EU reiterates rules to regulating “Finfluencers”

RegCORE Client Alert | Banking Union | Capital Markets Union

QuickTake

The accessibility of investment advice on social media platforms has grown significantly in the past years, particularly during the COVID-19 pandemic. Regulatory and legislative policymakers and supervisors stepped-in, notably in the EU, to set social media platform standards in the aftermath to GameStop and other social media driven exacerbated volatility in trading of shares.

The rise of content creators known as “finfluencers” has sparked renewed concerns on how to ensure content and distribution channels are appropriately regulated and supervised so as to protect (mostly younger retail) clients and consumers in particularly those that are vulnerable (mostly due to low to no financial literacy). In the simplest terms, finfluencers are individuals who use their popular status on public social media platforms to impact investment decisions and share personal experience of their use of traditional as well as crypto-assed focused financial services firms’ products, services and solutions. While a variety of finfluencers exist ranging from celebrities to well-known corporate personalities, there are generally three types of finfluencers: investment professionals, hired finfluencers and unregulated finfluencers. Not all influencers have suitable qualifications nor experience and their activity has raised questions on the scope of laws addressing investment fraud and share price manipulation.
 
Finfluencers provide their audience with unpaid or paid advice and/or promotions. Some may offer investment strategies across various asset classes. While responsible finfluencing may increase financial literacy and retail client market participation, failures can be costly for investors. This also applies to those commissioning content – whether established or more nascent entrants who may rely more heavily on social media generally and finfluencers specifically to spur on market penetration. Many finfluencers have millions of followers across a variety of platforms with global reach – Firms would love to convert such followers into their clients. Finfluencing however shifts the financial market information ecosystem. Finfluencers are not solely motivated to seek out fundamental value information but rather to maximise popularity (as measured in their following) and grow their personal brand. Disinformation and conflicts of interest are ripe, notleast because professional financial services advice – that is paid - is client-oriented and, as such, tailored to clients’ individual financial situations including risk tolerance and objectives. As a result, regulators around the globe are rushing to catch-up in publishing appropriate standards, most of which will have extraterritorial effect and impact, including as a result of enforcement action for false advertising, fraud and/or market abuse.

This Client Alert from PwC Legal’s EU RegCORE provides a focused overview of how the EU aims to improve standards applicable to financial services firms and their use of finfluencers. Given the short time frame until this new regime will become applicable, it is essential for such in-scope institutions, but also social media platforms, to adopt adequate and compliant solutions. Our EU RegCORE team has laid out what to expect and which aspects to monitor as the move to full implementation gathers pace.

EU legislative and regulatory policymakers step in on the (social media) scene

The rapid growth of finfluencers (from ordinary retail to celebrities) and their GenZ and Millennial followers are causing concern amongst regulators both in the risk of loss to such investors due to exacerbated price volatility, creation of bubbles, investment fraud and/or financial crime. Finfluencers use various social media channels and formats to offer advice, education, promotion and discussion about financial topics targeting tech-savvy GenZ and Millennials in the familiar entertaining format on a diverse set of subjects from personal finance and financial freedom to stock markets and crypto-assets trading through to how to set-up a start-up and plan for retirement.

Finfluencers are thus the newest breed of brand ambassadors, some are tied, some are not and some work for regulated and (as of yet) unregulated firms with a range of remuneration models. While “finfluencing” can have a positive impact on improving financial literacy (an overall aim of the EU) The EU’s Retail Investment Strategy package sets out new provisions that aim to spur Member States' action in the area of financial literacy, by encouraging them to introduce national measures to support the financial education of retail investors. The final objective is ensuring that all citizens feel more empowered to make decisions that contribute to their own financial well-being, such as in preparing for retirement, better managing budgets, savings or debt but also increasingly in engaging in investment activities. Particularly when investing, citizens should feel empowered to understand the risks and benefits involved, as well as the financial advice they receive. This does not mean that they are expected to become experts in financial services, but rather that they have the means to develop the necessary knowledge, confidence and awareness to make decisions that meet their financial needs.Show Footnote, using the large exposure that comes with (fin)influence to perpetrate fraud or manipulation of pricing across various asset classes is sadly not a new development.

As with warnings issued by the US’ Securities and Exchange Commission about social media and investment fraud Available hereShow Footnote along with the UK’s Financial Conduct Authority issuing a warning to finfluencers directly on the risks of promoting illegal get-rich-quick schemes, Available hereShow Footnote EU policymakers have subsequently stepped in. The European Securities and Markets Authority (ESMA) had previously on 17 February 2021 published a supervisory statement warning on respecting appropriate standards when using social media. "Discussing the opportunity to buy or sell the shares of an issuer does not constitute market abuse," ESMA warned. However, coordinating trades or orders to affect a share's price could be market manipulation. ESMA also warned that posting information on social media or message boards/forums about an issuer or financial instrument could constitute an investment recommendation and trigger a number of regulatory requirements. ESMA equally cautioned that the dissemination of such postings could constitute market manipulation. Since then, the EU’s Markets in Crypto-Assets Regulation (MiCAR – see separate coverage from our EU RegCORE) adds crypto-assets into the regulatory scope.Show Footnote Moreover, the website and project www.finfluencers.org, co-funded by the European Union provides tools on financial literacy but also “online training for young financial influencers”.

Following on from warnings at the national level across the EU, the European Securities and Markets Authority (ESMA) communicated in January 2023 See hereShow Footnote that it would look at social media and finfluencers as part of its common supervisory action on marketing by financial services firms more generally. While confusion may exist across the finfluencer community as to how they must comply with certain regulatory requirements, financial services firms have been reminded that finfluencers are regulated by rules on unfair commercial practices like regular influencers and also by laws on financial services advertising/promotions. This means finfluenceres must consider their duties under:

• The Unfair Commercial Practises Directive (UCPD), which covers "hidden marketing". Finfluencers must label sponsored content (Article 11) and cannot misrepresent themselves as consumers (Article 22) under the UCPD's 'black list' (Annex I). Finfluencers must declare sponsored content to their audiences under national legislation implementing the UCPD. This has been confirmed by multiple court rulings across the EU. Commercial activity misdisclosure can result in civil and administrative penalties.
• The EU’s Market Abuse Regulation, MiFID II and Commission Delegated Regulation 2016/958 apply to finfluencers. Investment suggestions and other investment-related information must be neutral and disclose any conflicts of interest under the Market Abuse Regulation (Article 20). Finfluencers who possess assets and manipulate the market may also commit securities fraud (Article 10(1)(d)). Influencers must comply with MiFID II as implemented in the respective Member States. MiFID II sets out criteria for investment advice (Article 24(4)), which is subject to authorisation by national regulators (Article 70(4)). Individual advice to retail investors, such as one-on-one coaching, is exclusively reserved for registered financial advertisers who comply with local laws – most finfluencers will not meet that standard. The above-referenced Commission Delegated Regulation further mandates that "facts are clearly distinguished from interpretations, estimates, opinions and other types of non-factual information" (Article 3(1)(a)). The legislative text also sets formal standards for experts, financial products, and advice dates and times (Article 3(1)(e)). Financial influencers who violate these laws may be subject to comprehensive use of sanctions.

Moreover, finfluencers also have to abide by the standards set by social media platforms in their terms of service. Such standards may include guidelines and restrictions on promoting certain financial products or conducting unpermitted or otherwise non-compliant advertising as well as other content moderations rules. Social media platforms are required to have content moderation practices in place because they have a legal responsibility to remove illegal content. The EU’s e-Commerce Directive and now the Digital Service Act generally provide platforms with safeguards from being held liable for user-generated content, but it is encouraged for them to implement stricter content moderation rules and supervision to prevent the spread of fraudulent or misleading information. These rules can involve the use of algorithms and human moderators to quickly identify and remove inappropriate content. Penalties for breach of such terms of service can vary widely from account suspension through to legal action. Finfluencers are very interested in meeting these contractual obligations so as to maintain their social media presence, their following and to generally avoid legal and reputational risks. However, with supervisors conducting mystery shopping of social media platforms to spot and single-out non-compliant behaviour, given the revised supervisory tone of ESMA and other EU authorities, it may well be prudent for financial services firms using finfluencers to conduct their ow undisclosed spot checks.

More recently ESMA announced supervisory expectations using the Retail Investment Strategy “package” and the planned replacement of the Distance Marketing of Consumer Financial Services Directive and other changes to, in addition to reminding on the principles above, set supervisory expectations for finfluencers (see standalone coverage from our EU RegCORE). These proposed measures as set out in the Retail Investment Strategy package aim to ensure that:

• Supervisors can better enforce the obligation that marketing communications should be clear, fair, and not misleading, regardless of the channel through which they are distributed and whether performed directly by the investment firms or indirectly, for example through finfluencers;
• Advertisements and (conceptually at least) finfluencer content will need to, in addition to being fair, clear and not misleading, have to present risk and benefits in a balanced way and include key product characteristics – including risk of loss; and
• In addition to the proposed requirements on the content of marketing itself, the package makes investment firms liable for any marketing done on their behalf. Investment firms will be responsible for the content and compliance of marketing communications, regardless of whether influencers or other third parties have been paid or simply incentivised to create promotional content. For example, a finfluencer's attendance and promotion of a free event by an investment firm will be considered marketing communication, for which the firm will be responsible. The same provisions will apply if a video influencer talks about a firm they were sponsored by. In such cases, if the marketing communication is misleading, the (national) competent authority may for example require the cessation of the communication or fine the financial intermediary who is remunerating the finfluencer.

Whether finfluencers and their followers have fully taken note of these supervisory expectations (or indeed visited EU-endorsed/funded resources), in particular since these have not been published in the same captivating manner via social media, remains to be seen. Management bodies of financial services firms are however responsible for compliance with the above, and the reforms proposed by the Retail Investment Strategy and corresponding consequences, ought to be clearly understood by them:

• Management bodies will become responsible for and receive reports on a firm's marketing activities;
• Firms will need to keep records of all marketing communications and strategies about marketing practices, in order to ensure that sufficient information is available for competent authorities to conduct investigations;
• (National) competent authorities will gain new enforcement powers: they will be able to suspend or prohibit marketing communications or practices, and in more serious cases request the restriction of access or removal of online content.

Notwithstanding the above, relevant supervisory authorities have yet to make use of any powers under wider-reaching legislation applicable to social media platforms generally to remove or censure postings. Social media stars however have been subject to direct enforcement measures by regulators and/or in court for alleged fraud, market abuse or other breaches of misleading advertising. The same is also true of offerors of certain ETFs and other structured products built to track social media “endorsed” investments. A number of courts have also decided that the provision of financial advice can occur on websites (not linked to the financial services provider) and social media, which means financial product advice can be given over a variety of platforms and the person conducting such activity needs to abide by the law and/or available exemptions.

Lastly, it should be noted that the Retail Investment Strategy package also sets out long awaited reforms to improving the requirements on the knowledge and competence of financial advisors (see separate coverage from our EU RegCORE on this). 

Warning signs for prospective investors

Regulatory warnings on risks relating to social media and/or finfluencers more specifically focus on educating (prospective) investors to assess:

1. How do creators get remunerated, is it transparent and what tangible experience do they have both in investing in general as well as with the subject in the created content?; 
2. What conflicts of interests exist in the creation and dissemination of social media content and/or finfluencer’s activities?;
3. Is there an undue sense of urgency, “fear of missing out” (FOMO) or a dependency being created?; 
4. What risks are involved with any trading strategy including those specific to the strategy itself such as tracking and/or execution error in copy-trading products/solutions or incorrect/false data and/or algorithms underpinning any signal trading as well as any overreliance risk on that provider; and
5. What is the track-record of risk versus reward in the actual investment being subscribed for? What is the total expense ratio?

A lot of these considerations are well known but when repackaged through the power of social media, require a refresh from the relevant regulatory supervisory policymakers and authorities to raise awareness of both supervised firms and the finfluencers that they currently use. 

Key considerations for financial services firms

As per the above, financial services firms using finfluencing, by any means should consider whether, in accordance with documented and non-documented arrangements:

1. Sufficient due diligence has been conducted on the finfluencer and the social media and other channels they may use to conduct activity?
2. The firm and the finfluencer content (as well as presentation thereof) meets the requirements and supervisory expectations applicable to that content? Equally, whether the firm has oversight and control rights of the finfluencer’s content;
3. The finfluencer is inadvertently presenting themselves or acting as a financial adviser and/or distribution agent (without a license) and what this means for their and the regulated firm’s legal, regulatory and reputational risk;
4. The firm has put in place appropriate risk management systems and monitoring processes to make sure finfluencers used are not providing unlicensed financial services and to engage in on-going monitoring including to ensure that the finflunecer only promotes a product/service to eligible clients in the relevant target market. 

As with the warnings for prospective investors, a number of the issues for financial services firms should not be new. Social media platforms and the rapid growth of finfluencing may require both existing and new firm entrants to revisit whether their arrangements meet the much stricter supervisory tone set out in the revamped requirements and expectations. It is conceivable that both the rise of RegTech and SupTech powered monitoring systems to complement the conducting of mystery shopping exercises by (national) competent authorities as well as ESMA across the EU will allow for a better monitoring of whether unpermitted content is being distributed by or on behalf of supervised financial services firms across social media channels.

Outlook and next steps

The EU’s most recent efforts and focus on finfluencers is a first step but one that is tied to a number of other important priorities set out in the EU’s Retail Investment Strategy package, each with a wider reaching impact of operational and client facing documentation change required by financial services firms. For financial services firms, their priorities when using finfluencers should be to ensure that they abide by the requirements that apply under existing law, pursuant to terms of service of social media platforms as well as the revised and new requirements as published pursuant to the EU’s Retail Investment Strategy package.

Affected firms are advised to get in touch early to discuss how, where and what changes are required to finfluencer-facing documentation inasmuch as client facing documentation, disclosure and other non-documented aspects across the respective customer journey so as to ensure that all aspects meet a very reformed Retail Investor Strategy package’s requirements. As a bare minimum, affected firms will want to ensure they have the appropriate safeguards as discussed above anchored into their arrangements in place with finfluencers. 

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators.

Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 750 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.

Moreover, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms’ relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.