Rashmi Birmole, Pranjal Kinjawadekar and I have a piece in the Financial Express of 30th Nov 2024 on the new structured digital platforms to regulate unregulated influencers being associated with registered SEBI intermediaries. The full piece is as below:
The regulation of finfluencers has been a subject of
debate long before any attempts to bring them within the regulatory fold. Designing
a framework to address the spread of unauthorized advice or misleading claims
to an impressionable audience has had its own challenges, especially given the
absence of fiduciary duties and a code of conduct. While such activities could
be penalized as fraudulent practices or unregistered advisory, given the scale
of misinformation and justifiable risks surrounding investor protection and
financial stability, there was a growing need to also consider pre-emptive
solutions.
To that end, in August 2023, SEBI proposed to limit
the association of regulated entities with unregistered persons, like
finfluencers, in a bid to disrupt their revenue model. The proposals culminated
in amendments to certain key regulations on August 26, 2024, that barred
regulated entities from associating with persons who provide advice,
recommendations or performance claims, without being registered to do so by
SEBI. However, such associations were allowed if carried out through a ‘Specified
Digital Platforms’ (SDPs) recognized as such as SEBI, based on whether the
specified preventive and curative measures could be demonstrated by such
platforms. This was also followed by a directive to regulated entities to
terminate all existing contracts with individuals providing unregistered advice
or making performance claims.
On October 22, 2024, SEBI released proposed measures
based on which digital platforms would be recognized as SDPs. Digital platforms
have also been broadly defined to encompass any platform that facilitates communication
between two or more individuals and allows user-generated content.
The criteria released by SEBI can be seen as two-fold
– preventative and curative. Preventative measures are envisaged as proactive
actions to prevent fraud, impersonation, unauthorized claims and presence of
unregistered entities. Several of these measures, such as implementation of
systems to identify and analyze content related to securities (including
advanced artificial intelligence (AI) and machine learning (ML) tools),
policies to take action against securities market violations and impersonation,
allowing investor education content and use of verified labels to distinguish
registered entities seem premised on creating a digital ecosystem that is
well-equipped to identify and filter out unauthorized advice, claims or
advertisements. However, what is truly striking, even upon a first reading of
the proposals, is the breadth of power given to SEBI on multiple levels.
Whether in terms of requiring an SDP to share securities-market related data on
request, act on inputs received from SEBI, take measures to the satisfaction of
SEBI and even periodically report to SEBI, in a manner akin to regulated
entities.
Curative measures,
on the other hand, are intended to address the gaps in preventive measures. The
requirement for prompt escalation of reports regarding unlawful content and
unauthorized entities by SEBI, regulated entities and users alike, is intended
to restore confidence and enable prompt identification of such content. The
SDPs would also be bound to act on such reported content within strict
turnaround times, which may also include takedown or blocking of content and
blacklisting of repeat offenders. Interestingly, the action that a platform
takes should be to SEBI’s satisfaction. This leaves little to no room for the
platform to arrive at objective conclusions based on its own verification and
is essentially a carve-out for SEBI to direct content to be blocked or taken
down, without further scrutiny.
Considering the growing
influence of social media and influencers in today’s day and age, it is evident
that the prospect of being recognised as an SDP would appeal to a number of
digital platforms. While the implications of SEBI’s extensive powers under the
SDP proposals on free speech and the legality of creating substantive
obligations through a circular warrant a separate conversation of its own,
digital platforms considering recognition as SDPs must be cognizant of the extent
of SEBI’s potential involvement in their activities, if they were to succeed.
Moreover, given that SEBI’s decision as to whether certain content qualifies as
‘advice’ or ‘performance claims’ is likely to be the end all, with platforms
bound to take action to its satisfaction, it is possible that legitimate
conduct may also be impacted, unless stronger controls are worked into the
framework.
The proposals also
call for platforms to implement policies for providing data upon request, thus
increasing SEBI’s oversight of financial activities in digital media. However,
the lack of clarity on the specific data to be shared may create compliance
challenges, particularly in respect of end-to-end encrypted data, which may
deter them from seeking recognition. Further, the costs of integrating advance AI
systems could potentially deter new entrants and smaller platforms. Automated
systems may also unintentionally flag legitimate content as violative,
resulting in unwarranted disruptions. This risk extends to lawful content or
advertisements being mistakenly identified as violations, which is precipitated
by the absence of any redressal mechanism apart from approaching SEBI.
When compared to international practices, SEBI’s approach
seems to be comparatively more intrusive and wider. The Financial Conduct
Authority (FCA) in the United Kingdom employs a collaborative model,
integrating its oversight with existing digital regulations rather than
introducing standalone frameworks for financial content. The FCA partners with
Ofcom under the Online Safety Act, emphasizing shared responsibility for online
platforms while avoiding the role of a direct regulator. Similarly, in
Australia, the Australian Securities and Investments Commission (ASIC) has partnered
with online platforms to enforce verification processes for financial services
advertisements. This collaboration reduces fraudulent promotions while
minimizing compliance burdens on digital platforms. For instance, Google now
mandates that financial services providers verify their Australian Financial
Services licenses, issued by ASIC, before advertising. Providers must also
complete Google’s advertiser verification program, a policy aimed at curbing
financial fraud through online advertising.
While SEBI’s initiative to regulate digital platforms
is a welcome step towards addressing the proliferation of unregistered
financial advice, the framework’s stringent requirements raise several
practical and legal concerns. Ultimately, the SDP proposals represent a
significant shift in its regulatory strategy, signaling a move towards tighter
control and attempting to bring platforms that fall outside SEBI’s
jurisdiction, within its regulatory ambit by reason of having facilitated the
publishing and availability of financial content. The new norms must face three
challenges. One, of how it acts within the framework of freedom of speech,
specially in borderline cases. Two, whether the regulator has the bandwidth to administer
such a large mass of the regulatory unwashed masses and whether this SEBI-Administered
Facebook (SAF) will have any takers. Third and most importantly, whether any of
the millions of people with views and youtubers would at all want to be on a
platform where the SEBI-Suaron’s eye is ever-watching. How these proposals
unfold in response to the financial sector and social media platforms alike
remain to be seen.
No comments:
Post a Comment