Financial influencers, commonly called ‘finfluencers’, are persons who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social/digital media platforms/channels, and have the ability to influence the financial decisions of their followers. The activities of these finfluencers may fall under the ambit of areas regulated by financial sector regulators such as SEBI, the Reserve Bank of India, Pension Fund Regulatory and Development Authority and Insurance Regulatory and Development Authority (IRDA).
SEBI Proposes Restrictions on Registered Intermediaries/Regulated Entities
Recently, on August 25, 2023, The Securities and Exchange Board of India (“SEBI“) released a consultation paper1 titled “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers).“ This paper proposes to restrict the association of SEBI registered intermediaries/regulated entities with unregistered ‘finfluencers’ and disrupt the revenue model for such finfluencers to reduce the perverse incentives in the ecosystem. The paper highlights SEBI’s concerns regarding the activities of finfluencers, which includes the following:
- Enticement of followers to purchase products, services, or securities in return for undisclosed compensation from platforms or producers;
- Providing advice with a lack of requisite qualifications or expertise on the subject that the finfluencers are advising upon; and
- In the absence of being bound by the code of conduct of any financial sector regulator, non-disclosure of any potential conflict of interest such as the finfluencers’ association with or interest in the products, services or securities that they promote.
SEBI believes that barring some finfluencers who may be genuine educators, a majority of them are unregistered and unauthorised Investment Advisers (“IAs“) or Research Analysts (“RAs“). SEBI has observed instances where SEBI registered intermediaries/regulated entities are relying on such unregistered/unregulated finfluencers to promote their products and services and in light of the same, SEBI has proposed the following measures:
- No Association with Unregistered Finfluencers – SEBI registered intermediaries/regulated entities or their agents/representatives shall not, directly or indirectly, have any association/relationship in any form, whether monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including finfluencers). SEBI registered intermediaries should take active measures to dissociate themselves from any unregistered entity using their name, product or service and bring it to the notice of the concerned enforcement agency.
- Non-Disclosure of Confidential Information – Entities registered/regulated by SEBI or stock exchanges or the Association of Mutual Funds in India (“AMFI“) shall not share any confidential information of their clients with any unregistered entities.
- Disclosures and Disclaimers – Finfluencers registered with SEBI or stock exchanges or AMFI in any capacity shall display their appropriate registration number, contact details, investor grievance redressal helpline, and make appropriate disclosure and disclaimer on any posts.
- Adherence to Code of Conduct/Guidelines – Finfluencers shall adhere to the code of conduct under the terms of their relevant registration and the guidelines issued by SEBI, stock exchanges and SEBI recognised supervisory bodies from time to time.
- No Trailing Commissions – SEBI registered intermediaries/regulated entities shall not pay any trailing commission based on the number of referrals as referral fee. However, limited referrals from retail clients, and payment of fees for such limited referrals by stockbrokers shall be allowed.
SEBI Proposes a Fee Collection Mechanism for IAs and RAs
SEBI has also released another consultation paper2 titled “Mechanism for Fee Collection by SEBI Registered Investment Advisers and Research Analysts.“ The paper discusses a proposal to create a closed ecosystem for fee collection by SEBI registered IAs and RAs from their clients to ensure that their payments are reaching only registered IAs and RAs. SEBI acknowledges that many unregistered entities have misled investors in breach of the SEBI regulations for IAs and RAs and recognises a need to proactively restrict their proliferation. SEBI seeks to help investors to identify, isolate and avoid unregistered entities. In the proposed mechanism, fees shall be paid by clients on a designated platform. IAs/ RAs shall provide the details of the designated bank account in which fees shall be received through the proposed mechanism, which would be used solely for collection of fee from investment advisory/research activity.
The revised Guidelines for Influencer Advertising in Digital Media (“Guidelines“)3, implemented by the Advertising Standards Council of India on August 17, 2023, serve as an essential backdrop to SEBI’s regulatory efforts. These Guidelines, which impose specific restrictions on influencers offering advice in the realms of Banking, Financial Services, and Insurance (BFSI), underscore the broader industry trend of recognizing the need for enhanced oversight and accountability by influencers.
Under the Guidelines, influencers providing advice and/or promoting and/or commenting on merits or demerits on aspects related to commercial goods and services, in the fields of BFSI, must have the necessary qualifications and certifications in order to provide such information and advice to consumers. They should be registered with SEBI and their SEBI registration number should be stated with their name and qualifications. For other financial advice, the influencer must have suitable qualifications such as an IRDA insurance license, CA, CS etc. In addition, they must abide by all disclosure requirements as mandated by financial sector regulators from time to time. They are also required to disclose their qualifications and registration/certification details prominently.
SEBI’s proposed regulatory roadmap for finfluencers represents a significant step towards ensuring ethical conduct by financial influencers in India. The above developments illustrate a concerted effort within India’s regulatory landscape to foster a responsible and accountable environment for influencers. SEBI’s approach seeks to safeguard the interests of investors, maintain market integrity, and ensure that finfluencers, operate within well-defined boundaries that benefit both consumers and the financial industry as a whole.