Before framing regulations to curb ‘misleading’ messages and stock recommendations by finfluencers (a portmanteau of the phrase ‘financial influencers’), the market regulator plans to put in place some ‘building blocks’ to ensure smooth enforcement.
Madhabi Puri Buch, chairperson of Securities and Exchange Board of India (Sebi), is of the view that the ‘traditional approach may not work’ to rein in finfluencers.
“There are many interlinked pieces in our regulations — investment advisor regulations, research analyst regulations, the fact that we don’t have algorithmic (algo)-related regulations, what brokers are permitted to do, and what is incidental advice.
"This is complex and going to become very big. The traditional Sebi approach is not going to work.
"So, we need to have a different approach to this.
"The first and critical building block for that is the performance validation agency,” she said while reiterating the need for financial advisors and financial inclusion.
The regulator plans to introduce a performance validation agency to back claims of higher returns often cited by finfluencers to draw in investors.
Buch, at an event on Monday, said that once the performance validation mechanism is approved, the regulator will have a wider set of regulations related to who is a finfluencer and what regulated entities are allowed to do.
Sebi has already constituted multiple working groups to formulate parameters for the validation of the performance of mutual funds, investment advisors, and portfolio managers.
According to a consultation paper by Sebi in August 2023, the performance validation will be done based on specified parameters such as returns, risk, volatility, and other suitable parameters decided by the industry forum and partnerships with credit rating agencies to provide legitimacy to the claims.
Last year, Sebi had proposed restricting its regulated entities from associating with finfluencers — including a bar on referrals and sponsored content.
Industry experts also feel that the regulator’s tweak in its approach towards the issue is needed.
“There are still many who are not associated with any regulated entity but still in their own rights are heavy lifters and a word from them influences millions,” said Rajesh Narain Gupta, managing partner at SNG & Partners.
Gupta added, “The regulator has to intelligently qualify who the impacted finfluencers will be and how the restrictions will not fall into the mischief of the right to speech and expression in a democratic country.
"Whether there is enough existing infrastructure to adjudicate and punish the wrongdoer is another big issue.”
Over the past year, the market regulator has taken action on pump-and-dump schemes operated through YouTube videos with stock recommendations.
Further, it issued over half a dozen warnings in February to individuals doling out investment advice or stock recommendations.
According to sources, Sebi has also met representatives from the broking and trading community to decide on a framework for algo-based trading.
These norms will also play a crucial role in building a base for guidelines on finfluencers.
Changing course
- Sebi to soon issue norms on performance validation agencies
- Third-party to verify claims by mutual funds, portfolio management services, and advisors, among others
- Regulator also needs to plug gaps in regulations on algo trading
- Wider guidelines after interlinked regulations streamlined
