto their words and advice daily.
Due to lack of regulatory oversight in the world of socials, anyone can make an account and give advice. Therefore, finfluencers can range from unqualified to erudite experts, and the viewers are left on their own to differentiate between the two. Being registered with SEBI would provide an authentication to the actual experts and would make them more trustworthy since they would have to undergo a rigorous evaluation process. This would make it very easy to filter out the hundreds of unregistered and unqualified finfluencers manipulating the market and fooling the unaware and easily beguiled public with the promise of making easy money. Through the regulations SEBI can monitor and assess the quality of financial and investment advice that the general public receives. And appropriate action can be taken in case of misconduct or potential market manipulation.
2. Alignment with Global Trends
Many developed countries have enforced strict guidelines with regards to online finance-related content. These guidelines generally require the influencers promoting investment securities to expressly disclose their relationships with companies and avoid any potential conflict of interest.
For instance, in New Zealand, the Financial Market Authority (FMA) came out with “A Guide to Talking About Money Online” in 2021. The guide provided suggestions and recommendations to both the influencers and viewers who wished to fruitfully engage in market-related activities and manage associated risks.
Finfluencers in Australia who provide advice without a prior licence also risk penalties and jail-term which may be extended to five years. Singaporean content creators have also been warned by the Monetary Authority of Singapore against false and misleading advertisement or statements which may be considered market abuse under the Singaporean securities law.
SEBI could take valuable lessons from the schemes adopted by these developed nations while also modelling it in a way to fit the Indian market, this would bring India in alignment with global efforts to manage the increasing control and dominance of finfluencers.
3. Standardised Definitions
The term “financial advice” is often understood to mean any professional guidance which help in managing money, which is not always correct. Financial advice covers a wide range of spheres, each with its own stipulations and needs, for e.g., tax planning, credit card, insurance, etc.
Some nations have defined “financial advice” to mean advice “given to promote buying of shares in a company or units in an investment fund.” This definition brings much-needed clarity and makes it much easier to define the scope of the regulations, and to understand who would be regarded as a registered investment advisor. Standardised definitions would help in making the law unambiguous for both the influencers and the viewers.
While we need to regulate financial advice given on online platforms, we also need to encourage financial education to promote investor literacy, and this also aligns with SEBI’s aims and objectives. Therefore, the guidelines need to walk the fine line between stringency, clarity, and fairness.
4. Content Disclaimer & Risk Disclosure
Financial advice should be accompanied with a disclaimer that the stock market is risky and that the potential investors should conduct their own due diligence before making an investment. Most of the time, the general public is only made aware of the benefits of such investment and little to no regard is ever paid to the risks. Influencers must display an explicit and noticeable disclaimer at the beginning of their videos to make it clear to viewers that the information is merely advice and to highlight the risks associated with making certain decisions.
There should also be increased transparency with disclosures of affiliations, financial interests, past performance of specific investments, professional qualification, and source of information as well. This would increase market awareness among people and would put them in a better position to judge for themselves if they would like to act on the advice being given to them.
5. Increased Accountability & Authenticity
One must meet a long list of requirements and successfully navigate a rigorous evaluation process in order to become an RIA. The public is more likely to trust the recommendations made and the advice given after this procedure has been duly complied with. Regulations will encourage influencers to act more responsibly and honestly because of the fear that one small piece of misinformation can influence the actions of millions of followers which could result in heavy monetary loss, and additionally they could also breach the guidelines which would have its own consequences of fines or even imprisonment. It is necessary to ensure that the regulations are consistently upheld and the social media platforms are not exploited as a site of wrongdoing.
6. Sponsorship Disclosure
The primary source of income for content producers is via sponsorship. To earn commission, creators advertise goods, services, or investment. Their advice may be tainted by these affiliations, providing viewers with inaccurate or incomplete information. Influencers ought to disclose paid promotions and brand affiliations in simple and comprehensible language in compliance with the DGA Guidelines which came out in the beginning of this year. If they are being paid by certain businesses to promote their investment products, it should be disclosed clearly in the videos. If the video is not sponsored, a disclaimer should be added stating that the investment advice is merely an opinion based on personal research and experience.
Conclusion
Absence of oversight and regulation in the digital sphere can be dangerous and can lead to unethical financial decisions which could toe the line of illegality. Establishment and regular enforcement of guidelines and regulations is a positive step for this arena since it displays that the government is acknowledging the transactions happening on these social media platforms and is appreciating its significance in the modern world.
There could be undoubtedly many challenges to the implementation of these guideline, one of the potential challenges could be the menace of renting out the registered licenses to promote investment advice. By collaborating with small research analysts, finfluencers use their licences to reach out to clients. Though this is a violation of SEBI Code, influencers continue to engage in this by paying around twenty percent of the commission they earn by providing tips and trading calls. This is done primarily to avoid the restrictive nature of RA while also evading the regulatory watch.
While creating the guidelines, SEBI must consider all these factors and leave no stones unturned to bring parity between the viewers and the influencers, raise investor awareness, and strictly but fairly regulate the capital markets.