Social media influencers promoting financial advice or investments may find themselves under the watchful eye of regulators who are becoming aware of potential fraud in this area.
The UK Financial Conduct Authority (FCA) reports a significant increase in the number of interventions the agency is making in response tolow adherence to financial promotions. According to the FCA, only individuals (and companies) who have applied for and received the proper credentials can speak to the merits of investments.
Market monitoring by the regulator in 2022 found 1,882 promotions from unauthorized companies that required modification or withdrawal following agency intervention, a 34% increase from the 1,410 promotions that received such treatment in 2021. Another 8,582 promotions from authorized subscriptions also needed to be modified or retired, compared to just 573 in 2021, a massive 1,398% increase.
The FCA notes that “[in] the last year we have seen an increase in the use of bloggers and influencers on social networks such as Instagram, Facebook and YouTube, which promote financial products, particularly investment products, to younger age groups. We've also seen an ongoing trend in the number of bloggers promoting credit on behalf of unauthorized third parties, with particular growth in financial promotions targeting students."
Finfluencers and regulations
the rise offinfluencers(Abbreviation offinancial influencers) (individuals on social media who advocate a certain type of investment option) is featured in the Royal Mint'sGeneration Z Investment Report 2022, which found that 23% of young investors are followers of finfluencers.
…influencers should be aware that social media is not an oasis where consumer protection laws, advertising standards and intellectual property rights can be ignored.
Some see the dissemination of financial information via social media platforms as a healthy way to engage people in investment activity and welcome the increased transparency inherent in this mode of communication. However, finfluencers should be aware that social media is not an oasis where consumer protection laws, advertising standards and intellectual property rights can be ignored.
Regulators around the world have started to provide guidance to finfluencers and their followers. He2021 statement on social media investment recommendationsby the European Securities and Markets Authority (ESMA), explores the boundaries between providing financial information and providing online financial advice and recommendations. In addition, the Hong Kong Securities and Futures CommissionGuidance on online advice and distribution platformsstipulates that any licensed financial advisor will be held accountable through all channels, including social media. The Financial Markets Authority of New Zealand has aGuide to talking about money online, advising consumers and finfluencers. Meanwhile, the Australian Securities and Investments Commission has afact sheet for finfluencersthat include details of financial products and services in their content.
If influencers provide financial advice and recommendations based on the regulators' definitions of these terms, they must comply with regional regulations on licensing and conducting business. However, the popularity of finfluencers, which is being driven by changing attitudes among investors and the more varied range of channels through which they can enter the investment market, makes it difficult for regulators and companies to ensure that these clients receive fair treatment. .
New attitudes towards investing
Factors such as new technologies, the global pandemic and concerns about climate change have led to changes in investor attitudes. The Royal Mint report paints a mixed picture of young adults' investment behavior. On the one hand, social media was found to have driven 17% of respondents to adopt a get-rich-quick mindset, with people expecting to double or triple what they invested in a short amount of time.
On the other hand, the report also finds that when losses occurred, 64% of 16-25 year olds actively sought to diversify their risks by adding what they believed to be “safer investments” into their portfolios. A full 80% of that same group now spend a portion of their income investing in their future, and two-fifths say the pandemic has made them realize the value of secure finance. As a result, more than a third adopted it. about themselves to learn about investing as a way to help grow their money.
AFCA Research Report 2021He noted that for those investing in high-risk products, “challenge, competition and novelty are more important than conventional, more functional reasons to invest, such as wanting to put your money to work harder or save for retirement.
finfluencer case study
Paul Pierce, former professional basketball player for the Boston Celtics and member of the NBA Hall of Fame, has promoted EthereumMax (EMAX), a cryptocurrency coin or token, on social media, as have many other celebrities. In his tweets, Pierce showed screenshots of alleged earnings along with links where followers could shop. Pierce is one of many celebrities claiming to make financial gains using these types of investments. During his EMAX token promotion on Twitter, Pierce failed to disclose that he was paid for his promotion with more than $244,000 worth of EMAX tokens, the U.S. Securities and Exchange Commission (SEC) alleged.
“This year, we will continue to put pressure on people who use social media to promote investments illegally, putting people's hard-earned money at risk.”
—Sara Pritchard| Chief Market Officer, Financial Conduct Authority
Pierce has now agreed to pay more than $1.4 million to settle allegations that he illegally promoted digital assets, the SEC said in February. This settlement is greater than the $1.26 million paid by Kim Kardashian to settle similar SEC charges related to the EMAX promotion. The deals with Pierce and others mark the latest move by the SEC to crack down on celebrity endorsements of crypto products.
The increase in the number of finfluencer promotions that do not meet the requirements suggests that, as investors seem more willing to take risks, company marketing departments may be tempted to make financial promotions more interesting.
In the UK, for example, the regulations are based on the principle of being clear, fair and not misleading. The regulations also provide detailed requirements for companies to include the need for financial promotions to give a fair and prominent indication of any relevant risks, and to be presented in a way that is likely to be understood by the average member of the group to whom it is directed. managed. Furthermore, these promotions cannot disguise, diminish or hide features, statements or important notices.
The future
This year, regulators' focus on the use of financial promotions is unlikely to diminish. Sarah Pritchard, Executive Director of Markets at FCA, gave a clear indication of what the future holds. “This year, we will continue to put pressure on people who use social media to promote illegal investments, putting people's hard-earned money at risk,” he said.
As the number of tools and resources issued by regulators to monitor promotions increases, so does the risk of companies being caught in non-compliant behavior. The FCA is consulting on introducing tighter controls on financial promotions and measures that will remove harmful promotions more quickly.
Finally, businesses in the UK need to consider the impact of the new Consumer Law, which many are expected to implement by July 2023. “Under the duty, businesses will need to show that they are providing consumers with information that helps them make decisions effective, informed decisions about financial products and services,” said the FCA.
In the United States, the SEC is moving to punish all bad actors, not just celebrities, according to Gurbir S. Grewal, director of the SEC's Division of Enforcement. “Federal securities laws are clear that any celebrity or other person promoting a crypto asset must disclose the nature, source and amount of compensation received in exchange for the promotion,” said Grewal.