In recent times, there has been a growing popularity of financial content creators (colloquially known as ‘finfluencers’), who often provide financial advice and recommendations over social media. While informative content on financial products can increase the financial literacy of investors, finfluencers have been under SEBI’s scanner in the recent past for providing unauthorised investment advice.
As a part of its ongoing efforts to curb advisory activities by unauthorised persons (including finfluencers), SEBI, through a circular dated October 22, 2024, has mandated all regulated entities to terminate their existing contracts with any persons engaged providing unregistered financial advice or making claims of guaranteed returns (“Prohibited Activities”). The above directive must be complied within three (3) months, i.e., by January 22, 2025.
The above requirement has been notified in furtherance of SEBI’s earlier decision to prohibit all associations between regulated persons and persons carrying out the Prohibited Activities. Such prohibition does not extend to persons engaged in investor education, or associations through a “specified digital platform”, which means digital platforms which have mechanisms in place to take preventive and curative action to ensure that such a platform is not used for carrying out the Prohibited Activities.
SEBI has also stated that it is in the process of framing guidelines for the recognition of such digital platforms. Thus, the termination of contracts by regulated persons with persons carrying out the Prohibited Activities appears to have been directed in the interim. To avoid non-compliance, regulated entities would be required to assess the activities of all persons associated with it and also whether such activities constitute ‘advice’. Since the restriction imposed by SEBI applies to all associations (direct or indirect),without the nature of contracts being specified, it would be challenging for the entities to ascertain whether the contracting party is engaged in any Prohibited Activities. Moreover, the term ‘specified digital platform’ still holds a vague definition as the guidelines for recognition of such digital platforms are yet to be notified and it is not clear what factors would constitute ‘satisfaction’ of SEBI in terms of having a preventive and curative action mechanism for such a platform.
The recent directive can be seen in the larger context of SEBI’s intent to prevent investors from being influenced by unauthorised persons, as seen through its attempts to silo regulated entities from such persons by prohibiting all associations and placing an obligation to ensure that any person associated with it do not engage in the Prohibited Activities. SEBI’s recent decision to introduce an optional centralized fee collection mechanism, intended to distinguish legitimate entities from unauthorised persons, is also a step in such direction.
SEBI has continued to acknowledge the educational value provided by finfluencers, but focused on targeting unregulated entities that spread misinformation and promote specific financial products.
Overall, SEBI’s effort to eliminate unregulated entities from the market is appreciated and we look forward to see its implementation.
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