The rise and regulation of financial influencers

Our financial landscape is changing. Young Australians are using new payment methods such as Buy-Now Pay-Later to manage their cash flow instead of credit. They are engaging with micro-investing apps, requiring as little as a A$5 initial commitment and, to ASIC’s concern, young Australians are increasingly turning to entrepreneurs, celebrities, gamers and other ‘financial influencers’ on social media platforms for financial product advice instead of registered financial advisors and counsellors.

As many young Australians look to TikTok, YouTube, Reddit, Twitter, blogs and podcasts to gain stock tips and investment advice, a 2021 ASIC survey confirmed something of a concern – that almost 64% of young Australians (aged 15-21 years old) had reported having changed at least one of their financial behaviours as a result of a financial influencer (Finfluencer),[1] yet the majority of Finfluencers are operating without an Australian financial services (AFS) licence.

ASIC has two primary concerns regarding the protection of young Australians and other retail consumers in their engagement with Finfluencers:

• are Finfluencers providing unlicensed financial product advice or otherwise promoting misleading or deceptive content?
  
  
• are AFS licensees contravening their legal obligations when engaging with Finfluencers?

This insight will explore:

• how ASIC regulates the Finfluencer industry;
  
  
• the key considerations an AFS licensee should satisfy itself before engaging a Finfluencer; and
  
  
• what challenges ASIC faces in regulating Finfluencers.

ASIC’s regulation of Finfluencers

ASIC has made it clear that it does not intend to introduce new regulations to capture Finfluencers’ conduct. ASIC will simply enforce the existing regulatory framework.[2] 

Following this, a Finfluencer will need to hold an AFS licence if they:

• provide financial product advice – this includes making a recommendation or statement of opinion that is intended to influence, or which could reasonably be regarded as intending to influence, a person making a decision in relation to financial products. Conversely, providing factual information, such as a person’s rights and obligations under law or a product’s terms and conditions, will not constitute financial product advice; or
  
  
• arrange for the provision of a financial service – this covers arranging for another person to engage in financial services. A Finfluencer can engage in ‘arranging’ conduct by using affiliate marketing links with a unique identifier on their social media platform or by otherwise obtaining sponsorship income for promoting a financial product or service. 

To determine whether a Finfluencer’s recommendations or statements constitute ‘financial product advice’, ASIC will have regard to the overall impression created by the Finfluencer’s communication and all the surrounding circumstances in which it was provided. Such circumstances include how the Finfluencer was remunerated, and any representations the Finfluencer makes to consumers.

In ASIC’s view, if a Finfluencer is remunerated by a company or if its benefit is dependent on a consumer’s behaviour, then the Finfluencer’s conduct is likely to influence the consumer and therefore constitute ‘financial product advice’ requiring an AFS licence (or requiring the Finfluencer’s appointment as an authorised representative of an AFS licensee).

Merely providing the names and details of AFS licensees that provide a financial service (such as a trading platform) is unlikely to constitute financial product advice, although a key consideration is whether the Finfluencer’s actions are intended to influence the customer’s behaviour.

As such, Finfluencers should:

• share only factual information if they are unlicensed and should either consider getting an AFS licence or becoming an authorised representative of an AFS licensee if they want to make any influential recommendations or statements;
  
  
• recommend that their subscribers obtain their own personal financial advice;
  
  
• be aware that they cannot rely on a ‘general advice warning’ to absolve themselves from legal responsibility;
  
  
• only promote products or services they understand and should exercise caution when promoting high-risk products;
  
  
• ensure that any statements they make are true and accurate and are able to be substantiated, so they do not mislead or deceive their subscribers and wider audience; and
  
  
• express any conflicts of interest, including whether they are remunerated in relation to the promotion of a financial product or service.

In engaging in financial services without an AFS licence, a Finfluencer can face up to five years’ imprisonment, while corporations that engage Finfluencers can face fines of over A$1 million. 

Finfluencers will also be subject to the prohibition against engaging in misleading or deceptive conduct. We note that, to reduce regulatory complexity, the Federal Government has proposed a new framework for financial services advice where all advice would either be ‘personal’ or just general information that does not require an AFS licence. This proposed framework would allow for the recommendation of financial products to consumers without taking into account the consumer’s objectives, financial situation or needs.

If this proposed framework were to become reality, Finfluencers could promote financial products without an AFS licence, however, they would still be subject to the laws prohibiting misleading and deceptive conduct. In simplifying financial services regulation, this proposed framework could result in greater consumer harm, by exposing young Australians and other vulnerable consumers to the swaying influence of Finfluencers.

As a taste of what’s to come, ASIC commenced proceedings against a Finfluencer in the Federal Court of Australia earlier this year for providing financial product advice without an AFS licence. A case summary on the matter is below.

Key considerations for AFS licensees before engaging Finfluencers

If an AFS licensee pays a Finfluencer to promote their financial products or services, then that Finfluencer may be held to be a representative of the AFS licensee. Following this, an AFS licensee must ensure that:

• it engages its Finfluencers as an authorised representative in accordance with the Corporations Act 2001 (Cth) to avoid the risk of its Finfluencers giving unlicensed advice (or otherwise engaging in ‘arranging’ conduct);
  
  
• it has sufficient resources to monitor and train its Finfluencers;
  
  
• it regularly monitors and audits its Finfluencers’ content to ensure that they are:
  
  
  • arranging for the sale or issue of the AFS licensee’s financial products or services ‘efficiently, honestly, and fairly’;
    
    
  • not contravening the ‘hawking prohibition’ (i.e. a Finfluencer cannot request or invite a retail client to ask, apply for or purchase a financial product, without the retail client’s consent to being contacted);
    
    
  • operating within the AFS licensee’s licence; and
    
    
  • not otherwise contravening financial services laws;
    
    
• its Finfluencers state whether they are being paid to promote the product – to ensure the AFS licensee’s adequate management of conflicts of interest; and
  
  
• it has taken reasonable steps to ensure that the Finfluencer only promotes the financial product to retail clients within the product’s target market, in compliance with the ‘design and distribution obligations’.

AFS licensees who engage Finfluencers to promote their financial products or services are not only exposed to the risks associated with breach of the requirements listed above. If the relevant Finfluencer is considered an employee of the AFS licensee, then the AFS licensee is required to make superannuation payments to the Finfluencer. ‘Employee’ has an extended definition for the purposes of Australian superannuation law so that, in some instances, some independent contractors have been considered to be ‘employees’ who are entitled to superannuation payments.

Former ASIC Commissioner, Cathie Armour, provides the following warning for AFS licensees: “If you’re approached by a Finfluencer seeking to collaborate, or you’re considering reaching out to one, please make sure you do your due diligence as they may be contributing to your regulatory risks” (quoted from The Australian Financial Review’s CFO Live Summit).

Challenges facing ASIC’s regulation of Finfluencers

ASIC faces a number of challenges in regulating Finfluencers, including:

• the issue of monitoring social media forums involving monitoring:
  
  
  • live-streamed videos, and videos that are time-sensitive (such as Instagram ‘Stories’ that expire after 24 hours); and
    
    
  • advice provided to a client using direct peer-to-peer messaging;
    
    
• understanding and giving meaning to the use of slang and emojis, which is an additional barrier in determining whether a Finfluencer’s conduct constitutes the provision of unlicensed advice or the promotion of misleading or deceptive content;
  
  
• balancing the exchange of ideas among market participants, with the need to protect consumers and prevent market manipulation (e.g. market manipulation could occur through Finfluencers arranging for their subscribers to artificially ‘hype’ up a security’s price, known as a ‘pump and dump’ scheme);
  
  
• the fact that ASIC cannot protect Australian investors who invest in international financial products and services following a Finfluencer’s advice. ASIC can only protect Australian investors who invest in Australian financial products and services; and
  
  
• the regulation of Finfluencers who provide advice relating to cryptocurrency. As digital assets are not prescriptively regulated in Australia, there is often little that ASIC can do to protect consumers from Finfluencers providing financial product advice or otherwise promoting cryptocurrencies and other digital assets. Although, we note that the Federal Government is currently undertaking a ‘token-mapping’ exercise to better categorise digital assets to prescriptively regulate them. 

In alignment with international jurisdictions, we may see ASIC ban the promotion of high-risk financial products on social media (such as cryptocurrency or other digital assets once regulated) or, alternatively, pecuniary penalties for Finfluencers who promote these assets without disclosing the remuneration they received for the product’s promotion. A recent example of such pecuniary action, the US Securities and Exchange Commission announced on 3 October 2022 that it was charging a US celebrity Kim Kardashian US$1.26 million “for touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion” (this payment being US$250,000).[3]

We can also expect ASIC to provide further guidance on how Finfluencers can promote products using social media and predict that ASIC will pursue litigation against other unlicensed Finfluencers. In the meantime, we await the Federal Court of Australia’s judgement, to be released later this year, regarding whether Tyson Scholz provided unlicensed advice as a social media Finfluencer.

Conclusion

As Finfluencers are offered lucrative deals for the promotion of financial products and services, and companies wish to capitalise on the latest marketing trends, we suggest that Finfluencers be wary of the regulatory risks associated with providing unlicensed financial product advice, arranging for the provision of financial services or otherwise promoting misleading or deceptive content. We also suggest that AFS licensees be diligent in their dealings with Finfluencers for the same reasons, in addition to any superannuation liabilities they make incur. 

As our financial services landscape changes, AFS licensees and Finfluencers alike should closely monitor reforms proposed by the Australian Federal Government in this space, as well as how ASIC proposes to address the challenges it faces in regulating Finfluencers, in addition to watching the progress of Finfluencer regulation in other international jurisdictions, as Australian Finfluencer regulation may follow suit.