SEBI proposes to regulate ‘Finfluencers’
Proposed regime may have registration, advertising guidelines, etc
– Sharon Pinto & Avinash Shetty | (corplaw@vinodkothari.com)
Introduction
In the digital age that we live in, our decisions are influenced by the content we consume on social/digital media platforms. This may include financial decisions too. Recently, there has been a rising trend of persons or entities who post quick bite sized posts with content providing financial advice or even promoting financial products. While some of these persons may merely have the intent of educating the masses and making financial advice more accessible, some may be working at the instance of issuers of these products, SEBI registered intermediaries, etc., for gain or gratification. Thus, influencers, who put digital content on financial products, and are engaged by any “regulated entities” or securities intermediaries, are now intended to be brought under the regulatory ambit of SEBI.
SEBI vide Consultation Paper (‘CP’) dated August 25, 2023, has put forth its concerns w.r.t. the functioning of the said finfluencers and has also proposed to regulate these entities (Our snippet covering the proposals in the CP can be viewed here).
Who is a ‘Finfluencer’?
The Advertising Standards Council of India (‘ASCI’) has defined an ‘influencer’ as someone who has access to an audience and the power to affect their audiences’ purchasing decisions or opinions about a product, service, brand or experience, because of the influencer’s authority, knowledge, position, or relationship with their audience. Thus, these persons use their digital media influence and reach to promote products or services.
Moving one step further from the above definition, influencers who engage with audiences on social /digital media platforms like Instagram, Facebook, YouTube, LinkedIn, Twitter etc., to offer information or advice on financial topics like investing in securities, personal finance, banking products, insurance, real estate investment, etc which are regulated by the respective sectoral regulators like SEBI, RBI, IRDAI, etc are referred to as ‘finfluencers’.
Finfluencers make content in the form of videos, short reels, stories on their accounts/handles, relating to the products or services offered by regulated entities. In many cases, they are not registered with the said regulators and thus may not necessarily have the expertise required to offer such content. They are therefore also not required to abide by the code put forth by the regulators.
ASCI has also issued Guidelines for Influencer Advertising in Digital Media. These guidelines, as also discussed herein, provide for disclosure requirements indicating promotional content, material connection between the influencer and the advertiser, manner of making the said disclosure, basic due diligence to be conducted by the influencer that the advertiser can substantiate the claims being made, etc.
What is their business model?
Finfluencers use their reach and influence to promote products and thereby get compensated for attracting clients. As per the CP, they get compensated in the following ways:
- Referral fee for usage of the product, channel, platform, or services that they advertise. This fee may be variable (per use or per user), or fixed (retainer model), or a combination of both. The commission may be in an upfront or trail manner;
- Non-cash benefits such as discounted or free usage of products or services;
- Compensation from the social media platform where they share their content; and
- Profit sharing with the underlying product, channel, platform, or services.
Association with SEBI regulated intermediaries and the risks involved
As discussed above, finfluencers use the digital platforms to offer content promoting financial products or services. In order to gain the benefit of such reach and influence, SEBI registered intermediaries such as stock brokers, portfolio managers, etc., engage with such finfluencers to promote their products and services.
As not all finfluencers are registered/ regulated by sectoral regulators, investors may be misguided with inaccurate or deceptive information pursuant to a lack of a prescribed set of rules or code governing such persons/ entities.
What is SEBI proposing?
In the present CP, owing to the risks and concerns as discussed above, and significant number of cases of non-adherence with the present guidelines as detailed below, SEBI has proposed to regulate the finfluencers by mandating the following:
What are the present obligations of finfluencers?
ASCI guidelines
The ASCI, which is a voluntary self-regulated council, has set forth guidelines as stated below, dated August 17, 2023 for financial influencers. Since, ASCI is not a government body, it cannot enforce its guidelines, however, it can alert the respective regulators such as SEBI, to take suitable action.
- In the area of BFSI related to stock or investments, they should be registered with SEBI and their SEBI registration number should be stated with their name & qualifications;
- For other financial advice, the influencer must have suitable qualifications such as an IRDAI insurance license, CA, CS, etc;
- They must additionally abide by all disclosure requirements as mandated by financial sector regulators from time to time;
- Such disclosure must be made prominently and upfront, or mentioned /called out as the opening remark in videos or podcasts.
However, there are a huge number of cases, wherein, the said guidelines are not abided by, as SEBI intermediaries such as brokers do not consider the activities of the finfluencers they engage with to fall under the ambit of advertising.
SEBI guidelines
A. Provisions relating to Investment Advisors (‘IA’) and Research Analysts (‘RA’)
- Meaning of IA
Reg. 2(1)(m) of the SEBI (Investment Advisors) Regulations, 2013 (‘IA Regulations’), defines an ‘investment advisor as any person, who for consideration, is engaged in the business of providing investment advice to clients.
Further, investment advice has been defined as advice relating to investing in, purchasing, selling or dealing in securities or investment products, whether written, oral or through any other means of communication for the benefit of the client including financial planning.
- Meaning of RA
Reg. 2(1)(u) of the SEBI (Research Analysts) Regulations, 2014 (‘RA Regulations’), define a research analyst to be a person who is primarily responsible for making available research content including making ‘buy/sell/hold’ recommendation or offering an opinion concerning public offer, with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’.
- Mandatory registration requirement
The IA Regulations as well as RA Regulations state that no person can act as an IA or RA unless a certificate of registration has been obtained from SEBI.
There are general exceptions provided for mandatory registration as an IA, including existing registration with any other regulator like IRDAI, PFRDA or registration as other SEBI intermediaries like stock brokers, portfolio managers, merchant bankers, etc. or cases where general advice is given in good faith without any specific mention of a particular security or investment product.
- Pre-requsites for registration
The pre-conditions for registration necessitate posessing the requisite qualifications at all times which includes a post graduate diploma in fields such as finance, accountancy, business management, commerce, economics, capital market, etc as well as a certification on financial planning or fund or asset or portfolio management or investment advisory services from NISM.
The regulations also mandate a minimum net worth requirement of not less than Rs. 50 lakhs for non-individuals and net tangible assets of of not less than Rs. 5 lakhs for individuals, in case of an IA. For registration as an RA, a body corporate of net worth of Rs. 25 lakhs and an individual having net tangible assets of atleast Rs. 1 lakh may apply for registration.
- Roles and responsibilities
The said SEBI regulations further provide the obligations and responsibilities of entities registered as IA or RA, which include disclosure of any conflict of interest, abiding by the prescribed Code of Conduct, maintaining arms’ length relationship between investment advisory and other activities, etc.
B. Provisions relating to stock brokers
- Registration of an Authorised Person (‘AP’)
An AP, as stated by SEBI in its Circular dated November 06, 2009 is an individual, partnership firm, LLP or body corporate that has been appointed by a stock broker.
A stock broker may appoint one or more AP after obtaining specific prior approval from the stock exchange concerned for each such person.
- Function of an AP
An AP will grant access of the stock exchange’s trading platform on behalf of a stock broker to the client while actively growing the firm’s clientele by attracting new customers and assisting existing clients in reinvesting, thereby expanding the firm’s business portfolio.
C. Stock exchange code of advertising
In February 2023, BSE and NSE issued circulars mandating prior approval of stock exchange for advertisements issued by Authroised Person/Influencer/Blogger being paid by stock brokers.
It also should have an internal policy/framework to ensure compliance by itself and Authorized Persons/Business Partner/Channel Partner of the members or Influencer/Blogger being paid by members, with the circulars/guidelines issued by the Exchange/ SEBI for Advertisements.
Additionally, the stock broker should have an internal policy/framework to ensure compliance by Authorized Persons/Influencers/Bloggers being paid by members, with the circulars/guidelines issued by the Exchange/SEBI.
Conclusion
It seems like finfluencing investors without having the requisite qualifications or expertise to do so and without bearing any responsibilities that are attached on account of being in a fiduciary position, would be difficult once SEBI rolls out the said regime. SEBI’s proposal which mandates registration and adherence to a proper set of rules governing the payment model, advertising practices, disclosure requirements, etc, would enable bringing all such unregistered finfluencers under scrutiny and hold them accountable for the content they disseminate thereby also contributing to their credibility.
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