In today's world, where the mantra is 'retire early, retire wealthy', everyone is trying to maximise their income by trying to have their own side-hustle or some form of passive income apart from their primary employment. Leveraging this opportunity, many have self-proclaimed themselves to be financial experts without formal registration with the Securities Exchange Board of India (SEBI).

With these people, known as financial influencers or finfluencers (not registered with SEBI) flooding social media platforms with their advice and comments, their followers stand a large risk of losing their money due to potentially mistaken or improper advice. Yet another concern is that unregistered entities may give out biassed advice with the motive of illicit financial gains.

A prime example is that of Vauld, a crypto exchange company, in which various highly followed financial influencers such as PR Sundar and Akshat Srivastav had advised to invest. The company's assets worth 46.4 million dollars were frozen by India's anti-money laundering agency alleging that the company was facilitating 'crime derived proceeds' from predatory lending firms, due to poor KYC norms and mechanisms to conduct background checks on the source of the proceeds.

The company suspended its customers from withdrawing, trading and depositing along with filing for bankruptcy. Following this, it was noticed that various financial influencers pose a credible threat of harming a common man's wallet, due to the lack of professional knowledge and necessary registrations to legally provide financial advice.

PR Sundar (banned finfluencer) was alleged to have selectively shared screenshots of his successful trades, conveniently leaving out his unsuccessful ones.

Under the 'Guidelines for Influencers in Digital Media' by the Advertising Standards Council of India, an influencer is someone with access to an audience and the power to affect their purchasing decisions or opinions due to their authority or relationship with the audience. While providing information or advice on multifarious financial topics, they also often deal in areas that are regulated financial sectors with regulators such as:
SEBI, RBI, PFRDA and IRDA.

It is common knowledge that these financial influencers do not do this for free, they advise in return for referral fees, non-cash benefits, monetary compensation received from the platform and profit sharing with collaborations or the underlying products, platforms or services.

When SEBI took notice of some SEBI registered intermediaries or entities relying on these unregistered entities for the promotion of their products, platforms and services, it took a stance by passing SEBI's consultation paper on association of sebi registered intermediaries/ regulated entities with unregistered entities (influencers), to limit the association of SEBI registered individuals or entities with unregistered ones.

The paper by SEBI has laid out some objectives and intentions, primarily to disrupt the model of revenue of such unregistered financial influencers in order to reduce "perverse incentives" and seeks the public opinion to implement a restriction on the association of registered entities with finfluencers.

The restriction in elaboration states that, no registered individual or entity (or any related registered party) shall associate with unregistered entities, either directly or indirectly, whether it is for monetary, non-monetary, promotional or advertising purposes.

Further in order to tighten and regulate the secrecy of confidential information, clause 4.3 of the proposal states that registered individuals shall not share confidential information and must ensure strict adherence to the code of conduct(1).

Further, to efficiently implement the same, the paper also requires that those registered restrain from limiting referrals from retail clients while adhering to the advertisement guidelines issued by SEBI and take necessary steps for disassociation with unregistered entities.

The practice of ensuring registration in order to curb fraudulence and deception have been implemented in various other nations as well, apart from India. An example of the same is the Regulation of Investment Advisers by the U.S. Securities and Exchange Commission March 2013 released by the U.S Securities Exchange Commission which states; "A firm that falls within the definition of "investment adviser" (and is not eligible for one of the exclusions) must register under the Advisers Act, unless it:

• Is prohibited from registering under the Act because it is a smaller firm regulated by one or more of the states
• Qualifies for an exception from the Act's registration requirement.

All advisers, registered or not, are subject to the Act's anti-fraud provisions" (2)

References:

1. https://www.taxmann.com/research/company-and-sebi/top-story/222330000000022495/sebi-proposes-to-restrict-association-of-sebi-regulated-entities-with-unregistered-finfluencers-news
2. https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf