The year of 2023 witnessed a series of crackdown by SEBI on financial influencers, or Finfluencers i.e., individual or group of individuals who provide financial advices on social media. Notable individuals like PR Sundar, Mohammad Nasiruddin Ansari (operating as "Baap of Chart"), and Gunjan Verma faced stringent actions for spreading false and misleading information, resultantly, leading...
The year of 2023 witnessed a series of crackdown by SEBI on financial influencers, or Finfluencers i.e., individual or group of individuals who provide financial advices on social media. Notable individuals like PR Sundar, Mohammad Nasiruddin Ansari (operating as "Baap of Chart"), and Gunjan Verma faced stringent actions for spreading false and misleading information, resultantly, leading the public to make misguided investment decisions. It is pertinent to note, in India, providing financial advice without obtaining registration from SEBI is prohibited under the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (the IA Regulations). However, the regulation exempts investment advice given through newspapers, magazines, electronic broadcasting, or telecommunications mediums, leaving Finfluencers outside its purview, thereby prompting the dissemination of inaccurate information.
To address the abovementioned loopholes in the law, SEBI introduced a consultation paper ((hereinafter referred as “paper”)) in August 2023. Notably, paper proposes mandatory registration for Finfluencers who collaborate with SEBI-registered entities in exchange of some consideration. While the Advertising Standards Council of India (ASCI) has made guidelines for mandatory registration for all Finfluencers, nonetheless, the paper remains silent on this aspect. Therefore, through this article the authors aim to analyze why the regulatory framework (assuming the paper becomes a regulation) governing Finfluencers is still inadequate, which resultantly raises more questions than solutions provided with respect to finfluencers fraternity.
The Problem Is Unresolved
As per the paper, any influencer providing financial advice and having the ability to influence the financial decisions of their followers is considered a "finfluencer." Finfluencers earn income by sponsoring posts and promoting services and securities, such as specific stocks, mutual funds, venture capitalists, and brokers, through their social media platforms. In return, they receive compensation, profits, or non-cash benefits. Unfortunately, some finfluencers engage in fraudulent activities, including but not limited to pump and dump schemes, for personal gain's sake. Through the paper, SEBI has taken a definitive measure to entirely sever the connection between SEBI-regulated entities and Finfluencers who opt not to undergo registration with SEBI. Consequently, any Finfluencer wishing to collaborate with financial product manufacturers is now required to register with SEBI. This move by SEBI aims to curb the unaccounted profit of finfluencers who are performing the task which is traditionally done by a registered Investment advisor and, ultimately protecting the general public from potential financial harm.
However, this raises an important question, does all finfluencers need to get registered with SEBI? The answer is no as registration is necessary for those finfluencers who seeks collaboration with entities registered with SEBI. This has rendered finfluencers who made profit through unsponsored posts and the sale of educational content immune to SEBI's scrutiny, highlighting a potential gap in the regulatory framework. This gap encompasses finflueners who deceive the public by selling financial courses and earning substantial profits without endorsing any specific brand, one such example is “Baapof Chart” which enticed consumers by making claims like “bas 5 minutes me profit surakshit karo”, “Make 5 lakh -10 lakh profit with 85% guarantee” to promote his courses, consequently, SEBI imposed a substantial fine of 17 crores.
A cue could be taken from the Australian regime, wherein, unlike India's regulations, it is mandatory for finfluencers providing financial advice to obtain Australian Financial Services license. Furthermore, in order to better regulate the information disseminated by any individual, Financial Product Advice (FPA) has been defined as a suggestion or opinion aimed at influencing, or reasonably seen as intended to influence, an individual making decisions regarding financial products. Moreover, test has been laid down, to determine probable dissemination of FPA, which involves identification of benefits or payment received in exchange of statements about financial products which may have influenced the decision of general public. To understand the "baap of chart" case, the above discussed test may be applied, wherein, as more consumers subscribe to the offered advice, the more benefit is being accrued to the respective finfluencer, therefore it can be categorized under unjust dissemination of FPA. Similarly, Australian Federal Court has adjudicated that finfluencers providing training courses and making recommendations about FPA need to obtain an ASIC license.
Accordingly, the authors argue that registration should be made mandatory for all finfluencers providing financial advice. Primarily because, in addition to sponsored finfluencers, unsponsored finfluencers are also susceptible to deceiving and defrauding the general public. Secondly, such an approach would be fair to registered investment advisors who are unable to offer the same investment advice without mandatory registration. Moreover, it would enable SEBI to adopt a proactive approach by monitoring the activities of finfluencers.
Finfluencers And Right To Speech And Expression
What follows from the above discussion is the argument proposed by some that such an approach would violate right to speech and expression and right to trade and profession of finfluncers, considering it has become a profession for many. The apex court has recognized freedom of speech and expression and, freedom of trade and commerce through the medium of internet as constitutionally protected rights under Articles 19(1)(a) and Articles 19(1)(g) respectively. Further, SEBI in one of its previous consultation papers introduced blanket ban on providing financial advice through social media except by Registered Investors and the same was faced with huge backlash. In this context, any restriction on finfluencers must take into consideration the fundamental right envisaged under article 19 of Indian constitution.
However, Fundamental rights are not absolute and cannot be enjoyed at the expense of harm to others. Therefore, requiring mandatory registration for finfluencers would be a justifiable restriction, given the potential for them to spread inaccurate and misleading information. Secondly, the restrictions also align with the purpose ( derived from the short title of the act) of SEBI Act i.e., protection of interests of the investors. Thirdly, the restrictions mentioned herein satisfy the doctrine of proportionality. The principle of proportionality suggests that regulatory measures should align with the level of harm it seeks to prevent. The risks associated with a financial analyst sharing detailed investment advice are different from an influencer offering general financial literacy tips. For the same reason, finfluencers sharing general financial literacy tips are exempted from the requirement of registration.
Lastly, if registration doesn't violate the right to speech and expression of a registered Investment advisor, how possibly would the same be violative of a finfluencer's right? In fact, allowing finfluencers to recommend stocks and engage in an unbridled manner (without registration) would violate the right to equality of RIs, who mandatorily needs to get registered with SEBI as per regulation 3 of IR regulation for performance of the same work as finfluencers.
Therefore, SEBI has to strike a balance between securing the rights of Finfluencers under article 19 and preventing gullible investors from becoming the victims of prejudicial and biased investment advices offered by such gen z finfluencers. At the same time, it has to ensure that the regulation doesn't become overarching as regulatory body can only regulate but can't control any trade or profession.
The existing regulatory framework for finfluencers lacks comprehensive regulation since it only addresses finfluencers associated with SEBI-registered entities, leaving unsponsored finfluencers unrestrained and unregulated.
The consultation paper also falls short in addressing how SEBI would regulate the financial arrangement between a Finfluencer and a registered entity, especially given the vast reach of social media. Additionally, it does not provide clarity on the situation of Telegram channels, which, although not operated by finfluencers, can impact the financial decisions of the public and are managed by anonymous individuals from various corners of the country.
Through this article, the authors have argued that registration shall be made mandatory for all the finfluencers. However, mandating Registration would not serve as a one size fits all solution towards the harm posited by plethora of finfluencers operating from every nook and cranny of the country. Henceforth, it is suggested that along with the mandatory registration SEBI shall also bring about a separate code of conduct for the regulation of those who are benefitting from imparting financial wisdom and shall also constitute a separate body to govern them. Also, specific directives can be given to social media platforms to regulate these financial advisors because unlike state actors, social media companies, being private entities, have the discretion to remove content without infringing on the right to free speech and expression.
Views are personal.