The Securities and Exchange Board of India (SEBI) has introduced a proposal to limit interactions between its regulated entities and unregistered “finfluencers”. Presented through a consultation paper on August 25, 2023, this proposal invites the public to share their perspectives on the matter, with submissions being accepted until September 15, 2023.
A “finfluencer” short for financial influencer, denotes an individual who imparts financial advice or commentary on platforms like social media. This category encompasses a wide range of individuals, spanning from personal finance bloggers to high-profile celebrities with substantial followings. Although some finfluencers possess genuine financial expertise, others might lack the necessary qualifications or experience to provide sound financial guidance.
Reasons behind SEBI’s proposal
Certain finfluencers have faced allegations of participating in unethical behaviours, including:
- Endorsing high-risk investments without transparently outlining the associated risks.
- Propagating false or deceptive assertions about their qualifications or experience.
- Imposing exorbitant fees for the services they provide.
- Concealing payments received from brokers or mutual funds.
These actions have the potential to deceive investors and expose them to financial jeopardy. In more severe instances, finfluencers have been accused of orchestrating Ponzi schemes.
Furthermore, criticisms have been directed at partnerships formed between brokers, mutual funds, and specific finfluencers. These collaborations provide a platform for these influencers to promote their offerings while concealing their vested interests, thereby raising concerns about conflicts of interest.
Purpose of SEBI’s proposal
The primary goal of SEBI’s suggested constraints is to safeguard investors against misleading or erroneous financial counsel emanating from unregistered finfluencers. These potential restrictions would prohibit SEBI-regulated entities comprising brokerage firms and mutual funds from:
- Endorsing or sponsoring unregistered finfluencers.
- Providing payment or compensation of any kind to unregistered finfluencers.
- Sharing confidential client information with unregistered finfluencers.
SEBI said in its consultation paper, “No SEBI registered intermediaries/regulated entities or their agents/representatives shall, directly or indirectly, have any association/relationship in any form, whether monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including finfluencers).”
These proposed regulations would mandate that SEBI-regulated entities implement measures to ensure that their employees refrain from engaging in any prohibited activities involving unregistered finfluencers. According to SEBI’s consultation paper, it is suggested that registered entities or intermediaries refrain from establishing any form of connection with unregistered finfluencers for the purpose of promoting or advertising their services.
In its proposal, SEBI added, “Such entities shall comply with the advertisement guidelines issued by SEBI, stock exchanges, and SEBI-recognised supervisory body from time to time. SEBI-registered intermediaries/regulated entities shall not pay any trailing commission based on the number of referrals as a referral fee.”
SEBI stresses separation from finfluencers
The SEBI consultation paper extends its recommendations beyond mere restrictions, proposing that registered intermediaries take proactive measures to disassociate themselves from any unregistered entity that employs their name, product, or service. This proactive stance aims to prevent investors from being misled by unregistered finfluencers who might exploit the reputation or branding of a registered intermediary to advance their own services.
Additionally, SEBI has established a mandate requiring individuals acting as ‘finfluencers’ within the BFSI sector to secure registration with SEBI before dispensing investment-related advice. This regulation is in place to ensure that only individuals possessing the requisite qualifications and experience offer financial guidance to investors. Registered finfluencers are also obligated to prominently display their SEBI registration number alongside their credentials.
The consultation paper proposes, “Finfluencers registered with SEBI, stock exchanges, or the Association of Mutual Funds in India (AMFI) shall display their appropriate registration number, contact details, investor grievance redressal helpline, and make appropriate disclosure and disclaimer on any posts.”
These measures represent a significant stride in safeguarding investors against potentially misleading or erroneous financial counsel provided by unregistered finfluencers. Nonetheless, it remains crucial for investors to conduct their own research and exercise caution when encountering finfluencers who make exaggerated promises or guarantees.
Integral to SEBI’s regulatory procedure, the public consultation phase serves as a pivotal component. The insights garnered from the public will be meticulously evaluated before arriving at a final decision regarding the proposed restriction.