Regulators across the world are burning midnight oil to break the ecosystem of finfluencers that disrupts financial markets, targeting especially the gullible young investors.

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.

They may induce clients to avail of these products or services in return for referral/commission fee or material benefits such as free usage of products or services; compensation from the social media or other platform where they share their content; and profit sharing with the underlying product, channel, platform, or services.

Targeting young people

A recent study by UK’s Financial Conduct Authority said last year it saw an increase in the use of bloggers and influencers on social media such as Instagram, Facebook, and YouTube, promoting financial products, particularly investment products, to younger age groups.

“We also saw an ongoing trend in the number of bloggers promoting credit on behalf of unauthorised third parties, with a particular growth in financial promotions targeting students.” The FCA has stepped up its efforts to tackle illegal and non-compliant financial promotions on social media platforms.

The European Securities and Markets Authority is also conducting a common supervisory action (CSA) with other national competent authorities throughout 2023, on marketing and advertising by firms through distribution channels including apps, websites, social media follow disclosure rules.

“Finally, the 2023 CSA will also be an opportunity to collect information about possible ‘greenwashing practices’ observed in marketing communications and advertisements.” ESMA said. Similarly, the SEC’s recent amendments to the Investment Advisers Act target stricter penalties and actions, enhancing oversight of mis-selling through endorsements and testimonials on neo platforms.

Disrupt revenue model

Not lagging behind, the Securities and Exchange Board of India, too, came out with a consultation paper to check the menace of finfluencers. Some of the important proposals included: no SEBI registered intermediaries/regulated entities or their agents/representatives should directly or indirectly, have any association/relationship with any unregistered entities (including finfluencers); and SEBI registered intermediaries/regulated entities should not pay any trailing commission based on the number of referrals as referral fee. However, it allowed limited referrals from retail clients, and payment of fees for such limited referrals by stock brokers.

Besides undertaking enforcement action against unregistered finfluencers who breach SEBI regulations, the paper proposed to disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce, the regulator said.

SEBI can adopt these proposals to mitigate risks posed by finfluencers to the system, but the primary responsibility lies with investors, especially newcomers. Brokerages and mutual funds should focus on guiding first-time investors, educating them about the risks associated with following finfluencers. They could also involve real investors who suffered significant losses due to these finfluencers to provide valuable education.

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