FinReg Update: FCA Cracks Down on Finfluencers

Focus on finfluencers: why is FCA concerned?

In the last 10-15 years, the power of individuals to achieve wide reach without using traditional media has ballooned: ‘influencers’ can now build large followings on social media and reach a huge audience. Influencers are not only perceived as glamorous or aspirational to their followers: many of them are also figures of genuine trust and authority. More than 60% of 18-29-year-olds follow influencers on social media, and nearly three quarters of those followers trust the influencers’ advice (according to statistics on FCA’s website).

It is of course no surprise that the influencer trend has reached finance and investing, and that we are now speaking about ‘finfluencers’. However, what is perhaps surprising is the reach of finfluencers’ recommendations: FCA finds that 9 in 10 young followers of finfluencers have been encouraged to modify their financial behaviour. Social media is awash with finfluencer content, and it manifests itself in a wide variety of forms, from snappy investment advice videos on TikTok, to celebrity endorsements on Facebook or Instagram, to finance gurus posting in Reddit investment forums or personal blogs.

The key issue for FCA is that finfluencers are trusted by their followers. Research by Barclays found that more than half of UK adults who use social media for investment guidance assume finfluencers’ advice is reliable. Further, the target demographic for finfluencers is typically a vulnerable one: young people, unlikely to be financially sophisticated or experienced, and in many cases burdened already with debt obligations from student and housing loans. This audience may be easily convinced to place their trust in finfluencers’ advice.  This in turn leads them to put savings into risky or inappropriate investments, or to borrow money to do so.  It is likely that such investors will not appreciate that finfluencers are in general not FCA-authorised, and that they as investors have minimal recourse if things go wrong.

What is FCA’s jurisdiction?

In principle, a finfluencer may be (a) providing potential investors with advice on the merits of a regulated investment product, or at the least (b) promoting that product.   Provision of advice is a regulated activity, as is the making of arrangements for persons to invest:  the finfluencer needs permission for this under Part 4A of the FSMA 2000.   Financial promotion is also strictly regulated; promotions of investments to the general public are effectively prohibited without hands-on involvement of persons with Part 4A Permissions.

A bit more on Regulated Activities

The main concern is with the regulated activity of ‘advising investors on the merits of dealing in investments’. This may apply to many finfluencers. It requires that the advice refers to a particular investment, and that it relates to the merits of dealing in that investment (e.g. buy, sell, subscribe). FCA is likely to be looking at finfluencers whose posts actively recommend that their followers buy or sell.

Finfluencers may also be engaging in the separate regulated activity of ’making arrangements for persons to invest’.  This will apply to a finfluencer who is actively involved in assisting followers with the investment process, for example by creating or posting portals through which investments may actually be made.

Financial Promotions

Where any medium (therefore including TikTok, Instagram etc.) is used to invite or induce persons to invest or to enter into investment agreements, it will fall under the UK’s financial promotion restriction.  This restriction applies to any person, not just to firms regulated by FCA. So a finfluencer who presents an investment opportunity via social media will be communicating a financial promotion.  Incidentally, it makes no difference if the finfluencer did not originate that promotion but took it from a third party.

Communicating a financial promotion is unlawful unless it is communicated by an FCA-authorised person, the content is approved by an FCA-authorised person, or the communication falls within a very limited number of specialised exemptions.

Consequences of breach

Both unlicensed regulated activities and breaches of the financial promotion restriction are criminal offences (carrying up to 2 years’ imprisonment and unlimited fines).  FCA can also require that the offender return any money paid over and in some cases there can be compensation for loss.  Usually, though, the most significant “sanction” is that of loss of reputation.  Social media influencers live by their reputations, and adverse publicity arising from FCA intervention will be very unwelcome.

Not acting by way of business – an escape route

Neither the carrying on of regulated activities nor the making of financial promotions is a breach, however, where the person concerned is not “acting by way of business”.   This is actually a complex concept, and it is not merely a question of whether the finfluencer is making money from posting investment advice or promotions in social media.  Many influencers do derive significant income from their activities (e.g. returns on product endorsements), and FCA likely suspects that finfluencers who promote investments are being similarly compensated.   However, a Facebook group of private individuals that operates as an informal investment discussion group is unlikely to be treated as run by way of business.

A word about Cryptocurrency

Finfluencers are especially keen on crypto, it would seem.  Cryptocurrencies (BTC, ETH etc.) are not regulated investments under FSMA 2000 (although crypto-shares and crypto-debt issues will be treated exactly the same as their TradFi equivalents).   However, amendments to aspects of the UK financial promotion regime have made promotion of cryptocurrencies (other than by FCA-authorised persons or entities registered as cryptoasset exchanges under the Money Laundering etc. Regulations 2017) subject to the same restrictions as apply to promotion of regulated investments.  So the unlicensed finfluencer talking up BTC may not be offering regulated investment advice, but promoting products and services that support transactions in BTC still breaches the financial promotion restriction.

How can Memery Crystal help?

Finfluencers (actual or would-be)

If you regularly discuss and promote financial products in your social media output, and have a commercial interest in doing so, you should be seeking advice on becoming regulated by FCA (or, if possible, on how to restrict what you do to avoid the need for regulation). If you have already been contacted by FCA, we can advise you on your resultant responsibilities and how you should best address any allegations FCA may have made.

Victims of fraud

If you have been misled by a finfluencer, we can advise you on your legal rights, refer you to a suitable claims management firm, or represent you in any financial claim if appropriate.

If you wish to discuss the issues raised in this article further, please feel free to contact Daniel Tunkel, Eva Wichtowski or Sam Sykes.