At midnight, regulators around the world are dying to destroy the influencer ecosystem, which is disrupting financial markets and particularly aimed at gullible young investors.
Financial influencers, commonly referred to as “influencers”, are people who provide information and/or advice on various financial topics such as investing in securities, personal finance, banking products, insurance, real estate investing, etc. via social/digital media platforms/channels. and have the ability to influence the financial decisions of their followers.
They may entice customers to avail these products or services in exchange for a referral/commission fee or material benefits such as free use of the product or service. Compensation from social media or other platforms where they share their content; and profit-sharing with the underlying product, channel, platform or services.
Target group are young people
According to a recent study by the UK’s Financial Conduct Authority, there has been an increase in the use of bloggers and influencers on social media such as Instagram, Facebook and YouTube to promote financial products, particularly investment products, to younger age groups over the past year.
“We have also seen an ongoing trend in the number of bloggers promoting loans on behalf of unauthorized third parties, with financial promotions targeting students in particular increasing.” The FCA has stepped up its efforts to combat illegal and unlawful financial promotions Social media platforms strengthened.
The European Securities and Markets Authority is also implementing a joint supervisory action (CSA) with other national competent authorities during 2023, where companies’ marketing and advertising through distribution channels such as apps, websites and social media will follow disclosure rules.
“Finally, CSA 2023 will also be an opportunity to gather information on potential ‘greenwashing practices’ observed in marketing communications and advertising,” ESMA said. Similarly, the SEC’s recent amendments to the Investment Advisers Act aim for stricter penalties and measures, and improve the monitoring of mis-selling through recommendations and testimonials on neo-platforms.
Break the revenue model
The Securities and Exchange Board of India was also not lagging behind and published a consultation paper to curb the threat posed by influencers. Key proposals included: no intermediaries/regulated entities registered with SEBI or their agents/representatives should have any connection/relationship, directly or indirectly, with non-registered entities (including influencers); and SEBI-registered intermediaries/regulated entities should not pay trailing commission based on the number of referrals as a referral fee. It did, however, allow for limited referrals by retail clients and for stockbrokers to pay fees for such limited referrals.
In addition to enforcement action against unregistered influencers violating SEBI regulations, the paper also proposed disrupting the revenue model for such influencers to reduce perverse incentives in the ecosystem, according to the regulator.
SEBI may adopt these suggestions to mitigate the risks that influencers pose to the system, but the primary responsibility lies with investors, especially newcomers. Brokerage firms and mutual funds should focus on guiding first-time investors and educating them about the risks involved in following influencers. You could also include real investors who have suffered significant losses at the hands of these influencers to provide valuable information.
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