Contributed by Arjya Majumdar and Esha Rathi (affilated with GBLR-SCCLP)

The manner in which we take financial decisions is changing. With ever more information and analysis on demand, channels through which retail investors access financial information and advice is also transforming. The post Covid-19 pandemic period has seen a marked increase in retail investors’ interest in capital markets in the UK and in India much like across the world.

At the same time, due to self and state induced isolation measures, we are more likely to consume information or content through digital sources, particularly video. This has led to the rise of the influencer – an individual who, by popularity, is able to influence its veiwers’ or readers’ views. They are able to use this influence, not only to shape opinion but also drive a perception of products they have been contracted to sell. When these products are financial in nature, we call them financial influencers or, ‘finfluencers’. They utilize various social and digital media platforms and channels to engage with their audience, exerting significant influence over the financial decisions of their followers. Consequently, the activities of finfluencers frequently intersect with areas regulated by financial sector authorities including central or reserve banks and securities regulators.

Many finfluencers may not be formally registered with the relevant regulators, may lack the requisite qualifications or expertise in the subject matter, are not bound by the codes of conduct enforced by these regulators, and may not disclose potential conflicts of interest, including their affiliations with or vested interests in the products, services, or securities they promote through referral fees, non-cash benefits, compensation, or profit sharing arrangements, there is a compelling need for their regulation. Given the obvious dangers posed to retail investors by finfluencers, the securities regulators of both UK and India have recently proposed to regulate this new channel of information dissemination. This post analyses the differing approaches by the two regulators and offers insights into the suitability of such regulation.

In spite of the UK’s guidance on social media and customer communications, there seem to be some violations. For example, investment app Freetrade was banned for the use unsubstantiated claims made by finfluencers who had partnered with them. As a result, the Financial Conduct Authority (FCA) is proposing to expand its communications guidance to firms communicating or approving financial promotions on social media, industry groups and trade bodies, influencers and unauthorised persons communicating financial promotions on social media, Social media platforms, Overseas firms communicating financial promotions to UK consumers on social media.

Similarly in India, there have been a slew of cases involving finfluencers who have accepted funds on the pretexts of either disseminating ‘premium’ advice or to invest on behalf of their customers. Both of these actions require registration under existing securities regulations. As a result, the Securities and Exchange Board of India (SEBI) seeks to regulate registered intermediaries/regulated entities, and unregistered/unregulated finfluencers that promote the products and services of the former.

At first glance, it may be important to compare the entities that are sought to be regulated. Both regulators seek to adjust the level of regulation on existing entities operating within the securities markets (such as investment advisors and financial services firms) as well as entities (including finfluencers) operating outside the registered purview of the regulator.

However, the regulatory approach and the level of regulation is where there are departures. SEBI is implementing a dual approach consisting of prohibition-based and disclosure-based measures. The prohibition-based measures pertain to the SEBI registered intermediaries/ regulated entities. SEBI proposes that registered entities, including stock brokers, investment advisors, asset management companies be prohibited from “engaging in any form of association or relationship, whether monetary or non-monetary, with unregistered entities, including finfluencers”. Any existing relationships including trailing commissions based on referrals are generally to be discontinued with some exceptions.

In contrast to the Indian regulatory framework, the UK has not focused on implementing absolute prohibitions on financial promotions from unauthorized sources. Instead, they have heightened the disclosure requirements, notably shifting the burden and liability onto the institutions seeking promotions rather than the financial promoters. Promotions by financial institutions should be fair, transparent, and avoid any misleading information to help consumers understand and make informed decisions. Risks or costs must be presented clearly and prominently, without any design elements that reduce their visibility. Risk warnings should be clear and not require additional clicks to access. Specific sectors may have more detailed risk warning requirements that firms ought to familiarise themselves with. Consumers should be guided to a more appropriate channel for obtaining additional information and measures should be taken to prevent consumers from being unknowingly directed to non-UK entities for services where they won’t have the benefit of UK regulation.

Interestingly, SEBI’s disclosure requirements pertain to SEBI-registered finfluencers, intermediaries and regulated entities to help clients make informed decisions. Such entities would now be required to disclose their registration numbers, contact details, investor grievance redressal helplines, and include appropriate disclosures and disclaimers in all their posts. This has been further bolstered by eligibility criteria laid down by the Advertising Council of India that place additional disclosure requirements. As per ASCI’s guidelines, finfluencers operating within the banking, financial services and insurance realm, can now offer investment-related advice only after being registered with SEBI. For other financial advice, influencers must possess appropriate credentials such as a license from the Insurance Regulatory and Development Authority of India (IRDAI), be qualified as a chartered accountant, holds a company secretaryship, etc.

Where the FCA actually does apply prohibitions is on high risk investments. Certain investments are banned from being mass marketed to retail investors, such as non-mainstream pooled investments and speculative illiquid securities (e.g., speculative ‘mini bonds’). Firms should not be promoting these investments on social media as there is no guarantee that these promotions will not be viewed by ordinary retail investors. Other high-risk investments including crowdfunding, crypto assets and contracts for differences (CFDs) can be mass marketed to retail investors but are subject to certain restrictions. Firms must ensure that promotions for these investments comply with the relevant restrictions, such as the requirements around risk warnings and the bans on incentives to invest.

SEBI’s approach to prohibit unregulated finfluencers and to completely cut off a source of revenue for finfluencers might be considered to be comparatively heavy handed. However, given that financial literacy in India is around 27% as compared to the UK’s 59%, an argument can be made for SEBI’s protectionist attitude. We have seen the same prohibitive approach in previous iterations of financial innovation as well, such as in the case of crowdfunding. On the other hand, the FCA’s relatively moderate approach in increasing disclosures and prohibiting only the riskiest of assets arises out of the fact that the securities markets in the UK are comparatively more developed and sophisticated.