Last weekend, the market regulator Securities & Exchange Board of India (SEBI), released two short discussion papers that aim to curb the malpractices of financial influencers or finfluencers. As SEBI defines them, finfluencers are “usually unregistered entities providing catchy content, information, and advice on various financial topics to their followers.”
Why is SEBI intending to rein them in? Anyone who has been paying attention to the wildfire spread of finfluencers pushing engaging stories, messages, reels and videos on various social media platforms such as Instagram, Facebook, YouTube, LinkedIn, and Twitter, nudging investors to jump into stocks and derivatives under the guise of education, should be worried.
Fake, distorted or cheery posts about companies, products and services are rife. Not only is most advice that is dished out harmful but, from SEBI’s point of view, they are also illegal because most finfluencers are unregistered. They are not registered investment advisers (IAs) or research analysts (RAs) who alone can offer investment advice on regulated products such as stocks and mutual funds. They often promote shady crypto schemes, gaming sites or Ponzis and multi-level marketing schemes, which are bound to inflict losses.
Finfluencers charge as little as Rs10,000 to as much as Rs7.5 lakh for an individual post (the latter is the fee charged by a failed start-up founder), excluding tax. Influencer marketing agencies quote as much as Rs20 lakh for a campaign, plus taxes, to entice their followers.
The menace affects not just financial products but health, food nutrition, durables and many other popular categories. This is why even the Advertising Standards Council of India (ASCI) has issued ‘Guidelines for Influencer Advertising in Digital Media’ to curb unethical influence peddling. ASCI describes ‘influencers’ as “someone having access to an audience and power to affect such audiences’ purchasing decisions or opinions about a product, service, brand or experience, because of the influencer’s authority, knowledge, position, or relationship with their audience”.
However, among all the products that are mis-sold, it is financial products that can damage the most. A high-pitched promotion of an option-selling strategy, backed by fake claims of humungous profits, can inflict massive losses. Or, a stock can be promoted as the next hot idea, sucking greedy investors into a voluminous pump-and-dump operation. In one case, it has turned out that the company is involved in fraud and forgery and has cooked up its accounts. Their videos and posts are always laced with the disclaimer that ‘this is not investment advice’, and is only meant ‘to educate you’. But nothing about such promotions is innocent:
• As SEBI has found out, unregistered or unregulated finfluencers work within the system. Many make money from referral fees or profit sharing for promoting the product, channel, platform, or services or get compensation directly from social media and other platforms.
• A trader who claims to earn crores a year from intraday trading still has to earn from referral fees. He does breathless YouTube videos every day on the Nifty and Bank Nifty, where he encourages his 1.44mn (million)-plus subscribers to open brokerage accounts with three broking firms that pay him money.
• In May this year, SEBI fined PR Sunder, a popular influencer, Rs6.5 crore for peddling “investment advice” under the guise of education, supported by pictures of him buying a Rolls Royce and living the high life in Dubai, implying the success of his trading techniques. It attracted thousands of people to his courses.
• Followers never get to know that behind the “education” they are getting is undisclosed compensation, paid either directly or through other financial intermediaries. Finfluencers don’t have to disclose any potential conflict of interest.
How does SEBI plan to curb this? The discussion paper reveals that it has proposed two steps. One, to “disrupt the revenue model for such influencers” by asking SEBI-registered intermediaries/ regulated entities or their agents/ representatives not to have any relationship, in any form, monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including influencers).
SEBI also wants registered intermediaries to take necessary action such as filing a case under section 420 of the Indian Penal Code, 1860 for impersonation and fraud, wherever applicable. If finfluencers are SEBI-registered, they would display their registration number, contact details, and investor grievance redressal helpline, and make appropriate disclosure and disclaimer on any posts. They shall also adhere to the code of conduct under the relevant regulation, and comply with the advertisement guidelines of SEBI, stock exchanges and SEBI-recognised supervisory body.
As a second step, SEBI has proposed a supervisory body of IAs or RAs (intermediaries) for centralised fee collection through its portal. Only registered IAs and RAs can log in and accept payment from this portal. Under the centralised fee-collecting mechanism, the intermediary will provide a payment link to the client for fee payment. All fees received through the portal shall be transferred to the designated account by a payment aggregator and then released to the respective intermediary. The idea is to cut out unaccounted or hidden payments to finfluencers.
Will the two-step approach work? A big part of the menace would indeed be curbed by putting the onus on regulated entities. The larger ones, with reputations at stake, will comply. But many registered intermediaries and listed entities are shady too. The question is, what kind of penalty will deter an intermediary, if they violate the finfluencer rules? Unfortunately, SEBI’s record of stopping bad behaviour with crippling penalties is spotty so far.
(This article first appeared in Business Standard newspaper)