Fininfluencers: Reining them in takes some effort but SEBI has the long arm to crack the whip

While there are several existing regulations to hold errant fininfluencers to account, there is a blanket exemption which effectively creates a large gaping loophole.

Social media influencers generally and financial influencers in particular have ballooned in number and reach in recent times. Some of these are serious professionals who work with zeal and at least a modicum of ethics. But most others peddle superficial, get-rich-quick advice or old platitudes dressed up in attractive but with gimmicky sound, graphics and video presentations. These days, anyone with just a smartphone can create, for free, a YouTube channel, a Twitter or Telegram account, etc. and get into business.

The raging question, however, is whether they should be regulated by SEBI?

Fininfluencers Get Free Run

On one hand are Investment Advisors (IAs) and Research Analysts (RAs) who are regulated in fair detail. They require to be registered, which is a rigorous process with screening, documentation, undertakings and payment of fees. They need to have a certain minimum qualification and certification. And observe minimum standards, code, diligence, staying away from conflict of interests, documentation of their work, etc.

IAs arguably face even more regulatory rigour, so much so that this profession has hardly picked up. All this was recently topped up by a new and harsh SEBI mandate that requires every communication, advertisement, etc by IAs/RAs to follow cumbersome guidelines. Every communication needs prior approval from the designated authority, available at a significant cost.

Fininfluencers, on other hand, seem to have a free-for-all. They do not need any registration or qualification. They do not need to document their work or observe even a semblance of ethics or diligence. Some are downright frauds aiming to carry out scams. Some others do not stoop so low but have other ways of ‘monetising’ their influence.

Why They Are Dangerous

Some promote certain scrips, perhaps with a behind the scenes golden hand-shake with vested interests. Others peddle misleading and even dangerous advice on major decisions like allocation of portfolio, dealing in futures and options, investing in mutual funds, etc.

A SEBI analysis recently showed not only a rise in the number of young and small investors trading in derivatives but also that a huge majority of 90 percent+ were incurring losses. While SEBI has focussed only on the hard data in this analysis without passing judgment, learned opinions have predicted much earlier the perils of influencers pulling in small, gullible and greedy investors into this field of landmines.

So, again, should fininfluencers be regulated? SEBI has been mulling and even dilly dallying on this issue. On one hand are reports that they plan to issue a consultation paper. On other hand are reports that SEBI believes it has no jurisdiction over them.

Regulations Exist, Loopholes Too

However, I think the subject can be viewed from two angles:

* Firstly, there are enough regulations covering many such fininfluencers and it is a matter of SEBI enforcing them.

* Secondly, and more curiously, the IAs Regulations themselves give a huge escape out – which some may even consider a loophole – that is stretched even wider by legally savvy fininfluencers. This provision needs urgent reconsideration.

Let’s first review the several existing provisions that could be enforced. To take the simplest one, the RAs Regulations require that persons desiring to engage in activity/services as a research analyst should have prior registration. One of the important activities covered is recommending stocks and other securities.

It is widely seen that many fininfluencers merrily recommend specific scrips and futures/options on social media which is in violation of the RAs Regulations. A simple search on Twitter, YouTube, etc. would throw up numerous of such instances. SEBI has demonstrated formidable sophisticated technical skills in tracing such persons which can be put to good use here.

Then there are Regulations on frauds and price manipulation which contain a plethora of provisions. Many unethical fininfluencers can be caught in their net. The provisions are widely framed and any “unfair trade practice in securities markets” can be penalised. Apart from such generic ban, certain specific acts are deemed to be violation of these Regulations. Sharing false information, knowingly or recklessly, relating to securities, for example, is banned.

One Step Forward, Two Backwards

Then there is another clause that specifically bans sharing “information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities” (some words highlighted for emphasis). This should cover numerous fininfluencers. SEBI again could easily catch and penalise a few of them which would act as deterrent for others.

While there are several existing regulations to hold errant fininfluencers to account, there, unfortunately, is a blanket exemption which effectively creates a large gaping loophole for many fininfluencers to escape.  The IAs Regulations state that the regulations will not apply to investment advice, whether by print or digitally, that is available widely to the public.

Moreover, these Regulations apply only to investment advice provided “for consideration”. The advice fininfluencers typically give out is for “free” in the sense that the consumers do not directly pay any fees or costs (some do adopt a “subscription” mode and these could get hit by the Regulations).

Try Exercising Available Penalties

This exception may have been well intended. Such generic advice would normally be educative and banning even this may be too restrictive on media generally. However, this exception is too wide and was made a decade back, at a time when fininfluencers were at a much nascent stage. And hence outdated. It clearly needs a review in light of rapid recent developments.

But even this exception applies only to that type of investment advice covered by the IAs Regulations. The earlier stated restrictions under the RAs Regulations and also the Regulations governing unfair trade practices, frauds, etc. still apply.

To conclude, reining in fininfluencers is a no-brainer and is overdue. A good beginning could be made by applying existing and tested provisions to errant fininfluencers. The “loophole” highlighted earlier could be narrowed down by placing reasonable conditions. It is only in the next stage that adding yet another set of guidelines to the already existing mountainous pile of law could be considered.

Jayant Thakur is a chartered accountant. Views are personal, and do not represent the stand of this publication.​