Federal regulators from a number of countries are focusing on the potential for abuse and fraud among "finfluencers" — those social media influencers who promote financial advice or investments
International and national regulatory bodies are raising a hue and cry over the use of social media celebrities who can influence consumers’ financial decisions — so called finfluencers. The number of high-profile cases has increased visibility in this sector leading to a subsequent increase in regulatory focus on these finfluencers.
The European Securities and Markets Authority (ESMA) is conducting a joint supervisory action with national regulators throughout 2023, checking whether marketing communications, including collaborations with influencers, follow disclosure rules.
The European Commission has proposed replacing the Distance Marketing of Consumer Financial Services Directive with new requirements regarding financial services contracts concluded at a distance that will be added to the European Union’s 2011 Consumer Rights Directive, to reflect the digitization of financial services.
The European Parliament’s internal market and consumer protection committee recently voted for these new provisions to include rules requiring finfluencers to declare whether they are competent to promote a product and whether they have received any remuneration. Finance Watch, a European campaign group, wants the revised the Directive to ban influencer marketing of risky investment products.
At the member-state level, stricter rules on the mass marketing of virtual currencies brought in by the Belgian regulator FSMA have recently taken effect. Spain also introduced new advertising requirements for cryptocurrencies, and French politicians have drafted a law that would ban influencers from promoting investments or digital assets.
In the United Kingdom, the Financial Conduct Authority (FCA) banned an investment app from using paid-for social media promotions in February 2022 over concerns about its partnership with a finfluencer, and then separately warned the public about crypto-products promoted on social media. The FCA also stepped up interventions over financial promotions, with 8,582 amended or withdrawn in 2022 against 573 in 2021.
“Last year, we saw an increase in the use of bloggers and influencers on social media, such as Instagram, Facebook and YouTube, promoting financial products, particularly investment products, to younger age groups,” the FCA stated in its financial promotions data report for 2022. “We also saw an ongoing trend in the number of bloggers promoting credit on behalf of unauthorized third parties, with a particular growth in financial promotions targeting students.”
There are two points to note, however. First, it is not automatically wrong for firms to use a social media celebrity or a finfluencer to promote a product or service, provided the rules are followed. And many are doing just that. A report last October from the International Organization of Securities Commissions (IOSCO) found regulators had seen more use of influencer marketing by firms, and 43% of European firms planned to increase their use.
“Many influencers have a follower base which is very attractive to financial services firms due to it matching their target customer demographic,” says Ian Taylor, head of crypto and digital assets at KPMG UK. “Using an influencer may also be cheaper than using traditional marketing channels. Until recently, the rules and repercussions surrounding the accuracy of advertising through social media channels were unclear. This meant that using influencers could allow firms to avoid the scrutiny that comes with more traditional marketing campaigns.”
Lack of trust
Second, the rise of finfluencers is symptomatic of other problems facing the retail investment market. Trust in traditional financial and investment firms is not great, and the expense deters people from getting formal financial advice. The FCA’s 2020 Financial Lives survey found that 26% of consumers distrusted the industry, just 35% of 18–24-year-olds trusted it, and only 17% of those with £10,000 (US $12,527) or more in investable assets had sought advice. As a result, people are becoming self-directed investors, with finfluencers filling an information and confidence void.
“Finfluencers can help to democratize and demystify financial services,” explains Scott Guthrie, director-general of the Influencer Marketing Trade Body in London. “Financial education was once the preserve of the already-rich and middle class. Today finfluencers provide relatable, lived experiences. Through engaging storytelling, finfluencers connect with their communities on important topics that are often not being talked about by their friends and family.”
Regulators’ main concern seems to be what finfluencers promote and how. Many advertise that familiar boogeyman of digital finance: high-risk, sometimes fraudulent, crypto-schemes. Some finfluencers frequently fail to disclose that they are being paid, and the informality that makes them engaging can often mean their promotions break regulations.
An IOSCO report on retail market misconduct published in March said finfluencers make investment more accessible, but cause problems with transparency and advice being given by authorized persons. The report recommended that, where applicable, regulators remind firms that they are responsible for the online communications of affiliates such as finfluencers. IOSCO also said regulators should provide guidance on finfluencers’ obligations and be ready to take enforcement or other disruptive action against those who promote misleading and deceptive products or information. IOSCO also recommended that regulators go to where the fight is and use social media platforms to target fraudsters and alert investors.
To that end, Belgium’s FSMA is backing its new rules on advertising virtual currencies with financial education about the assets, including videos and a game aimed at young people.
In early April, the FCA launched a campaign with the Advertising Standards Authority (ASA) and social media celebrity Sharon Gaffka to educate finfluencers about the obligations and risks they face. The FCA stated it wanted to work with finfluencers so they keep on the right side of the law because they often tout products without knowing the rules or understanding the harm they could cause their followers.
Furthermore, the rules finfluencers should follow when promoting crypto-assets to U.K. consumers are to become more onerous. The government plans to introduce legislation classifying crypto-assets as restricted mass market investments and subject to similar additional warnings and obligations.
“The FCA and ASA reminded finfluencers that making an unlawful financial promotion is a criminal offense that carries a maximum sentence of two years imprisonment and an unlimited fine,” says Kate Dawson, sector lead of capital markets at KPMG’s regulatory insight center. “Due to this increased scrutiny, the use of influencers by crypto-businesses is likely to decrease and, in any case, [should be] approached with more caution.”