Financial influencers, or ‘finfluencers,’ have carved out a significant niche in social media, particularly among young audiences. Their appeal of acting as traditional influencers whilst providing financial advice means they are able to make complex topics more accessible and engaging to their audiences. However, the rising influence of finfluencers has raised significant concerns about the accuracy and safety of the financial guidance they provide to large audiences.
What is a Finfluencer?
A financial influencer typically uses platforms like Instagram, YouTube, and TikTok to provide insights into financial markets, investment strategies, and personal finance. Their attraction lies not only in their ability to make complex financial jargon accessible to their audiences, but also in their approachable personas, which resonate well with younger demographics unfamiliar with traditional investment avenues.
Why and How Did Finfluencers Become Relevant?
In recent years, finfluencers have shaped the financial literacy landscape for younger generations. There are four main reasons behind their rise in popularity:
1. The Rise of Fintech and Financial Literacy
As financial technology (fintech) companies have rapidly grown, they've utilised advertising tools with the aim of making personal finance, investments, and savings accessible to a wider audience. This surge has coincided with Gen Z and Millennials' growing interest in financial literacy. Living in a digital-first world, these generations have seamlessly integrated fintech solutions into their daily lives, fostering a community that is more money-savvy than ever before. Finfluencers have tapped into this trend, offering content that resonates with an audience eager to learn and apply financial concepts to their personal lives.
2. Economic Uncertainty from COVID-19
The pandemic brought unprecedented economic challenges, leaving many young people feeling uncertain about how to manage their finances. As traditional economic pathways seemed less reliable, finfluencers stepped in to fill the gap, offering guidance and advice on navigating financial instability. Their timely insights helped many young individuals make sense of their economic situations during a time of global uncertainty.
3. A Push Toward Financial Resilience
With the rise in unemployment triggered by the pandemic, particularly among younger demographics, there has been a marked shift towards self-education when it comes to personal finances. Gen Z and Millennials are increasingly turning to social media not just for entertainment but for education, using platforms to equip themselves with the knowledge they need to build a more secure financial future. Finfluencers, often peers in age, have become relatable educators and mentors in this regard.
4. Curiosity About Cryptocurrency and Investments
With the bombardment of flash cars and lavish lifestyles on our screens, there's no denying the allure of cryptocurrencies and the broader investment landscape that is being advertised by finfluencers for the younger generations. However, while interest is high, understanding of these complex markets is often limited, hence individuals are susceptible to making poor financial decisions despite the promise of riches. Finfluencers have found their niche here, simplifying complex concepts and presenting them in digestible, engaging formats. Their content aims to illustrate the risks and processes involved in investing, making financial markets seem more accessible to novices.
Finfluencers have been able to emerge as key figures in a landscape where traditional financial institutions and advisories might seem out of touch with younger consumers. Their success lies in their ability to speak the language of their audience and use platforms that resonate with their daily habits, making them pivotal in shaping how financial knowledge is consumed and acted upon by the next generation of earners.
Are There Regulations Around Finfluencers?
In short, yes. Financial influencers operate in a sector where compliance with regulations is not just important but essential. Individuals who offer financial advice must be properly regulated and credentialed, ensuring that their guidance is both accurate and reliable. This is particularly crucial when talking about finfluencers as they wield considerable influence over large, often young, audiences.
When finfluencers share personal financial experiences or their own successful strategies, it is imperative that they clearly outline this. By making it explicit that they are not providing formal financial advice, they responsibly direct their followers to seek guidance from qualified professionals for their specific financial needs. This is even more critical when looking at content relating to cryptocurrencies. Finfluencers discussing their experiences with crypto must begin and end their content with clear disclaimers, underscoring that these are personal insights and not professional advice, thereby urging their audience to consult certified financial advisors before making any financial decisions.
A major challenge faced by regulatory bodies, like the Financial Conduct Authority (FCA), is that the sheer volume of content being distributed amongst platforms makes the task of monitoring and enforcing compliance incredibly difficult. This coupled with finfluencers, intentionally or not, flouting the rules has led to the perfect storm.
Whilst the FCA and other regulators continue to develop strategies to manage the onslaught of content, the expansive nature of social media provides ongoing challenges that are still to be overcome. In March 2024, the FCA issued new guidance specifically targeting the ways financial services are promoted on social media, including through memes, reels, and gaming streams. Here’s a closer look at the regulatory landscape as outlined by the FCA:
- Clarification of Expectations: The FCA's guidance aims to set clear expectations for both firms and influencers involved in promoting financial products on social media, ensuring all parties understand their responsibilities.
- Advertisement Standards: The FCA insists that all financial promotions must be fair, clear, and not misleading. They should provide a balanced view of the benefits and risks involved, adhering to established regulatory standards.
- No New Penalties: While the guidance introduces no new penalties, it elaborates on what makes social media posts compliant or non-compliant, helping to outline the boundaries of acceptable promotions.
- Firm Considerations: Firms are advised to carefully consider their target audience and the essential information that consumers need to make informed decisions, aiming to reduce confusion and enhance understanding.
- Risk Warnings: Promotions, especially those concerning high-risk investments, must include prominently displayed risk warnings to inform potential investors of the risks involved clearly.
- Supporting Customer Understanding: Under consumer duty regulations, financial promotions must be designed to support customer understanding, helping them make effective financial decisions.
- Responsibility for Compliance: Firms remain responsible for ensuring that their promotions, including those conducted through affiliates like finfluencers, comply with all regulations.
- Proactive Responsibility for Affiliate Marketers: There is an increased emphasis on firms to actively monitor and ensure that their affiliate marketers understand and adhere to financial promotion regulations.
- Legal Risks for Unauthorised Promotions: Unauthorised individuals, including finfluencers who promote regulated financial products without proper FCA authorisation, may be committing a criminal offence.
- Challenges with Social Media Platforms: The FCA recognises that social media may not be the ideal platform for promoting complex financial products due to limitations such as character count or space. This acknowledgement has led to increased scrutiny and the removal of over 10,000 misleading adverts in the last year alone.
These guidelines represent a critical step towards ensuring that financial information on social media is both accurate and beneficial, steering the current social media landscape away from becoming a 'Wild West' of financial information that can cause serious damage to individuals' personal finances.
The Issue of Finfluencers
As the influence of finfluencers grows, so do the concerns regarding the accuracy and impact of the financial information they provide. Several key issues have emerged in recent years that clearly highlight the potential risks associated with this modern form of financial guidance:
- Fitness and Propriety of Advisors: A primary concern is whether finfluencers possess the necessary qualifications and integrity to provide financial advice. Unlike strictly regulated financial advisors who are required to meet rigorous standards of fitness and propriety, finfluencers often do not have the formal qualifications or proven expertise in financial planning. This discrepancy can lead to information that may not always be in the best interest of the consumer.
- Accuracy and Relevance of Information: Social media content needs to be engaging, current and most importantly, accurate. However, the need for rapid content production can sometimes lead to information being circulated that is outdated or not fact-checked. This raises questions about the reliability of the financial advice being shared, especially when dealing with complex products or markets that can change quickly.
- Viewer Literacy and Risk Tolerance: Finfluencers typically reach a broad audience, which varies greatly in terms of financial literacy, risk appetite, and risk tolerance. There is a concern that followers may not fully understand or may misinterpret the information provided, leading to financial decisions that do not align with their personal financial situation or risk profile.
- Risk of Misleading Information and Scams: The combination of potentially unqualified advisors and the lack of regulatory oversight can create an environment ripe for misleading information and scams. Finfluencers might unintentionally or intentionally promote financial products or strategies that are unsuitable or risky without adequately explaining the potential downsides to their audiences.
- Attraction to High-Risk Assets: Finfluencers often discuss trendy financial topics like cryptocurrencies and meme stocks, which are known for their volatility and high risk. The glamorous portrayal of these assets can attract an audience that is unaware of or underestimates the risks involved. This can lead to significant financial losses for individuals who are enticed by the potential for high returns without a clear understanding of the possible consequences.
These issues underline the need for viewers to approach financial advice from finfluencers with caution and to conduct their own thorough research or consult with professional advisors before making investment decisions. The growing concerns also highlight the potential for more stringent regulatory oversight as the impact of finfluencers on market behaviours and individual financial decisions becomes more pronounced.
Case Study: The FCA's Crackdown on Reality Stars and Influencers
Recently, the Financial Conduct Authority (FCA) in the UK charged several social media influencers in connection with promoting an unauthorised foreign exchange trading scheme. Central to these charges is Emmanuel Nwanze, who is accused of running an unauthorised investment scheme and issuing unauthorised financial promotions through platforms like Instagram. These charges highlight the critical oversight needed in the burgeoning sphere of financial advice on social media.
The Nature of the Investments and Legal Proceedings
The investments in question—contracts for difference (CFDs)—are particularly risky, with statistics indicating that 80% of investors lose money. This case underscores the need for greater transparency and regulation to protect unsophisticated investors from potentially ruinous financial decisions.
Broader Implications
The incident is part of a wider trend of misleading financial adverts that have seen a notable increase, as reported by the Advertising Standards Authority (ASA). From 2020 to 2023, there was a 40% rise in cases of financial misconduct linked to advertisements, illustrating a significant need for clearer and more responsible financial advertising.
Susannah Streeter, Hargreaves Lansdowns Head of Money and Markets, perfectly summarises why these charges are so crucial to the issue of finfluencing:
“Regulators are clearly horrified at the damage superstar celebrities can do to the bank balances of vulnerable consumers, who are influenced by almost every move they make. The delusions of quick riches can spread far too rapidly on social media with speculation amplified by reposts by millions of followers.”
A Look into the Future of Finfluencing?
The charges brought by the FCA, coupled with the growing concerns over the impact and legitimacy of finfluencers, suggest a pivotal moment in the regulation of financial advice online. As digital platforms continue to blur the lines between entertainment and advice, the call for stricter oversight becomes not just necessary but urgent. The role of authorities like the FCA and ASA will be crucial in shaping a safer financial landscape for all users, particularly the vulnerable young audience drawn to finfluencers and the flash ‘you could have this too’ lifestyle they portray.
