Why is SEBI proposing action?

Of late, financial influencers have come under the radar of SEBI, owing to multiple instances of influencers selling pipe dreams to their viewers and advocating for various brands online. In May, SEBI barred a famous finfluencer from trading in the market for a year and ordered his firm to pay settlement and disgorgement fees.[i] The finfluencer was offering investment advisory services without being registered in violation of the Investment Advisers Regulations.[ii]

Most of these finfluencers have been successful in churning out content on often mundane financial topics for mass consumption, with their content being produced and edited to perfection. Their loyal “fan following” allows them to tender advice regarding investment opportunities. Thus, SEBI is now aiming to control financial advice by finfluencers not having the requisite expertise or knowledge, to protect the interests of retail investors. 

SEBI’s Proposal

SEBI’s consultation paper explains how finfluencers’ “referral business model” works. The primary concern of SEBI is that as finfluencers are not registered with the relevant financial sector regulator, they may lack “requisite qualifications or expertise on the subject.” Additionally, they may not even disclose any potential conflict of interest with brands or services that they promote. Influencers may be attempting to induce viewers to avail of certain products or services in return for (a) a referral fee for usage from the promoted entity (either a fixed fee or variable); (b) non-cash benefits; (c) compensation directly from the social media platform where content is shared; (d) profit sharing agreement with the underlying platform or product.

The regulator seeks to remedy this problem by limiting the association of SEBI-registered intermediaries/ entities and their agents with unregistered entities (which includes finfluencers). The goal of this step is to “disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce.”[iii] It is proposed to bar SEBI-registered entities and their agents from having any association in any form with unregistered finfluencers. Registered entities will not be allowed to share any confidential information of their clients with any unregistered entity, including finfluencers. Finfluencers who have registered with SEBI, stock exchanges, or the Association of Mutual Funds India (AMFI) must display their registration number, contact details, and investor grievance redressal helpline, and make appropriate disclosures and disclaimers on all posts.[iv] In what will be a blow to finfluencers, SEBI plans to bar registered entities from paying trailing commissions based on the number of referrals as a referral fee while only allowing “limited” referrals from retail clients and payments for it.

Comments

SEBI’s proposal effectively directs regulated entities to dissociate themselves from any unregistered entity, while also actively reducing the scope for finfluencers to make profits through their referral-based business model. This step is in line with guidelines released by other entities like the Advertising Standards Council of India (ASCI), which recently revised its influencer advertising guidelines to place more responsibility on finfluencers. The amended ASCI guidelines mandate finfluencers operating in the Banking, Financial Services, and Insurance (BFSI) sector to have SEBI registration. Moreover, they must display their registration numbers clearly alongside their names and qualifications. In January 2023, the Department of Consumer Affairs released guidelines[v] for preventing misleading advertisements and endorsements, with a focus on celebrities, influencers, and virtual influencers.[vi] These guidelines mandated that disclosures about endorsements must be made in simple, clear terms and be prominently visible making them hard to miss. Failure to disclose any material connection would make violators liable for penalties. False and misleading advertisements can attract penalties of up to INR 50 lakhs under the Consumer Protection Act, 2019.[vii]

The proposal is a good step to ensure that the growing cases of fraud and misrepresentation in the online realm are controlled. Additionally, mandating finfluencers to register themselves with the market regulator will ensure accountability is affixed in case of any wrongdoing. A more subliminal impact would be recalibrating the expectations of retail investors with the market reality, as many finfluencers set wrong expectations from the market, which leads to eventual disappointment.