[Malini Mukherjee is a 5th year BBA LLB (Hons.) Student at Jindal Global Law School]
On 27 June 2024, the Securities and Exchange Bureau of India (“SEBI”) convened its board meeting, where it approved norms to regulate financial influencers or ‘finfluencers’ (“the norms”). SEBI has defined finfluencers as individuals who provide advice on various financial topics and can influence the financial decisions of their followers. Finfluencers have seen a rise in popularity since the COVID-19 pandemic. During the pandemic, retail investors relied on social media for accessible investment education. Regulators have since recognized that unqualified finfluencers can harm the interests of retail investors who rely on their advice.
Finfluencers have remained largely unregulated by financial regulators in India, except for Advertising Standards Council of India (“ASCI Guidelines”) which released updated guidelines for influencer advertising in 2023. SEBI’s initiative to regulate finfluencers began after discussion among international financial regulators at the International Organization of Securities Commissions led to the publication of the Report on Retail Distribution and Digitalization. The report recommended the adoption of regulatory measures by members to address the increasing risks and challenges of digitalization of retail marketing and distribution. Risks and challenges of digitalization include instances when influencers who influence financial decisions make promotions about firms without necessary disclosures about potential risks and the connection between the influencer and the firm. To safeguard retail investors, the report recommends that the responsibility of accurate information and timely disclosures should be assumed by the management of the firm that engages the influencer. Shortly after the report, SEBI released a consultation paper (“theConsultation Paper”) which was opened to public comments. The norms adopt the recommendations set forth in the Consultation Paper while encouraging investor education. No regulatory changes have been implemented.
This post discusses the content of the norms, the Consultation Paper and the ASCI Guidelines (collectively, “the legal framework”) and evaluates the implications of the legal framework by contrasting with international developments in capital markets. SEBI’s move hampers investor education and has been inadequately enforced.
The Legal Framework
The ASCI Guidelines define influencers as those who have access to an audience and the power to affect the audience’s opinions about a product, service, brand, or experience because of their authority, knowledge, position, or relationship with their audience. The ASCI Guidelines safeguard consumers against misleading advertisements by requiring influencers to disclose any material connection between the advertiser and influencer. A material connection includes benefits and incentives which would affect the weight or credibility of the representation made by the influencer, including monetary or other compensation. The consumer is required to be informed of whether the influencer is advertising the product, service, brand, or experience because of a material connection or otherwise. The ASCI Guidelines require influencers who make representations connected with banking, financial services or insurance to register themselves with SEBI. The finfluencer must display their registration details in the advertisement of the product, service, brand, or experience.
The ASCI Guidelines are voluntary and cannot be enforced; a finfluencer may or may not adopt them. SEBI’s Consultation Paper implements the regulatory structure recommended by the Guidelines and prohibits advertisements by unregistered finfluencers. This will disrupt the revenue model of finfluencers. SEBI has recognized four sources of income for finfluencers from an advertiser: referral fee for usage, non-cash benefits, direct compensation from the social media or other platform, or income from a profit-sharing model with the product, channel, platform or services. Advertisers or advertising firms, which include persons regulated by SEBI and the agents of such persons, have been prevented from having association, directly or indirectly with unregistered influencers who provide advice about securities. The Consultation Paper places a veritable embargo on the interaction between advertisers and finfluencers. SEBI’s protectionist stance guarantees that the financial regulator is cognizant of the information about securities being talked about by finfluencers employed by advertising firms. The Consultation Paper was not binding upon advertising firms and remained open for public comments. The norms adopt the restriction recommended by the Consultation Paper but specify that the restriction will not apply to association of firms with persons who are engaged in investor education and do not provide advice about securities.
Registration of Finfluencers
The legal framework emphasizes the registration of finfluencers with the financial regulator as investment advisors or research analysts under the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) and the SEBI (Research Analysts) Regulations, 2014 respectively (“RA Regulations”) (collectively, “the Regulations”). The regulations require investment advisers and research analysts to apply for a certificate of registration and meet qualifications for receiving the certificate. While the IA Regulations require investment advisers to disclose material information to their clients, both investment advisers and research analysts must act honestly and in good faith. The obligations of investment advisers and research analysts are defined in the code of conduct of the Regulations. To strengthen the code of conduct, SEBI released an Advertisement code for Investment Advisers and Research Analysts (“Advertisement Code”) for investment advisors and research analysts, which requires them to seek prior permission before making any advertisement that may influence the investment decisions of any investor. These obligations are applicable to investment advisers and research analysts, thereby excluding unregistered finfluencers from their purview. SEBI has not defined the scope of finfluencers, which creates confusion between finfluencers and investment advisers or research analysts. As a result, an unregistered finfluencer is only required to comply with the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, which includes false or reckless representations within the scope of fraud.
Impact on Investor Education
SEBI has adopted a protectionist stance by disrupting the revenue model of finfluencers, which will reduce their interactions with Indian investors. The norms are expected to have an adverse impact on investor education, even though their operation is limited to influencers who provide financial advice, because of two reasons: there is no distinction made between ‘advice’ and ‘education’ and advertising firms are not permitted to engage with the finfluencer to ensure compliance For example, the Australian Securities & Investments Commission (“ASIC”) has provided the circumstances wherein a finfluencer requires an Australian Financial Services License. These circumstances include the following: (i) when the finfluencer provides financial product advice or (ii) arranges for the audience to deal with the advertising firm. A clear definition of financial product advice is provided as a recommendation or a statement of opinion which is intended to influence an investor’s decision in relation to financial products, while ‘dealing by arranging’ includes arranging for someone to deal in a financial product. The ASIC views finfluencers as representatives of firms carrying on a licensed financial services business. In such a circumstance, the licensee is required to make certain that the finfluencer acts in the best interests of the client and provides appropriate advice to the client based on complete and accurate information. Thus, the ASIC demarcates circumstances in which an Australian Financial Services Licence (“AFSL”) is required, in contrast to the legal framework in India.
In India, finfluencers providing investor education have been expressly excluded. SEBI requires the registration of finfluencers but does not define the term ‘advice’. The IA Regulations define ’investment advice’ as advice relating to purchasing, selling or dealing in securities, but exclude advice given through electronic or broadcasting or telecommunications media which are widely available to the public. Similarly, the RA Regulations provides for research reports by certified research analysts but excludes comments or discussions about the securities market. The scope of advice under the regulations excludes advice provided by finfluencers, which is widely available on social media to an audience. In the absence of a definition of ‘advice’, influencers providing investor education may be compelled to register under the regulations. The regulations provide onerous qualification requirements, which would deter influencers from engaging in providing investor education. There is an embargo placed on the interaction between finfluencers and advertising firms.
In the United Kingdom, the ‘Finalised guidance on financial promotions on social media’ (“Guidance”) released by the Financial Conduct Authority assists advertising firms to remain compliant with the Financial Services and Markets Act, 2000. Financial services promotions are restricted unless they are conducted by persons authorized under the Financial Services and Markets Act, 2000, or persons who have received approval from authorized persons. Advertisements or promotions in contravention of this are illegal. The Guidance provides the regulations to be complied with, and also the scope of the regulations and the manner in which compliance should be made. The Guidance provides what would be included within the scope of finfluencer activities.
By restricting advertising firms from accessing the services of unregistered finfluencers, instead of requiring advertising firms to ensure compliance of the finfluencer that it engages, SEBI’s approach is anticipated to undermine the financial literacy in the country.
Conclusion
SEBI’s initiative to regulate finfluencers signifies a step towards protecting retail investors from misleading information on social media. However, SEBI’s protectionist stance and the restrictions on access imposed are expected to hamper the dissemination of valuable financial education to investors. The methods of the financial regulators in Australia and the United Kingdom demonstrate that a balanced legal framework should be adopted, including compliance through training and development along with stringent disclosure requirements. In conclusion, while SEBI’s initiative is a welcome step towards investor protection, a flexible framework which focuses on investor education would entail long-term benefits for the capital markets in India.
– Malini Mukherjee
