Financial regulators in the United Kingdom, European Union, and United States are proposing new rules to regulate how financial products are promoted on social media platforms. There is a particular focus on financial influencers, who are individuals or groups with large followings on social media that promote financial products or services, also known as "finfluencers.” Regulators are taking action against finfluencers promoting what they deem to be high-risk financial products, including cryptoassets, after a series of cases where financial products promoted online led to huge losses for consumers.
The UK's Proposed Measures
The Financial Conduct Authority (FCA) is taking steps to tackle illegal and non-compliant financial promotions on social media platforms. The FCA plans to extend its existing guidance to address the increasing number of advertisements on social media falling short of existing rules, especially those targeting younger consumers who tend to place more trust in finfluencers. The aim of the FCA’s new guidance is to target promotions on social media platforms where there is not enough text to accurately convey the risks of investing.
The EU's Common Supervisory Action
In the European Union, the European Securities and Markets Authority (ESMA) launched a common supervisory action to assess whether investment companies and credit institutions adhere to the MiFID II requirements on marketing communications. The concern is particularly focused on younger and unsophisticated investors who may look to social media and influencers for investment advice. In the European Union, there is no specific legislation on influencer marketing, but horizontal consumer protection laws apply to ensure transparency. For example, the Digital Services Act (DSA) addresses concerns over transparency in online advertising, ensuring that online adverts can be identified as such and include information about the advertiser.
Regulatory Action in the US
In the United States, the US Securities and Exchange Commission (SEC) has been at the forefront of action against finfluencers promoting cryptoassets. Notable cases include reality TV star Kim Kardashian, who was fined $1.26 million for promoting EMAX tokens without properly disclosing her payment from EthereumMax. The SEC also charged eight other celebrities, including actress Lindsay Lohan and YouTuber Jake Paul, for allegedly unlawfully promoting cryptoasset securities.
The SEC updated its marketing rule under the Investment Advisers Act, aiming to better regulate endorsements and testimonials. The marketing rule now requires the disclosure of the material risks associated with potential benefits to investors when investing in the promoted financial products. The Federal Trade Commission (FTC) has also released updated endorsement guidelines to address the growing trend of influencer marketing.
In short, as financial promotions through social media become more widespread, regulators are stepping up their efforts to protect consumers from potential harm. By focusing on finfluencers and implementing guidelines on transparency and disclosure, the aim is to strike a balance between promoting financial products and safeguarding the interests of consumers. As the landscape continues to evolve, it is essential for finfluencers and financial institutions to stay informed about the latest regulations and adhere to best practices to ensure responsible and fair promotion of investment products on social media platforms.
Trainee solicitor Lovell Owiti contributed to this post.