These days, “investment professionals” shoot up like mushrooms. Celebrities—more or less successful start-up entrepreneurs and other lateral entrants—become “financial influencers” across social channels. Ironically, very often a “this is not investment advice” disclaimer adorns texts, which are crystal clear and explicit recommendations.
The demarcation line between marketing and advice is in a sort of limbo and marketing communication must be considerate of straightforward financial market legislation.
If there are grey areas or services that lack sufficiently rigid legal frameworks as to what is allowed and what isn’t, investment advice is one of them. However, when the existing rules were established, the legislative bodies are unlikely to have had in mind the rapid changes that have been brought about by the internet and social media—not just in terms of technical options but also in terms of culture.
For example, MiFID was introduced in 2004, came into force in 2007, was revised in 2014, entered into force in July 2016 and had to be implemented—with a delay of one year—on 3 January 2018. As a regulated service, investment advice has existed for some time now. The segregation of definitions—between what is investment brokerage and what is investment advice, whether it is independent or not etc.—are precise.
National legislative frameworks are equally straightforward and do not only subject the relevant services to permissions but have supervisory and civil law definitions for them. And even if a recommendation doesn’t meet the definition of investment advice—for example, because the recommendation is given publicly rather than being aimed at a defined group of persons—it must meet certain diligence criteria.
Specifically, the revised version of MiFID has introduced the so-called “fair, clear and not misleading information requirements” under a delegated act that oblige firms to ensure that all information they address or disseminate to clients or potential clients satisfies a number of conditions.
Most importantly, the information must be accurate and always give a fair and prominent risk warning whenever referencing the potential benefits of an investment service or financial instrument; this includes marketing communications.
When it comes to individuals, the Market Abuse Regulation and its delegated acts expand the requirements relevant to investment recommendations to persons who present themselves as having financial experience or expertise—and here it is already sufficient that they are perceived as such by market participants.
But while most compliance departments scrupulously ensure that everything the company communicates undergoes careful scrutiny, individuals in social networks don’t feel this diligence obligation.
If, going forward, damage caused by a financial influencer will result in legal proceedings, it will become clear that there is no lack of legal foundation to condemn wrongdoing in the context of investment advice. This will not just be painful for the influencer, who may then be found guilty of offering services he wasn’t entitled or licensed to provide, but also for issuers of financial instruments or providers of financial services subject to MiFID and or domestic banking acts who cooperate with those influencers.
Some pending and some recently enacted court-decisions on influencer marketing highlight legislators’ awareness of the new distribution channels. It’s just a matter of time until there will be a closer supervisory monitoring of financial influencing. Australian supervisor ASIC has just reminded companies of the regulatory risks of engaging with financial influencers or “finfluencers” as they’re sometimes called.
However, it has to be said that there is nothing fundamentally wrong with the dissemination of recommendations via social channels. It’s just difficult to see any reason why different rules should be applicable here. If you rent a store, put up a sign reading “investment advice” and sit down with clients without a license, it will be no more than one or two days, if at all, until authorities close your shop and penalise you and, should you have had any, your institutional partners. On the internet, these activities are a bit harder to detect; the main problem is that there seems to be an all-new culture of taking risks.
The playful easiness of voting, posting, entering into contracts, and actioning purchases or sales of any kind via mobile devices is a blessing—but it involves significant risks, especially for inexperienced individuals that should enjoy a higher level of protection against these risks.
The Covid-19-pandemic has amplified this trend due to increased remoteness and the strong desire among young people in particular to meet and interact. Unfortunately, financial education hasn’t found its way into school curricula yet—where it belongs.
In the absence of an institutional educational path for all age groups, a clear line should be drawn between investing for the purpose of wealth creation and trading for the purpose of taking short-term risks.
Leave the wealth creation part to investment professionals like the majority of people do, because this requires the combination of time, knowledge, experience, and risk-bearing capacity that hardly any individual can dedicate.
Stay calm when you see your friend making huge profits with a single trade and stay calm when markets turn down, and allocate only those funds to individual trading that you can easily afford to lose entirely.