With retail investors developing a yen for risky products since Covid, financial regulators have been grappling with the issue of enforcing their writ on social media influencers, or finfluencers. Regulators have had a tough time cracking down on so-called ‘advice’ from finfluencers because they lack jurisdiction over mass media. Any blanket ban on sharing of financial content on social media would run counter to the individual right to free speech.

Finfluencers have however been exploiting this leeway. Capital market participants, for instance, regulated by Securities Exchange Board of India (SEBI), are expressly barred from offering investment advice in any form without registering as research analysts (RAs) or Registered Investment Advisors (RIAs) and complying with set rules on fees, performance claims and conflicts of interest. But unregistered influencers have built up a massive social media following by offering product recommendations and stock advice without any such restraints. Many influencers present sponsored product plugs as ‘independent’ content. Some have allied with sharp operators to dupe retail investors by running pump-and-dump schemes in dodgy stocks. Despite repeated warnings by Reserve Bank of India (RBI) about the lack of legal standing for crypto-currencies, finfluencers have actively peddled them. SEBI, finally, may have found a smart workaround to rein in finfluencers.

The regulator has decreed that all market entities regulated by it should not associate with or have any transactions that involve money, compensation in kind or product referrals, with unregulated entities providing advice or recommendations or making performance claims. This can help rein in finfluencers on three counts. One, sponsorship fees (or payments in kind) for creating content from regulated players such as brokers, mutual funds and transaction platforms make up the main revenue stream for finfluencers who offer ‘free’ social media advice. Two, to circumvent SEBI’s rules on the kind of returns claims they can make and the disclaimers that should accompany them, some regulated entities use finfluencers as the conduit to hard-sell their products. SEBI’s new dispensation plugs this regulatory arbitrage. Three, an ecosystem is now in place for investors or third parties to escalate complaints to SEBI on over-the-top promotion of regulated products. SEBI rules will, however, not apply to persons exclusively engaged in investor education.

While SEBI may have reined in finfluencer activity on capital market products, the field remains wide open for mis-selling on non-capital market products such as insurance schemes, insurance-cum-savings plans, and activities such as offshore forex trading and trading in crypto-currencies. This calls for other financial regulators such as RBI, IRDA (Insurance Regulatory and Development Authority) and the Pension Fund Regulatory Authority to put in place similar rules, without further ado.