From Matt Damon to Kim Kardashian: The dangers of influencers on small investors

Supervisors of financial markets want to protect small investors from potential fraudulent online finance schemes that have been growing in recent years. One particular target is products that come recommended by celebrities. The Spanish National Securities Market Commission, along with its European counterparts, is waging war on questionable practices, and in the United States, the Securities and Exchange Commission (SEC) recently fined Kim Kardashian for hawking a cryptocurrency.

The International Exchange of Securities Commissions (Iosco), which brings together 130 national supervising bodies, issued a warning about the online marketing of financial products and the role of “finfluencers,” or digital influencers. One notorious example is the advertisement for the Crypto.com platform, starring Matt Damon, that aired during the 2022 SuperBowl. In its report, Iosco argued that supervisors must face the growing challenges posed by growing digitization and urged them to take action on the matter to protect small investors.

The international organization believes that digitization and social media are changing the way that financial services and products are marketed among small-scale investors. And it believes that, particularly because of the Covid-19 pandemic, those factors have allowed investment services firms to reach a greater number of clients, who in turn have access to more investment services.

The rise of social media and digital marketing have also turned influencers into financial advisors. Iosco warns that finfluencer marketing is on the rise. The organization’s recent report sounded the alarm, pointing out that, in some cases, supervising bodies have jurisdiction over investment firms but not over influencers.

The Dutch Authority for the Financial Markets (AFM) concluded last December that finfluencers run the risk of carrying out advisory tasks without having a license to do so. They also sometimes promote investment firms that market high-risk products such as contracts for differences (CFDs), currencies or cryptocurrencies.

In the case of Kardashian, the influencer and businesswoman came to a $1.26 million settlement with the SEC. She was not fined for promoting a crypto asset, but rather for not notifying that it was an advertising agreement. Similarly, boxer Floyd Mayweather Jr. and music producer DJ Khaled were forced to pay $767,500 in 2018 for promoting an initial coin offering (ICO).

In its report, Iosco proposed that regulators consider requiring investment firms to have rules for online sales, including elements that involve gamification, to prevent harm to financial consumers. ESMA, the watchdog of the European markets, is already working on a similar project. In May, it pointed out that “gamification techniques in trading apps and personal recommendations on social media may cause retail investors to engage in trading behavior without understanding the risks involved.”

In addition, the report suggested that regulators consider requiring investment firms to impose specific requirements on online marketing. And it suggested that mystery shoppers could be used to monitor the way in which products are sold. The international organization recommended an initiative that was adopted years ago by the Italian market supervisor, Consob, which has the power to close or block web pages and suspend the activity of financial schemes.