Financial influencers, also referred to as finfluencers, are a booming phenomenon on social media platforms and a growing concern for financial regulators. Around the world, governments are mulling on ways to create a regulatory framework for online personalities promoting risky, and sometimes fraudulent, investments to often inexperienced consumers.
In the UK, fraudulent and misleading financial promotions are becoming rampant. In 2022, the Financial Conduct Authority (FCA) asked firms to amend or remove more than 8,500 promotions, or 14 times more than the year prior, the markets watchdog said in February 2023.
The FCA said it has already acted against several finfluencers and that these personalities will be facing more pressure in 2023. The regulator added that it was consulting on introducing tougher checks for firms that want to approve financial promotions to help crackdown on ads from unauthorized firms and individuals.
“The FCA has worked closely with several big tech companies to change their advertising policies to only allow financial promotions that have been approved by FCA-authorized firms, but more needs to be done by tech companies to protect consumers,”
Sarah Pritchard, the FCA’s executive director of markets, said in a statement.
“This year, we will continue to put the pressure on people using social media to illegally promote investments, which put people’s hard-earned money at risk.”
In Australia, the government is cracking down on content creators who offer financial advice without a federally-issued license. In an information sheet released in March 2022, the Australian Securities and Investments Commission warned that influencers who provide unlicensed financial services can be penalized with hefty fines and face up to five years in prison.
And in the European Union (EU), the financial markets regulator and supervisor, the European Securities and Markets Authority (ESMA), launched in January 2023 a common supervisory action to look at marketing practices of firms and how they target audiences through online distribution channels, including apps, social media and collaborations with affiliates such as influencers.
The rise of finfluencers
Finfluencers are social media personalities providing financial advice and advertising financial products on popular platforms such as TikTok, Twitter, Instagram and Facebook.
The content of their posts and videos can offer advice, education and discussion about financial topics, covering a broad range of themes from personal finance, financial freedom and investment strategies, to crypto-asset investing and product reviews of new fintech products. Some finfluencers also share their own experiences, such as gains and losses in the stock market, in addition to personal tricks to save and earn money.
Finfluencers often work with regulated and unregulated fintech companies in paid collaborations. These partnerships can generate some substantial income. Austin Hankwitz, a 27-year-old TikToker from America, makes more than US$500,000 on the platform annually. On TikTok, the most popular finfluencers can make up to US$7,000 per sponsored post, according to a 2022 study conducted by derivative trading provider CMC Markets.
With a significant following on social media and a high level of influence, finfluencers are increasingly coming under the scrutiny of regulators. This is due mainly to the potential risks associated with providing inappropriate financial information to a wide audience on social media platforms, and the impact of that content on the financial well-being of their followers.
In the traditional financial services space, areas of concerns including the fitness of the person providing advice, the factuality of the information provided, as well as the level and understanding of financial literacy, risk appetite, and risk tolerance of the viewers, are addressed through laws and regulations. Legislations including consumer protection laws and corporate laws mandate that financial advisory activities must be conducted by licensed parties and under the supervision of financial regulators.
However, many finfluencers are not licensed financial advisors, and some might not even know that these laws and requirements apply to them.
Regulatory requirements for finfluencers in the EU and Switzerland
In a new report released earlier this month, consultancy EY outlines the regulatory framework for finfluencers and financial institutions promoting products on social media under Swiss and EU laws.
In the EU, ESMA issued in 2021 a public statement on investment recommendations on social media, reminding that these must follow the EU Market Abuse Regulation, the report notes.
Advice should be made in a specific and transparent manner so that investors understand and are able to assess the credibility of the recommendation and its objectivity, as well as any interest of those making the recommendations, it explains. It adds that the regulation is also applicable to crypto-assets if such assets are classified as financial instrument in accordance with the Markets in Financial Instruments Directive.
In Switzerland, content on financial products and services, as well as financial tips may trigger specific regulatory requirements, EY says. For example, if a finfluencer promotes a financial product that qualifies as financial instrument as defined by the Swiss Financial Services Act, this may be considered “advertising” or “offering”, triggering licensing obligations. The same goes for a financial tip that falls under the legal definition of an “investment advice”, it says.
Advertising for a financial instrument must be clearly recognized as such, and the ad must refer to the Key Information Document (KID), which must be drawn up by the producer of the financial instrument, in addition to the prospectus for the financial instrument.
As for investment advice, advisors are subject to certain rules, including information and disclosure duties, professional knowledge, entry in the register of advisors, and affiliation with the ombudsman’s office, the firm says.
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