Fininfluencers | Existing regulations enough to rein in fraudsters

The Securities and Exchange Board of India (SEBI) is rightly concerned about the rapid and unregulated growth of financial influencers (aka fininfluencers). These range from those who claim to be well-meaning financial educators to downright frauds. Indeed, other financial regulators such as the RBI, the IRDAI, and the PFRDA too should have cause to worry.

However, the kneejerk reaction of issuing more and detailed regulations should be avoided. India already has ample regulations to deal with this challenge. For this, it is important to make a distinction between the army of fininfluencers trying to make a mark out there, and those outright fraudsters preying on the gullible investor/trader.

Fininfluencers are not a new phenomenon. What has led to a spike in their numbers is Internet penetration across the country which has meant that a person at a remote corner of the country has a level playing field with those in urban centres. Even Internet-based fininfluencers have been around for a while now. Starting from blog writers, who graduated to ‘free’ websites of their own, which in turn gave way to their migrating to social media platforms such as Twitter, Facebook, Instagram, YouTube, etc. To be fair, it brought out brilliant talents from unexpected places. The fraudsters were also quick to hop on.

The fake mutual fund sites which SEBI recently has expressed concern about are just one example of the fraud. There are also countless social messaging (telegram, discord, etc.) groups that claim to offer ‘hot tips’. They capitalise on greed of easy money, and attract subscribers through various means. One way they raise money is through monthly subscriptions, which is graded upwards depending on nature of recommendations. SEBI’s site is replete with orders against such persons. The other mode is to offer a ‘free lunch’ by hot tips of securities claimed to be undervalued. Except that soon after the purchase, the market for the security vanishes, and can be sold for a fraction, if at all.

The other category is that of the well-meaning fininfluencers. The primary difference is how they make money. Many such well-meaning fininfluencers are not interested in pushing a scrip or even giving recommendations for a fee. They are simply interested in more views. The more their followers, the more views for their videos, the higher they earn from the host website. The website, in turn, makes money through advertisements, subscriptions, data mining, etc. These require a different form of regulation.

However, among these are also those who give a sample video to promote their full educational courses or other subscription-based products. Yet another category are those who are sponsored by a corporate house, a fund, etc. Action against them would depend on how transparent they are, their diligence, whether they promote dubious investment, whether their own deals are contrary to their recommendations, etc.

However, the existing regulations can tackle most of these issues. It would boil down to proper investigation. For example, the pump-and-dump technique is a well-worn scam. There are elaborate regulations to deal with it. False statements purposefully made to induce people to deal in securities are specifically considered as fraud under the FUTP Regulations. Giving false, reckless or careless advice is also an offence under Regulation 4(1)(k). So is mis-selling of services relating to securities markets. Giving advice while knowingly concealing the associated risk is again a specific offence. These offences invite penalty, debarment, or even prosecution.

The question then is how to focus an investigation to tackle social media-based frauds and malpractices. The 2020 case where SEBI fined two persons for sharing unpublished price sensitive information (UPSI) is an example of how not to tackle the issue. The accused faced action because they allegedly shared price-sensitive information through the personal messaging app. SEBI, however, faced technological dead ends in the case. Despite this, an adverse order was passed. However, the case had to be dropped. On the other hand SEBI has carried out some very clever investigation using innovative means resulting in convictions that held firm even in appeals. In short, setting examples of a few and giving harsh punishment using existing provisions may be a sufficient deterrent.

Fininfluencers claim to be financial experts and dole out ‘expert’ knowledge, skills, trading techniques, and advice. Often these are hollow words with no substance in it. Some are even entertaining. There are extensive regulations for research analysts, which can be used against fininfluencers if they recommend securities. If they give personalised advice, regulations guiding investment advisers are enough to punish them.

For registered advisers, no further regulation is required. For those who are not registered, they could be required to insert a short disclaimer in their videos — say of 45 seconds, prepared by SEBI itself. This will make it clear that such fininfluencers are unregistered, they do not have the prescribed qualifications, and are not licensed to give financial advice. The message of caveat emptor – buyer beware – would go loud and clear.

Above all, the public needs to realise that there are no free lunches. Those who watch such videos by fininfluencers are surely paying for it — the question is how? If it is through subscription for educational courses, then it is perhaps the most transparent. If it is through subscription to a social media channel, the advice may be of low value as it is spread over large numbers. If it is sponsored, and this is disclosed, the bias would be as obvious.

What is needed is a mechanism where the identity of those who run advice groups and channels that give tips on social media and private messaging platforms is clearly determined. In the case of any violation, details will help easily nab the culprits. The encouraging news is that SEBI already has extensive surveillance and intelligence gathering techniques, and are making them even more sophisticated.