Pankaj Sharma and Phoebe Chan discuss the complexities of regulating financial promotions online, finfluencers in particular, and offer recommendations.
The rise of social media fostering a preference for immediate gratification and swift outcomes, has not spared the investment management industry. This is evident from our interactions with stakeholders and industry participants, wherein CFA Institute has consistently received feedback that younger audiences are especially more comfortable with an engaging audiovisual experience. This also facilitates the development of their learning and understanding of how investments work as compared to a text-based experience, either offline or online.
This paradigm shift is an attractive opportunity for several different new-age business categories including virtual assets, trading platforms, finfluencers and others. Across different geographies, this has posed a new challenge to regulators, as they work to develop robust mechanisms to protect investor interests and regulations that are effective and efficient. This is a fast-moving arena and as a result, regulation also needs to evolve at the same pace.
The recent JPEX incident and SFC response
In line with our long-standing objective of ‘protecting investor interest’, CFA Institute is contributing meaningfully to such discussions. For example, when Hong Kong’s Securities and Futures Commission (SFC) proposed regulatory requirements applicable to licensed virtual asset trading platform (VATP) operators in the first quarter of this year, our joint comment letter with CFA Society Hong Kong emphasised the institute’s long-standing advocacy positions. These changes became effective on 1 June 2023, covering retail access to licensed VATPs to trading in virtual asset derivatives.
Following the recent JPEX incident, the SFC has further released lists of virtual asset trading platforms to help investors more easily identify suspicious VATPs doing business in Hong Kong. JPEX is an application-based trading platform that promised investors exponential profits while touting zero commission fees. So far, the number of reported cases has soared to 2,623, with 66 arrests and involving losses of HKD 1.6 billion (USD 205 million) from retail investors, making it one of Hong Kong’s biggest financial scams. Among the arrestees were influential figures from social media platforms, commonly referred to as “Finfluencers”. This case of JPEX also revealed a hidden marketing strategy that has possibly shaken market stability.
Setting the scene: the rise of finfluencers
With the advent of new digital platforms and the proliferation of financial marketing on social media sites, such as TikTok, Instagram and YouTube, a new market has emerged: finfluencers. Regulatory bodies like the UK Financial Conduct Authority (FCA) and Hong Kong’s SFC have acknowledged this new trend of investing, especially among younger investors, where social media is increasingly used to promote financial products and make investment recommendations.
This has been under focus of regulation in other geographies across Asia-Pacific. For example, India’s capital markets regulator, SEBI, has imposed heavy penalties on finfluencers found guilty of misconduct. It also floated a consultation paper in August 2023 proposing regulations to restrict the association of SEBI-registered intermediaries or regulated entities with unregistered ‘finfluencers’. The consultation paper has proposed measures to “disrupt the revenue model for Finfluencers indulging in misconduct, so that the perverse incentives in the ecosystem reduce”.
The recent scandal of finfluencers in Hong Kong entangled in financial fraud is not the first in the world, and without proper governance, it is unlikely to be the last of its kind. Globally, we have witnessed the impact of celebrities and prominent figures in shaping investor perception and associated action. But there are challenges and often due process are not followed.
For instance, in the case of FTX, certain individuals were paid to endorse the platform as a safe investment – while the marketing worked; it does not necessarily indicate a well-conducted Know Your Customer (KYC) process. In fact, the high-profile endorsements featured in FTX commercials concealed poor record-keeping practices and a lack of checks and balances. Eventually, the collapse of FTX ended the bull run of crypto assets.
Social media can be a double-edged sword
Recognising the potential of social media in making financial information more efficient, and accessible to the younger generation – we acknowledge that it offers ‘significant value to firms’. This was acknowledged by the FCA as early as 2015. Social media could also enhance financial inclusion and reduce information asymmetries between firms and individuals, a notion underscored by the investing habits of Gen-Z.
To better understand this emerging trend, CFA Institute is currently conducting a study on the use of social media finfluencers in investment promotions and recommendations. The study, detailed results of which are forthcoming, examines how younger investors engage with finfluencers. In general, Gen-Z reveals a stronger appetite for risk, and yet displays relatively low levels of financial literacy.
In the context of finfluencers, our study brings to light concerns about common practices, including:
- The potential for marketing practices to exploit consumer behavioural biases
- Improperly disclosed marketing when finfluencers potentially receive inducements
- The lack of risk warnings and balance in finfluencer content
One of the recurring questions posed by our members revolves around the factors that create uncertainties for regulators and limit their authority. We acknowledge the complexities of regulating financial promotions online and the constraints faced by regulators in addressing entities outside the scope of its regulatory perimeter, such as finfluencers acting independently from firms.
Among the other challenges, a salient concern arises from the varying levels of financial and advertising literacy among the general public – particularly in the context of decentralised finance and virtual assets. These concepts are highly complex by nature and the market features high volatility. Additionally, there is inadequate and low-quality reporting, impeding investors’ ability to make informed decisions.
Moreover, the consumption of promotional content created outside the regulator’s jurisdiction poses a challenge, as it becomes challenging to conduct due diligence on such information. The extent to which these materials fall within the purview of the financial promotion regime remains unclear.
In light of the harmful practices observed in some financial promotional activities, we put forth the following policy recommendations:
- Disclosures: We suggest regulators extend the existing rules, which apply to traditional distribution channels, to encompass marketing disclosures on social media platforms. Firms that are engaged in affiliate marketing should mandate their affiliates to disclose the exact nature and structure of any related compensation. This would ensure they do not benefit from an unfair comparative advantage, as exemplified by FTX, which was exempted from disclosure obligations under applicable laws.
- Geography: Given the transnational nature of social media content, fostering cross-border cooperation among regulatory bodies becomes indispensable to safeguard the best interests of investors. Furthermore, individuals sharing financial information on social media platforms while operating in diverse markets should include disclaimers that specify the geographical relevance of their content.
- Quantifying harm and protecting consumers: We believe regulators may also enhance their data collection efforts and strengthen reporting mechanisms for whistleblowing and complaints related to finfluencers as a distinct category. Additionally, regulators should consider using social media platforms for the public to access resources, such as the list of approved firms and platforms as well as to lodge complaints.
Trust is key
Both FTX and JPEX experienced a rapid and catastrophic decline resulting not only in substantial financial losses for investors, but also in the erosion of trust within the market. This reminds us of the importance of market integrity.
Regulators face the critical task of striking the right balance. They should ensure that rules governing social media platforms are consistent with those applied to print advertising and other distribution channels – thereby preventing undue advantages to any of these methods, without restricting their ability to adapt to evolving modes of information consumption.
To ensure the success of such efforts, all stakeholders need to contribute. CFA Institute also urges firms to assume greater responsibility over their promotional activities when partnering with finfluencers and other third parties. These firms should evaluate the nature and extent of training they provide to influencers affiliated or engaged with them to ensure that local regulations are respected. The social media platforms should also fulfill their role to play in ensuring adherence to marketing disclosure rules.
Social media is borderless with a plethora of investment advice and analysis available. However, succumbing to herd mentality and investing in concepts one does not fully comprehend can be a recipe for disaster. Embracing the idea of DYOR (Do Your Own Research) necessitates refraining from blindly following hype. Instead, it encourages investors to conduct their own research, think independently, and exercise critical judgment.
To understand more about the related investment concepts, please refer to our previous report “Cryptoassets: Beyond the Hype” and our upcoming study on finfluencers.
By Pankaj Sharma, Senior Manager, Capital Markets Policy, India, CFA Institute and Phoebe Chan, Capital Markets Policy Specialist, CFA Institute
 The study examines a sample of 110 sources of content on YouTube, TikTok, and Instagram across three jurisdictions, specifically the United States, UK, and EU, with a focus on France, Germany, and the Netherlands.