EU Warns Finfluencers To Be Careful With Their Investment Advice
Acting as an unregulated financial advisor can have legal consequences for social media influencers – and the firms who use them.
Image: Unsplash
Creating a financial brand from scratch
In recent years, the financial industry has understood the importance of influencer marketing for financial services and embraced influencer collaborations.
Establishing trust is crucial for financial service providers, and creating trust for FinTechs has proved difficult. When we look closely at the army of neobanks available in almost every country, we can see that the majority of FinTech banking service providers are reaching their target customer limits. Even with branding and cash incentive campaigns, most consumers hang on to their primary bank or "house bank," this is particularly true for customers from German-speaking regions with high brand loyalty. The repeated surveys show that most customers in Germany do not change their primary banking providers despite the tools that provide a smooth account switching experience. As a new financial brand, how can you convince these customers that you are trustworthy as a financial service provider?
Influencer marketing in financial services
This is where influencer marketing becomes interesting for financial services.
Influencer marketing utilizes the influence and power of individuals with significant online followings, known as influencers, to promote products or services to their engaged audiences. By leveraging influencers' credibility, authenticity, and reach, brands can effectively connect with target demographics and drive brand awareness, engagement, and conversions.
For financial service providers, influencer marketing offers a unique opportunity to humanize complex concepts, build trust, and engage with audiences meaningfully. By partnering with influencers with expertise and credibility in finance, banks, insurance companies, investment firms, and fintech startups can tap into new audiences, foster community engagement, and enhance brand perception. Customers are more inclined to try these brands when hearing about financial products and services from their trusted online celebrities. Of course, this concept enables an excellent source of trust for new banks and financial service providers. From personal finance tips to educational content on investment strategies, influencer collaborations enable financial services brands to deliver valuable content in an approachable and relatable manner, ultimately strengthening customer relationships and driving business growth. In the past years, we have seen banks and neobrokers collaborate with financial coaches and influencers as well as lifestyle influencers, hoping to make an impression and lure new customers.
Marketing financial products
Offering financial advice for money is illegal in many EU countries unless the advisor is suitably trained and regulated. Offering opinion about financial matters is acceptable as long as it's not based on one's own financial holdings, and even then it's generally fine as long as the vested interest is disclosed.
For example, if a holder of Apple shares posted a widely-read, unpaid-for blog post extolling the virtues of Apple, that would usually be considered acceptable as long as the information provided was true and accurate, and the author made their stock ownership clear in the text or as a footnote.
The same would be true for other stocks, or gold, or Bitcoin, in fact for any investable asset. There are variations in the specific laws of different EU countries but on the whole, accuracy and a declaration of one's own position are vital when offering financial opinion.
However, when opinion crosses the line into concrete advice - which is usually when money changes hands or when there is a strong recommendation - the rules become tighter. Only regulated financial advisors can legally offer paid-for financial advice in the majority of EU countries, regardless of whether they're being paid by the client or by a firm whose services they may be promoting to the client.
It's (not) different online!
There are good reasons for these rules, not least protecting financially naive customers from being fleeced by legitimate-sounding 'advisors' who may be part of a Ponzi scheme, a pump-and-dump, or a boiler-room scam.
Even on a more mundane level, if the person selling you a pension scheme is being paid 5% of the amount you'll pay for the duration of the pension by the pension company they're recommending, you have a right to know about that before making your decision. After all, something that makes your financial advisor rich might not also make you rich.
Unfortunately, financial advice regulations aren't yet widely known in social media influencer circles. Or if they are known, they're often ignored in the belief that offline rules don't apply online. As a result, financial advice online has been something of a Wild West, with some influencers flouting the laws and offering advice that they are unqualified and unregulated to give.
But the rules do apply online, and the EU has recently been making noises to ensure that finfluencers sit up and take notice of the binding regulations that govern their activities.
What is a finfluencer?
The word 'finfluencer' is a portmanteau of financial influencer and refers to someone who has a substantial online following to which they may be offering financial opinion or advice.
Some finfluencers are experts in their field, understand the rules and regulations, and only offer opinion and advice that they are legally qualified and regulated to offer. Some finfluencers make it up as they go along or try to influence the price of financial assets that they already own, without declaring it.
A finfluencer may not even have any financial knowledge at all. They may be influential in a totally unrelated subject area, yet could be offering financial advice to their followers. Their reasons for doing so might be naivety and self-interest, but more usually, they're being paid to promote a certain investment, stock, or asset class to their followers.
Finflluencers in Germany
COVID and lockdowns have created a mass of influencers worldwide, some specializing in decision-making in financial services. Local solutions require local brand ambassadors; therefore, banks and investment companies have been on a mission to partner with local creators to influence the decision-making process.
Although bank-influencer cooperation boosts trust for the influencer, there is no criteria or certification process for being a finfluencer. Financial influencers are neither certified nor supervised by local authorities, including the German Federal Financial Supervisory Authority (BaFin).
The lack of accreditation and supervision can lead to even financially illiterate influencers giving financial advice on social media and online platforms. The results of such scenarios can be drastic for consumers. A study dated May 2023 revealed that less than 6% of finfluencers know what they are talking about.
BaFin has been publishing warnings against influencers for consumers and investors.
In particular, the EU seeks to bring this activity into line.
A sea of red tape for financial advice
Regulating financial advice in the EU is the remit of the European Securities and Markets Authority (ESMA). No new EU-wide regulations have been formulated recently, but the ESMA has been making statements – most recently in February 2024 – indicating that it intends to prosecute errant finfluencers more actively. There’s no shortage of laws and guidance that can be used to justify such prosecutions. For example:
• The Retail Investment Strategy
• The Unfair Commercial Practises Directive
• The Distance Marketing of Consumer Financial Services Directive
• The Markets in Financial Instruments Directive II
If these regulations and directives are breached, the ESMA can potentially levy fines of up to five million euros or initiate criminal prosecution.
In addition to these rules, there are country-specific laws to consider. For example, France limits the promotion of 'risky' products such as crypto and tobacco by social media influencers. Social media platforms also have their own policies and guidelines governing finfluencer activity and tend to be proactive in banning anyone who breaches their user agreements.
Why so much regulation for finfluencers?
If all of this seems like a crushing amount of regulation, there are good reasons for it.
• Financial advice is a potential minefield since no single piece of investment advice is applicable or useful to every potential investor.
• Dabbling in the riskier end of the stock market may make sense for a 20-something worker who can afford to lose a little wealth now because they're (hopefully) nowhere near the peak of their income potential. By contrast, gambling one's entire pension on crypto is probably unwise for a 65-year-old because if that trade goes against them, they could end up penniless.
• Good, regulated financial advisors apply risk profiles to their clients and interview them carefully to ensure that the financial advice provided best matches each client's needs.
• This is very different to a TikTok shampoo influencer, with a million twenty-something followers, passionately encouraging them all to buy stock in an obscure East African diamond mine, the owner of which just happens to have generously donated a six-figure sum to that same influencer (as an extreme, fictional example).
Financial advice regulations apply to everyone who's being paid to give financial advice, regardless of who's doing the paying. Ignorance is no excuse – and this is a global issue.
For example, in a couple of high-profile cases, celebrity influencer Kim Kardashian was prosecuted and fined by the SEC and footballer Cristiano Ronaldo has been sued by investors into Binance’s crypto coin. The latter is a private lawsuit but is based on the same legal principles regarding financial advice by influencers.
The list goes on and on. Examples include banks, digital assets, and neobroker partnerships featuring Hollywood celebrities, models, and even politicians.
The ESMA has its work cut out since not all finfluencers are so easy to identify. Some market-moving actions are the work of groups of anonymous finfluencers, such as in 2021 when Reddit user subgroup massively boosted the price of GameStop stock.
What can financial firms do to avoid falling foul of false finfluencers?
It’s not just finfluencers themselves who must take care of the advice they offer. Anybody employing finfluencers must also be careful. Tempting as it may be to hire or otherwise remunerate a finfluencer to promote a FinTech product, company, or service, choosing the wrong one can cause more harm than good. Financial companies looking to make use of finfluencers should follow the best practices when doing so:
• Due diligence: ensure that the finfluencer is reliable, trustworthy, and aware of the financial rules that govern their influencer operations.
• Content agreement: all content presented by the finfluencer about the financial company should be agreed beforehand in writing, with no ad-libbing or off-the-cuff comments.
• Legal compliance: ensure that the financial company and the influencer understand their obligations in terms of false advertising, data management, fraud, and unlicensed advice or promotion.
• Suitability: the financial advice or opinion being offered should be tailored to the expected target audience, in particular their risk profile and level of financial education.
• Clarity: the wording used must be clear and straightforward, not convoluted or impenetrable. The goal is to help the audience to understand, not confuse them.
• Caveats and warnings: any advice or opinion offered must be accompanied by sensible warnings about the importance of asset diversification, risk management, self-directed research, and the possibility of loss.
• Disclosure: the connection of the finfluencer to the financial company should be disclosed. The details don’t have to be specified, but the existence of a financial incentive must be declared. The same is true for any conflicts of interest, both positive and negative, that may occur.
A positive ending
It may seem that the EU is clamping down on finfluencers in general, but that’s not really the case. The majority of finfluencers play an important role: they help to educate their audience about financial matters. This is particularly true of younger generations, for whom the idea of visiting a financial advisor in an office is so archaic as to be unbelievable.
Financial education of the population is vital for the success of all decent financial companies and for ensuring that any deceitful practices are brought to a swift halt. This type of information is not – unfortunately – taught in many schools, leaving younger people, in particular, vulnerable to misinformation and fraud.
Teaming up with a responsible finfluencer can be a winning strategy for financial firms looking to broaden their reach, but it’s important to choose the right one. Therefore, the finfluencer regulation has the potential to eliminate fraudsters and create a safer financial ecosystem for consumers and investors in Europe.
