Fiscal Frontiers: Unveiling India’s Evolving ‘Finfluencer’ Regulatory Framework

[By Arnav Gulati]

The author is a student of Jindal Global Law School.

 

Introduction: 

In the burgeoning digital finance arena, financial influencers, termed as ‘finfluencers’ have emerged as influential arbiters of financial decision-making, however their actions continue to be uncontrolled. The absence of regulatory oversight in this domain has created a vacuum that has been used by such finfluencers, who often lack the requisite credentials, to propagate inaccurate and deceptive financial information. The Securities and Exchange Board of India (SEBI) has acknowledged the significant effect of social media on stock markets, the process of price discovery, and the susceptibility of novice investors who are prone to being swayed by “tips” or suggestions. Through the notorious ‘Telegram Case,’ i the dark underbelly of unregulated financial advice was brought to the fore. In the aforementioned case, titled “Re: Stock Recommendations using Social Media Channel (Telegram)” – the trading activity in a particular stock was momentarily influenced by the quantity of channel members and the number of tips/recommendations shared on Telegram, which gave rise to concerns within the framework of the Prevention of Unfair Trade Practices Regulations (PFUTP). The decision made by SEBI signified a noteworthy advancement in acknowledging the impact of social media on stock markets, while simultaneously ensuring market integrity by combating unregistered operations and unfair activities. This decision of January 2022 served as a strong indication from SEBI that persons without sufficient regulatory control are prohibited from offering financial advice or suggestions, hence imposing challenges on finfluencers seeking to perform their services in an unregulated way. The Telegram case, along with other cases such as Sadhna Broadcast Limitedii and Mansun Consultancyiii have drawn attention to the recognition by SEBI of the potential for stock price manipulation associated with a substantial subscriber base.  

SEBI’s new consultation paper and the Advertising Standard Council of India’s (ASCI) revised guidelines mark India’s foray into uncharted regulatory waters. Herein, I critically appraise these emerging regulatory propositions, dissecting their potential efficacy, overreaches, and the nuanced challenges they may inadvertently usher in. 

The Double-Edged Sword of Transparency Mandates: 

Right off the bat, I firmly believe that SEBI’s insistence on rigorous disclosure norms is a commendable attempt to infuse transparency into the finfluencer ecosystem. However, the mandate’s viability teeters on practical enforcement. The digital sphere’s fluidity, coupled with the sheer volume of finfluencer-generated content, raises significant concerns about the effective monitoring of these disclosures. Moreover, there’s a thin line between ensuring transparency and inundating consumers with excessive information, potentially leading to decision paralysis rather than informed financial choices. 

Furthermore, the requirement for finfluencers to disclose all affiliations (Paragraph 4.4 of the consultation paper) could inadvertently create a skewed perception. For instance, a finfluencer with multiple disclosures might either be seen as more trustworthy due to transparency or be perceived as biased due to numerous affiliations, regardless of the actual content quality. This paradox underscores the need for a more nuanced approach to disclosures, perhaps emphasizing the quality and relevance of affiliations over sheer quantity. 

The Quagmire of Defining ‘Financial Advice’: 

One of the most contentious aspects of the emerging regulations will be to define what constitutes as ‘financial advice.’ SEBI currently defines ‘investment advice’, but not ‘financial advice’.  

This legislative uncertainty might place influencers, regulatory agencies, and consumers at risk. Without a defined, legally enforceable definition of ‘financial advice,’ content providers might design their messages to avoid seeming to give explicit investment advice while nevertheless driving audience behaviors. Known as “dog-whistling” in other situations, this phenomenon uses coded language to send specialized signals to those who understand it. 

This offers a complicated issue for regulators. First, monitoring the large amount of information on numerous platforms, each with its own language and regulations, is logistically tough. Not only is content volume important, but linguistic complexities demand sophisticated comprehension and interpretation, which is not readily scalable for wide regulatory supervision. Second, regulating this disguised communication without infringing on casual financial talk is very difficult. Regulators must safeguard customers from deceptive information that might harm their finances without intruding on free speech and expression, protected under Article 19 of the Constitution. The framework should define what is and is not ‘financial advice’, giving content providers and customers more clarity and safety. To empower people in this digital era of information overload, authorities should examine ways to spread awareness on how to distinguish expert financial advice from informal comments. 

Potential Pitfalls in the Enforcement Mechanism: 

As we delve deeper into the regulatory landscape, it becomes clear that good intentions alone may not suffice. The real test lies in how these rules are put into practice. While the emerging regulations are well-intentioned, their success hinges on the robustness of the enforcement mechanism. SEBI has used the current framework comprising of the SEBI PFUTP Regulations, Settlement Proceedings Regulations 2018, and Investment Advisers’ Regulations 2013 to address the activities of social media influencers. To create investment advisors as a separate category of market intermediaries, SEBI enacted the Investment Advisers Regulations. These rules were created to protect investors’ interests and avoid any potential conflicts of interest that could result from advisors also serving as financial product distributors. Additionally, SEBI significantly changed these laws in July 2020 to coincide with the rise in finfluencer activity during the COVID-19 lockdown period. The consequences of non-compliance are not sufficiently addressed by these adjustments, which included revisions to the qualification, certification, and net worth criteria for investment advisers. This strategy is not, however, streamlined. The upcoming regulations run the danger of becoming paper tigers without severe fines and a methodical enforcement strategy. Furthermore, platforms that host finfluencer material will bear the bulk of the responsibility for maintaining compliance. This assumption might result in uneven enforcement as platforms with different competencies will try to implement laws consistently. As a result, there is a growing risk of “regulatory arbitrage,” in which finfluencers move to less restrictive platforms, so evading the same scrutiny that regulations aim to provide.  

Overlooking the Consumer’s Role: 

The Ministry of Consumer Affairs’ most recent “Endorsements Know-hows” will have to be kept in mind while drafting the regulations. The Ministry classify influencer activities as “services” under Section 2(42) of the Consumer Protection Act 2019 (COPRA), placing them under the jurisdiction of the Central Consumer Protection Authority (CCPA) while also enhancing consumer protection by requiring endorsers to support their claims and exercise due diligence. Notably, Section 21’s of COPRA grants authority to the CCPA allowing it to order the removal or alteration of endorsements that have been shown to be untrue or deceptive after an inquiry. 

However, the SEBI is a specialized body with a goal to safeguard investors and control market dynamics, while the COPRA is a comprehensive statutory framework. In order to ensure that its guidelines complement the COPRA and take into account the unique characteristics of financial investments, SEBI must precisely navigate this dual regulatory environment. This calls for a comprehensive strategy that takes into account the impact of finfluencers on market stability, the subtle distinction between general recommendations and financial advice, and the possibility of conflicts of interest to ensure strong investor protection without stifling the innovation and growth of the digital finance ecosystem.  

The Conundrum of Global Jurisdiction: 

The issue of jurisdiction in the regulation of financial influencers becomes prominently apparent when examining a hypothetical scenario of a financial influencer based in the United States who, although situated in New York, provides guidance to a wide audience, including Indian investors, via a live broadcast on YouTube. The author’s suggestions, which may not have been well researched in the context of the Indian market, have the potential to influence readers towards making unwise investment decisions. Despite exerting a substantial effect on players in the Indian market, she is exempt from the regulatory oversight of the SEBI owing to her non-resident status. 

The aforementioned circumstance brings attention to the significant absence of jurisdiction under the existing regulatory framework. The geographical constraints inadvertently create a loophole that allows foreign-based finfluencers to exert influence on Indian markets without being subject to the same standards as their Indian counterparts. The aforementioned situation not only exposes Indian investors to the possibility of receiving incorrect advice, but also generates an uneven playing field for domestic financial influencers who are obligated to adhere to more stringent compliance requirements. 

Conclusion: 

The consultation paper released by SEBI and the ASCI Guidelines represent significant advancements in the regulation of digital financial advisers, aiming to establish control over the unregulated nature of this sector. Nevertheless, they are not devoid of notable limitations. The comprehensive delineation of financial advice, the possibility of excessive information, disparities in enforcement, and the regulatory duality and global jurisdiction are crucial domains which would need prompt consideration. In order to progress, it is essential that these rules undergo a process of ongoing stakeholder involvement, input collection, and revision. The objective should be to cultivate a setting in which openness, authenticity, and accountability serve as the foundational principles of digital financial advisories, therefore establishing a secure and resilient ecosystem that benefits both finfluencers and customers. 

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