We usually see content creators in our vertical content feed while scrolling our phones, they bring some catchy hook to hold our dopamine, with some graphical editing, they tell you how this reel or shorts is going to help to make money in the stock market, and we keep watching it for hours. Recently a content creator in the finance niche Mr. PR Sundar, a "Finfluencer" who provided financial advice, was banned by the Securities and Exchange Board of India (SEBI). SEBI has highlighted the potential risks associated with influencers, particularly when people blindly follow their financial advice, which promises substantial returns. PR Sundar had been offering investment advisory services without the necessary registration from SEBI. Consequently, SEBI has prohibited him from engaging in securities transactions for one year and has also instructed him to reimburse his clients, including the advisory fees. Influencers have the task of persuading individuals to act in accordance with their own interests. Nowadays, numerous influencers are actively working to convince their audience to invest in or purchase various products, including consumer brands, real estate, and even high-risk financial instruments. Unfortunately, these endeavors sometimes lead to irreparable losses.
What’s wrong with Finance influencer advise on stock market?
Influencers are not only the sole source of risk in these situations. People can also fall prey to unauthorized financial activities carried out by chit funds that lack the required permissions from the Reserve Bank of India (RBI). Clearly, seeking financial advice from unregulated entities poses significant risks. The problem becomes more complex when it comes to ‘finfluencers’. They may lack the requisite qualifications, resulting in the dissemination of incorrect information. Moreover, they might provide biased advice with the intention of securing illegal financial gains from the promoters of specific products. For instance, consider the case of Vauld, a company that promised high returns on cryptocurrency investments. Ironically, the company went bankrupt, leading to substantial losses for many individuals. In this particular case, several well-known influencers, including Ankur Warikoo, Akshat Srivastav, and PR Sundar, had advised people to invest in the company. Nevertheless, it is important to note that not all investment products are inherently bad; some may carry certain risks. It is the responsibility of financial advisors to caution individuals about these dangers. In Sundar's case, allegations were made that he selectively shared screenshots of successful trades while deleting unfavorable transactions. The Advertising Standards Council of India (ASCI) has established guidelines for influencers who have the ability to influence people's purchasing and investment decisions. If influencers receive any form of compensation from a brand or product they endorse, they are required to provide clear and conspicuous disclaimers in their text or video content.
When individuals fall ill, they seek the assistance of doctors with MBBS degrees. For specialized ailments, they turn to doctors with additional qualifications. Similarly, when seeking advice from an influencer, it is crucial to determine whether the person is qualified to provide such guidance. They should possess the necessary training or certifications. For financial planning advice, it is advisable to approach a certified financial planner or a SEBI-registered financial advisor who can be relied upon for their expertise. "Whether it's finfluencers or celebrities, exercising caution before making any decision is essential. Currently, we observe many celebrities endorsing products that can harm our health or even promoting betting and casino apps. Ultimately, the responsibility lies with viewers to conduct thorough research before reaching a decision," advises Anant Ladha, the founder of Invest Aaj For Kal, a financial advisory firm. Therefore, always conduct comprehensive research and exercise due diligence before making any decision, as it involves your hard-earned money.
Why there must a regulation on Finfluencers?
The rise of finfluencers and their influence on the investment decisions of first-time investors has created a pressing need for regulation in the financial influencer space. Many individuals who enter the markets with the hope of making quick profits may be vulnerable to the content shared by these influencers. Unlike registered investment advisors who are obligated to disclose any conflicts of interest with the regulator, finfluencers operate in a regulatory gray area, leaving investors exposed to potential risks. The regulatory dilemma surrounding finfluencers has caught the attention of the Securities and Exchange Board of India (SEBI), given the growing investor base in the country. With over 100 million demat accounts and millions of investors in mutual funds, the lack of specific regulations for financial influencers poses a significant challenge. While the Advertising Standards Council of India (ASCI) provides voluntary guidelines for influencers to disclose brand collaborations and sponsorships, these guidelines are not legally binding. The numbers paint a concerning picture, with numerous instances of violations by financial influencers, particularly in cryptocurrency-related promotional content. In the previous fiscal year, there were a total of 415 instances of violations, with 372 of them related to cryptocurrency promotions. Even in the current financial year, there have already been 71 violations reported. This rampant dissemination of investment advice through social media platforms has garnered global attention from regulators who are already burdened with their regulatory responsibilities.
It is imperative to bring finfluencers under the regulatory net to protect investors and maintain market integrity. SEBI is actively exploring ways to regulate these influencers, particularly those who profit from providing advice on social media platforms. Earlier actions by SEBI, such as cracking down on celebrity advertising for cryptocurrencies, demonstrate the need to address this issue. Other countries have already implemented some form of regulation for finfluencers. Australia, for instance, imposes up to five years of imprisonment for providing financial advice without a license, while the European Securities and Markets Authority has issued guidelines on investment recommendations made on social media.
China and Singapore have also imposed restrictions on the promotion of cryptocurrency-related products and provided guidelines for finfluencers. In India, experts and legal professionals are calling for the regulation of financial influencers. It is crucial for SEBI to find effective ways to regulate and oversee these influencers, despite the challenges involved. Collaboration between finfluencers and domain financial experts could be explored to mitigate risks and enhance consumer protection.
The need for regulation in the finfluencer space is urgent. The potential risks associated with the advice provided by these influencers, as demonstrated by the crypto meltdown, demand appropriate safeguards for consumers. While guidelines and regulations are evolving worldwide, it is high time for SEBI to take decisive action and establish a regulatory framework to ensure the responsible conduct of financial influencers and protect the interests of investors until a reform is not there influencers like Pranjal Kamra, CA Rachana Phadke Ranade, Labour Law Advisor, can be taken as an example for maintaining the ethics and integrity for this new profession, one thing which makes them different from PR Sundar is the qualification, a need for minimum standard of professional qualification is also needed.
Author: Suryansh, B.A. LLB. (Hons) student, Hidayatullah National Law University Raipur. Views are personal.