Retail investors, especially millennials and centennials, are succumbing to meme trading promoted by self-proclaimed experts on social media. Meme trading refers to the phenomenon where stock prices of certain companies that are not backed by fundamentals are driven up through social media. This engagement spells inevitable financial doom for many people. Using finfluencers to perpetrate manipulation and fraud is no longer a hidden agenda. Therefore, dealing with the ‘finfluencer menace’ has become a paramount concern for financial regulators worldwide.

Certain common practices have been embraced by all regulators worldwide to deal with the finfluencer menace. First and foremost, regulators globally emphasise the golden rule: anyone providing financial advice must possess the requisite licensing.

Taking action 

Enforcement action against finfluencers for fraudulent activities has been a regulatory tool. For instance, in May, the Australian Securities and Investment Commission (ASIC) prosecuted a trader for promoting listed stocks on social media, and indulging in ‘pump and dump’ campaigns. ASIC has instituted stringent rules against unlicensed financial advice and it can lead to five years of imprisonment or hefty fines. This regulatory mandate has been effective, resulting in a reduction in affiliate links on the social media pages of finfluencers in Australia.

The US Securities and Exchange Commission (SEC) filed civil and criminal charges against eight social media influencers in December 2022. These influencers used their social media accounts to manipulate stock prices, which resulted in a $100 million scam.

In India, too, SEBI has booked a few finfluencers who were advising investors without the requisite licensing under the provisions of the SEBI Investment Adviser Regulation. These finfluencers have been penalised heavily. Some stock manipulators recommending stocks through various social media handles were charged under Prohibition of Fraudulent and Unfair Trade Practices Regulations for frontrunning.

Also tune in to: How to select a good financial advisor | Simply Save

Keeping tabs

Promotion on social media is being tightly monitored by regulators of both securities markets and consumer protection. The UK’s Financial Conduct Authority (FCA), for example, targets promotions on social media platforms that lack sufficient text to accurately convey investment risks. Promoting or providing advice regarding regulated financial products or services without FCA approval can be considered a criminal offence. In the UK, brokerages, mutual funds, or other intermediaries using social media influencers must manage the process carefully to ensure new investors are not misled.

In the US, the SEC has made it clear that statements made via social media can lead to investigations and charges for potential violation of federal securities laws. The Federal Trade Commission (FTC) in the US has updated endorsement guidelines to regulate influencer marketing. The Financial Industry Regulatory Authority—FINRA, a government-authorised not-for-profit organisation that oversees US broker-dealers—has advised firms using finfluencers to establish written supervisory practices, and evaluate their background and prior social media activities to mitigate reputational risks. Companies have also been advised to maintain records of referral programmes through finfluencers and provide them with training while defining permissible and prohibited codes of conduct.

In Australia, the Australian Competition and Consumer Commission (ACCC) monitors finfluencers on various social media platforms, taking legal action if claims are found to be deceptive. Finfluencers are required to disclose paid endorsements or affiliations to ACCC if necessary. The regulator also monitors social media and educates consumers about finfluencers.

SEBI can take a cue from these global regulators and increase monitoring on social media platforms. Admittedly, social media is a wide universe and monitoring will not be easy; therefore, it can consider making companies/brokerages accountable for their social media communications, with mandatory disclosures in stock exchange filings. Perhaps the regulator can explore a collaboration with social media platforms to incorporate warnings on posts related to investor advisories. This proactive step would bolster investor protection in the digital era.

SEBI in action

To tighten the noose around finfluencers, SEBI has been proposing bold steps through multiple consultation papers.

These proposals include allowing market intermediaries to promote products/services through registered finfluencers, displaying finfluencer details (such as the appropriate  registration  number,  contact  details, investor  grievance  redressal  helpline, appropriate disclosures/disclaimers  on  any  posts), and introducing a unique fee payment platform for registered investment advisers.

On August 25, SEBI proposed a new mechanism for collection of fees for investment advisers (IA) and research analysts (RA). Under this mechanism, all payments made by clients will be monitored by a SEBI-recognised body to prevent unregistered IAs and RAs from misleading investors. This closed ecosystem to collect fees will help instil confidence in the minds of investors and prevent them from being misled by unregistered entities and finfluencers. Indeed, this innovative fee structure could potentially serve as a model for regulators worldwide.

But the point on registration of finfluencers is not clear and warrants clarification. Just like an advertisement code is applicable for any product, some leeway should be afforded to intermediaries for finfluencer engagement. Finfluencers are modern advertising models and celebrities; with their simple and engaging communication strategies, they play a vital role in spreading financial literacy and democratising investments. However, considering the financial stakes involved, a calibrated approach is essential. Perhaps, a better way would be to require intermediaries using finfluencers to do their due diligence and make them (the influencers) comply with regulations. This has been prescribed by ASIC as an obligation for Australian financial services licencees that use an influencer.