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  • Writer's pictureShafaq Uraizee Sapre

C&M E-ALERT: SEBI approves guidelines for regulating association with Finfluencers

In a move aimed at protecting the retail investors, the Securities Exchange Board of India (“SEBI”), in its board meeting dated 27 June 2024 (the “SEBI Finfluencers Guidelines”)[1], approved certain guidelines to regulate the association between (a) entities regulated by SEBI including, inter alia, listed companies, mutual funds, stockbrokers, research analysts or investment advisors and their agents (the “REs”); and (b) any other person who, directly or indirectly, provides advice or recommendation or makes any implicit or explicit claim of return or performance in respect of or related to security or securities unless permitted by the Board to provide such advice/recommendation/claim (commonly referred to as Financial Influencers or “Finfluencers”).

 BACKGROUND

The Guidelines for Influencer Advertising in Digital Media issued by the Advertising Standards Council of India (ASCI) defines an ‘influencer’ as “someone having access to an audience and power to affect such 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”.

 

Finfluencers are influencers who provide information and/or investment advice ranging from personal finance, investment in securities, investment in mutual funds, banking products, insurance, real estate investments etc (the “Investment Products”) through online platforms such as Instagram, Facebook, YouTube, LinkedIn, Twitter, etc (collectively, “Social Media Platforms”). Finfluencers often encourage their followers to invest in various Investment Products using engaging stories, messages, reels and videos on Social Media Platforms. Investment in most of the Investment Products is regulated by Governmental/regulatory authorities like SEBI, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDA) etc (collectively, the “Regulatory Authorities”).

 

Such Finfluencers may not necessarily have the technical qualifications or expertise to opine on Investment Products and thus, any action taken based on their advice may pose a risk to the investor community. Currently, the Finfluencers neither require any registration with SEBI nor fall under the ambit of any SEBI regulation or the code of conduct of any other Regulatory Authority. Considering the same, the Finfluencers may not be obligated to disclose any conflict of interest to their followers while providing investment advice. SEBI has, in the past, come up with instances where they found certain REs relying on Finfluencers to promote their Investment Products. In order to protect the interest of the retail investors, it was important for SEBI to come up with certain guidelines to ensure that the REs do not associate themselves with such Finfluencers, who will encourage their relevant followers to make investment decisions in the Investment Products of such REs.

 

On 25 August 2023, SEBI published a consultation paper on association of REs with unregistered entities (including Finfluencers) (“Consultation Paper”)[2]. The Consultation Paper focused on disrupting the revenue models of unregistered Finfluencers. An unregistered Finfluencers’ revenue might consist of referral fees for promotion of product or non-cash benefit and non-disclosure of such information can influence the decision of investors. The Consultation Paper laid down requirements for protecting confidential information of REs and enhancing the transparency by obligating the Finfluencers to disclose / display appropriate registration number with contact details to their audience.


 WHAT HAS HAPPENED NOW?

Post the publication of the Consultation Paper for public comments, SEBI has released the SEBI Finfluencers Guidelines to regulate the associations of REs and unregistered entities forming a part of financial market (including the Finfluencers). SEBI has set the ground rule for REs restricting them from having any association with any person who directly or indirectly provides advice or recommendations in respect of securities and / or makes any claim of fixed returns on such investments. Association of REs with such unregulated entities can be in any form and may include any transaction involving money or money’s worth, referral of client or any association of similar nature.

 

It is also important to note that SEBI also recognises the contribution of such Finfluencers in spreading financial awareness and education and hence, has also proposed an exemption to REs for associating themselves with persons who are exclusively engaged in investor education by exercising sufficient amount of skill, and who will not, directly or indirectly, provide any advice or give any recommendations on any claims or returns or performance to that may have any bearing on or affect the financial decision of the investors or prospective investors. Specified digital platforms which have a mechanism in place to take preventive as well as curative action to ensure that such platforms are not used by any Finfluencer for providing advice or recommendations on claims or returns or performance that may affect the decision-making power of investors, will also have the benefit of this exemption.

 

The onus for the above compliance will remain with the REs, who would have to ensure that the associated person / Finfluencer does not indulge in the prohibited activities such as inducing clients to avail non-cash benefits such as free usage of product or services, profit sharing with underlying digital platforms and channels, payment of referral fee or commission and avail compensation directly from social media platforms. Most of the unregistered Finfluencers usually work on a commission-based model and changing this model, would create a transparent financial ecosystem beneficial to the investors at large.


 WHAT DOES IT ENTAIL

With SEBI approving the proposal to set out guidelines for REs while associating themselves with Finfluencers, there is a possibility that SEBI may release a formal circular with regulations on these guidelines in due course with more clarity on roles, responsibilities and directions for Finfluencers. This will help in bringing more transparency and accountability in the growing Finfluencers marketing space in Indian capital market. The move may also prevent the investors or prospective investors from being misguided by unregulated entities and curbing malpractices, while at the same time encouraging skilled and qualified Finfluencers.

Further, there will be an obligation on REs to follow SEBI guidelines if they wish to associate themselves with Finfluencers.  SEBI may hold such REs accountable if they are found in contravention of the guidelines. This will ensure that the information provided is accurate, unbiased and in line with SEBI’s principle of responsible financial advice.

 KEY TAKE AWAYS

  • As of now, there exists no framework to regulate the Finfluencers. To protect the interests of the investors, SEBI has, from time to time, introduced regulations such as SEBI (Investment Advisers Regulations), 2013 and SEBI (Research Analysts) Regulations, 2014. These regulations focus on laying down certain qualifications and certification requirements on any person acting as an investment advisor or a research analysist. Finfluencers may register themselves as an investment advisor or a research analyst, if they wish to provide investment advice that falls within the purview of the SEBI (Investment Advisers Regulations), 2013 and/ or the SEBI (Research Analysts) Regulations, 2014. It is important to note that registration under these regulations as an investment advisor or a research analyst would also entail compliance with the relevant regulations, which currently the Finfluencers are not mandatorily required to follow.

  • Since 2022, SEBI has passed numerous enforcement orders against unregistered investment advisors in the form of market ban, monetary penalty and refund of investor fee. Aligning with SEBI’s intent of investor protection, the associations of REs with unregistered persons will be under SEBI’s scrutiny. Any non-compliance to these SEBI Guidelines may lead to inquiry and enforcement orders by SEBI.  

  • Pursuant to the release of the SEBI Guidelines, SEBI has again reiterated its intent to build a fair and transparent capital market ecosystem by obligating the REs to associate themselves with Finfluencers only in the manner as may be prescribed by SEBI.  

  • Finfluencers incur the ability to shape the opinions of masses which can add up in spreading of biased opinions and financial frauds. Such initiatives of SEBI reflect the commitments of regulating and protecting the capital market as fair and transparent space. Maintaining a balance between investor protection and fostering genuine financial education will be the key focus.  

 

This C&M Alert provides an overview of the regulatory update. For complete information and details, please access the information given in the relevant links as provided in the footnotes.



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