Contributed by Shaswat Kashyap and Harshal Chhabra

Introduction

In the ever-evolving landscape where influencers, fintech, and the “Generation Z” converge, a new phenomenon has emerged – the rise of “finfluencers”. This trend has caught the attention of regulators worldwide, leading to the implementation of robust measures to oversee the activities of finfluencers. While the Securities and Exchange Board of India (“SEBI”) is still in the initial stages of demanding accountability from finfluencers, there is an opportunity to adapt and implement best global practices.

In a previous cross-jurisdictional analysis   (available here), regulations related to finfluencers in India and the UK were compared. Building upon this foundation, the focus now shifts to Australia, delving into its regulatory landscape to glean insights and propose steps for India to align with global standards in addressing the challenges posed by finfluencers.

Australian Context

In Australia, the Australian Securities and Investments Commission (“ASIC”) monitors online discussions about financial matters led by influencers who promote or feature financial products. The focus is on identifying any misleading, deceptive, or unlicensed representatives or financial services. Operating a financial services business without holding an Australian Financial Services (“AFS”) license is considered an offence under the Corporations Act 2001, unless the individual is authorized as a representative of an AFS licensee or falls under a relevant exemption. The Corporations Act prescribes severe penalties for violations, including imprisonment of up to five years for individuals and substantial financial penalties for corporations that can amount up to millions of dollars. ASIC takes enforcement actions when it determines that it is in the public interest to do so. Moreover, ASIC has established a specific benchmark for evaluating whether advice provided by a finfluencer meets the criteria for financial advice. If the compensation or benefits are linked to consumer behaviour, suggesting a possible conflict of interest, the guidance may be categorized as financial product advice. ASIC thoroughly examines the overall impression conveyed by a finfluencer to ascertain the need for AFSL.

On March 21, 2022, ASIC released a new Information Sheet, INFO 269, titled “Discussing financial products and services online.” This document contains crucial information relevant to both finfluencers and AFC licensees who collaborate with finfluencers. It includes examples of what ASIC classifies as financial product advice, dealing by arranging (arranging for a person to deal in a financial product, such as buying or selling a financial product, is a financial service), and instances of misleading and deceptive conduct (the law prohibits misleading and deceptive conduct in relation to financial services). The Information Sheet 269, functions as a guide, offering a code of conduct for finfluencers. It recommends specific disclosure practices, emphasizes the importance of thorough due diligence, and encourages a cautious approach when providing financial advice. This aims to foster responsible and informed practices within the realm of online discussions about financial products and services.

ASIC’s regulatory stance requires finfluencers to share only factual information if unlicensed and mandates the consideration of obtaining an AFS license or becoming an authorized representative of an AFS licensee for providing influential recommendations (if presented in a way that recommends or discourages investment in a product or class of products). The regulator emphasizes the importance of promoting products or services only after a comprehensive understanding, exercising caution with high-risk products, ensuring accurate and substantiated statements, and disclosing any conflicts of interest. The determination of whether a finfluencers’ recommendations or statements constitute “financial product advice” is based on the overall impression created by their communication, considering the surrounding circumstances. A recent landmark judgement, ASIC v Scholz  [2022], clarified that discussing financial products on social media could categorize an individual as operating a ‘financial services business’ under the Corporations Act 2001. The Act’s definition of financial product advice is broad, encompassing recommendations or statements intended to influence decisions about financial products.

Lacuna within the Indian Model and Recommendations

Taking an example from the Australian model and acknowledging that some finfluencers prioritize educational content over explicit investment advice, SEBI should enhance the definition of “investment advice” in the Investment Advisors Regulations. A more encompassing definition should distinguish between advice aimed at influencing and educational content, allowing finfluencers to offer valuable financial education without unwarranted liability concerns. Additionally, the Consultation Paper published by SEBI discourages Investment advisors from forming associations with finfluencers. While this broad prohibition may appear as a preventive measure, it could impede the widespread dissemination of  financial advice and information to the general public. In contrast, AFS licensees have the flexibility to engage with finfluencers, contingent on actively supervising and evaluating the content produced by finfluencers and providing necessary training. Within this collaborative framework, finfluencers function as authorized representatives of AFS licensees, thereby adhering to the same regulatory standards. This setup ensures the maintenance of a strategic partnership without compromising investor interests, as AFS licensees assume responsibility for the conduct of finfluencers. SEBI should consider contemplating a similar approach, striking a balance between the necessity for regulatory control and the potential advantages of constructive collaborations in the financial advisory domain.

ASIC has provided non-binding good practice guidance concerning promotional activities related to financial products. This guidance emphasizes the importance of presenting a balanced view of the products, encompassing information on returns, features, benefits, risks, costs, and disclaimers. Finfluencers are advised to steer clear of technical jargon, ensuring that advertisements are clear and easily understandable. Moreover, the qualification criteria for an AFS licensee involves possessing a suitable tertiary qualification,  a Diploma being the minimum bar, along with mandatory training on the pertinent financial products. This regulatory framework is designed to uphold industry standards, ensuring that those engaging in financial promotions are adequately qualified and informed.

The Australian Competition and Consumer Commission (“ACCC”) has initiated efforts to identify misleading testimonials and endorsements by social media influencers, signalling an increasing focus on this area. This heightened scrutiny, coupled with ASIC’s proactive stance, suggests a potential acceleration of investigations and enforcement actions. As Australia navigates the challenges posed by finfluencers, this regulatory landscape provides valuable insights for SEBI. To align with global standards and address the nuances of influencer-driven financial advice, SEBI might consider incorporating elements of the Australian approach, emphasizing the need for licenses, clear guidelines, and stringent enforcement mechanisms.

SEBI can look to the Australian model as it revisits regulations for finfluencers, tailoring the approach to address the specific challenges present in the Indian context. To streamline the regulatory framework, SEBI could introduce two distinct categories: Registered Investment Advisors (RIAs) and unregistered financial advisors. RIAs would be required to meet stringent qualification standards, while unregistered advisors would be held to minimum disclosure and due diligence requirements. An amendment to the definition of “investment advisor” should encompass individuals offering advice without compensation and those receiving payment tied to consumer behaviour.

By leveraging the authority granted by Section 11(1) of the SEBI Act, which empowers SEBI to safeguard investor interests and regulate market development,  it could create a new classification for finfluencers within the intermediary definition.