SEBI proposes to enforcement action, disrupt revenue model for finfluencers

Besides undertaking enforcement action against unregistered finfluencers who breach SEBI regulations, the regulator proposes to disrupt the revenue model for such finfluencers, so that the perverse incentives in the ecosystem reduce.
SEBI has come across instances where SEBI registered intermediaries/regulated entities may be relying on such unregistered/unregulated finfluencers to promote their products and services.

As per a new paper, no SEBI registered intermediaries/regulated entities or their agents/representatives shall, directly or indirectly, have any association/relationship in any form, whether monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including finfluencers)

Entities registered/regulated by SEBI or stock exchanges or AMFI shall not share any confidential information of their clients with any unregistered entities.

Financial influencers, commonly called 'finfluencers', are persons who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investment, etc. through social/digital media platforms/channels, and have the ability to influence the financial decisions of their followers.

Thus, the activities of finfluencers may deal in areas regulated by financial sector regulators such as SEBI, RBI, PFRDA, and IRDA.

Finfluencers often attract investors/prospective investors through their engaging stories, messages, reels and videos on various social media platforms such as Instagram, Facebook, YouTube, LinkedIn, Twitter, etc.

However, finfluencers not registered with the relevant financial sector regulator may not have the requisite qualifications or expertise on the subject.

Worse, not being formally subject to a financial sector regulator's code of conduct, they may not disclose any potential conflict of interest such as their association with or interest in the products, services or securities that they promote.

Many unregistered/unregulated finfluencers directly or indirectly promote products, services or securities. They may induce clients to avail these products or services in return for referral fee for usage of the product, channel, platform, or services that they advertise - such referral fee may be variable (per use or per user), or fixed (retainer model), or a combination of both.

The commission may be in an upfront or trail manner, non-cash benefits such as free usage of products or services, compensation received directly from the social media or other platform where they share their content; and profit sharing with the underlying product, channel, platform, or services.

Other unregistered entities/finfluencers may be effectively enticing their followers to purchase products, services, or securities in return for undisclosed compensation from platforms or producers.

This paper seeks to restrict the association of SEBI registered intermediaries/regulated entities with such unregistered finfluencers, to curb the flow of such compensation.