Consultation Paper on Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)

Margesh Rai

30 Mar, 2024

SEBI has on come up with a Consultation Paper on the Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered ‘finfluencers’. The objective of this consultation paper is to seek public comments on a proposal to restrict the association of SEBI registered intermediaries/regulated entities with unregistered ‘finfluencers’.

Need for Regulation

The reason why this consultation paper was sought is because in recent times, activities of financial influencers (finfluencers) have attracted wide public and media attention. Finfluencers are mostly unregistered entities providing catchy content, information and advice on various financial topics to their several followers. While some have genuine educators, many are effectively unregistered and unauthorised Investment Advisers (IAs) or Research Analysts (RAs). A separate consultation paper proposed a unique fee payment platform for registered IAs and Ras that should help investors identify, isolate and avoid unregistered entities/finfluencers. Other unregistered entities/finfluencers may be effectively enticing the followers to purchase products, services or securities in return for undisclosed compensation from platforms or producers. So this consultation paper seeks to restrict the association of SEBI registered intermediaries/regulated entities with such unregistered finfluencers to curb the flow of such compensation. 

Finfluencers and their business model

An influencer means someone having access to an audience and power to affect such audience’s purchasing decisions or opinions about a product, service, brand or experience because of the influencer’s authority, position, knowledge, or relationship with their audience. The Advertising Standards Council of India has given this definition in its ‘Guidelines for Influencer Advertising in Digital Media’.

Financial influencers are called as ‘finfluencers’. 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 or 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 attract investors/prospective investors through engaging stories, messages, reels and videos on various social media platforms such as Instagram, Facebook, YouTube, Twitter, and LinkedIn.

Those finfluencers who are not registered with the relevant financial sector regulator may not have the requisite qualifications or expertise. Further, not being formally subjected 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 induce clients to get these products or services in return for-

1. 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;
2. Non-cash benefits such as free usage of products or services;
3. Compensation received directly from the social media or other platform where they share their content; and
4. Profit sharing with the underlying product, channel, platform or services.

SEBI came across situations where SEBI registered intermediaries/regulated entities may rely on such unregistered/unregulated finfluencers to promote their product and services. So it decided to limit the association of SEBI-registered intermediaries/regulated entities and their agents/representatives with unregistered entities (including finfluencers).

Limiting the association of SEBI registered intermediaries/regulated entities and their agents/representatives with unregistered entities

1. Apart from initiating enforcement action against unregistered finfluencers who breach SEBI regulations, this paper also proposes to disrupt the revenue model for such finfluencers to reduce the perverse incentives in the ecosystem.
2. 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).
3. Entities registered/regulated by SEBI or stock exchanges or AMFI shall not share any confidential information of their clients with any unregistered entities.
4. Finfluencers registered with SEBI or stock exchanges or AMFI in any capacity shall display their appropriate registration number, contact details, investor grievance redressal helpline and make appropriate disclosure and disclaimer on any posts. They shall also fully adhere to the code of conduct under the terms of their relevant registration.
5. Such entities shall comply with the advertisement guidelines issued by SEBI, stock exchanges and SEBI-recognised supervisory body from time to time.
6. Such entities shall comply with the advertisement guidelines issued by SEBI, stock exchanges and SEBI-recognised supervisory body from time to time.
7. SEBI-registered intermediaries/regulated entities shall not pay any trailing commission based on the number of referrals as a referral fee.
8. Limited referrals from retail clients and payment of fees for such limited referrals by stockbrokers shall be allowed.
9. SEBI registered intermediaries shall take active measures to dissociate themselves from any unregistered entity using their name, product or service. They shall take necessary action to bring it to the notice of the enforcement agency concerned to take appropriate action, including filing case under section 420 of the Indian Penal Code, 1860, for impersonation and fraud, etc. as may be applicable.

Public comments have been invited in this regard in the following format: