Rethinking the Regulation of Financial Influencers

The growth of social media has led to an unprecedented rise in financial influencers, so- called finfluencers, who share investment ideas and opinions with a global audience. Finfluencers have various business models, from endorsing products to advertising their mutual funds. Retail investors are particularly vulnerable to the risks posed by financial influencers because most lack financial literacy, according to a UK Financial Conduct Authority study from 2021. Additionally, the power dynamic inherent in the influencer- follower relationship can also increase consumers’ susceptibility, particularly through one- sided parasocial relationships. Parasocial relationships are one-sided relationships where one person extends emotional energy and interest towards the financial influencer, who may be completely unaware of the follower’s existence. Such relationships can lead to a higher level of trust, credibility, and reliance on the advice and recommendations of financial influencers, even if they are not qualified or licensed to provide financial advice. This can be particularly dangerous for retail investors with low levels of financial literacy, who may be more vulnerable to the risks posed by finfluencers. Thus, the current regulatory framework may not be adequate to protect consumers from the potential harms of financial influencers.
This Article starts by briefly examining the current regulatory framework for financial influencers (based on Pflücke 2020 and 2022), including how the EU and five platforms govern it. It then proceeds by critically analysing and proposing targeted and actionable policy considerations to increase fairness and transparency on social media platforms. The Article argues that the current approach is neither evidence-based nor tailored to the activities and potential harms of financial influencers, requiring radical reforms to protect consumers and capital markets.