Sebi's plan to bring more finfluencers under its fold welcome, but could backfire on two counts

The bigger influencers may still be worried about the compliance requirements around posting promotional content.

Finfluencers or financial influencers have largely welcomed the proposed relaxations in the regulations governing research analysts (RAs), and feel more inclined towards applying for registration after the consultation paper that was released on August 6.

Though they still have a few concerns, they find the suggestions on reduced educational qualifications and doing away with industry experience very encouraging.

Also read: Sebi proposes sweeping relaxations to regulations for investment advisors, research analysts

However, market insiders told Moneycontrol that there may be unintended consequences—of encouraging people who are not competent in investing to register and of allowing people to get away with giving bad trading calls.

The consultation paper released by the Securities and Exchange Board of India (Sebi) is one part of an overarching strategy mapped out by the regulator to encourage more unregistered entities or finfluencers to come under its umbrella.

What will help

A finfluencer, on condition of anonymity, said that the lowering of educational qualification to graduation and doing away with experience in the finance industry will definitely help get more people to apply for a registration.

As of now RA regulations require such an individual to have a minimum qualification of a postgraduate degree or postgraduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services or markets provided by certain recognised universities, institutes or associations.

The regulations also allow graduates in any discipline to apply provided they have an experience of at least five years in activities relating to financial products, markets, securities or fund, asset or portfolio management.

The consultation paper has said that "to attract young minds" to the investment advisor (IA) and RA professions, the minimum qualification requirement may be relaxed to a graduate degree and that the requirement for experience may be dispensed with.

According to insiders, there has been a lot of interest among finfluencers to register themselves after the regulator has been cracking down on unregistered entities and has asked registered entities to restrict their association with unregistered entities.

Therefore, such relaxations may encourage  influencers with smaller number of followers to apply for registration just to avoid the regulatory whip and continue their association with entities such as stockbrokers.

Concerns that remain

The bigger influencers may still be worried about the compliance requirements around posting promotional content. RAs are required to get their advertisement/promotional content vetted by the oversight body Research Analyst Administration and Supervisory Body (RAASB). Financial influencers are concerned that this means every social media post or content may need to be cleared by the body.

Also, there is a worry about the fee-collection mechanism set up for RAs. The regulator has set up a website called Safe Space through which investors can pay IAs and RAs.

Finfluencers often split their income across various businesses—training, brand promotion, advisory—to reduce tax implications. They worry that with the fee-collection platform, they may have to channel all their income into one bank account and have to pay higher taxes as a result.

Unexpected outcomes

Market insiders also pointed out that there may be unforeseen adverse consequences from this.

RAs who trade have been asking for an easing of the rule that bar them from trading in a security they have recommended 30 days before the call and five days after. This has been done to stop any potential pump-and-dump operations. In other words, to avoid an RA stocking up on a security and then giving a buy call on it, only to offload it to unsuspecting investors.

But RAs say that this provision also stops them from profiting from a good investing opportunity they have spotted.

As a trader who has a considerable following on microblogging platform X said, "If I have a good grasp on something and want to leverage that by sharing it with others for a fee and create a win-win situation both for me (making money by sharing my trade recommendations) and my audience (who act on those recommendations and make money), why would I not trade the same stuff for myself?"

Also read: Research analysts may soon be able to recommend model portfolios without a worry; Sebi proposes framework

The consultation paper does not suggest any relaxation on this score.

Putting money where the mouth is

An insider said that this could result in competent traders/investors keeping away from registering themselves and incompetent people registering themselves to profit from bad investing advice.

Another insider also pointed out that with this restriction, finfluencers will be free to give any stock tip or trading call without any skin in the game. That, if their clients ask why they aren't putting their money in these securities themselves, the influencer-RA can say that they are not allowed to under the regulations.

Therefore, an accountability measure that is now there in the unregistered universe will be taken away inadvertently.

That said, both the insiders said that it would be difficult for the regulator to do away with this restriction because pump-and-dump worries are more real and serious than concerns about incompetency resulting in losses.

"It's a tricky situation," a trader commented.

As another insider said, the market will have a self-correcting mechanism for this: "If someone is offering bad advice, the market will eventually take them out. So the regulator is right in keeping the focus on the danger of pump-and-dump."