Global regulators have made a rearguard attempt to rein-in the lawless online financial wild west with a triptych of papers laying out final ‘good practice’ guidelines for policing the digital money-lands.
In the three reports published simultaneously, the International Organization of Securities Commissions (IOSCO) takes on so-called finfluencers, copy-traders and ‘digital engagement practices’ as three core regulatory concerns.
While technology has enabled the good, the bad and the ugly to roam unhindered across the internet, IOSCO says stronger regulatory intervention combined with better public education could limit the risk posed to retail investors by online financial outlaws.
For example, regulators in several jurisdictions have begun to crack down on “finfluencers and market intermediaries that use finfluencers to promote their products”.
“These actions include cease-and-desist orders, financial penalties, and public warnings aimed at deterring misconduct and protecting investors,” the final IOSCO finfluencer report says. “Moreover, some jurisdictions are adapting their existing regulatory frameworks to better encompass the activities of finfluencers, particularly around issues of licensing, disclosure, and conflicts of interest management.”
Despite acknowledging the potential positives of finfluencer activities (such as education), the paper highlights a long list of regulatory worries including a rise in unlicensed advice-givers, fraud, scams, promotion of ‘inappropriate’ risky products, conflicts of interest in dangers hyper-scaled when celebrities are involved.
Most regulators surveyed by IOSOC “observed that unlicensed individuals or firms tend to promote potentially higher risk or more complex investments such as forex, crypto assets, or/and CFDs”.
The peak global regulatory body also found a link between finfluencing and the copy-trading craze where retail investors simply reproduce the investment choices marketed by alleged experts via social media.
“This can blur the lines between the provision of authorized and regulated financial advice and the provision of general financial information, creating further risks for retail investors,” the IOSCO ‘Online imitative trading practices’ report says.
Copy-, mirror- and social-trading – slight variations on the theme – might also bring benefits for some investors but the paper says most trades promoted via these techniques tend to focus on risky assets such as contracts-for-difference, forex and crypto.
And most regulators classify copy-trading as likely falling “within the provision of investment advice and/or individual portfolio management and/or reception and transmission of investors’ orders and therefore those jurisdictions can apply their existing rules”.
IOSCO says the surge in self-directed investing practices like copy-trading is partly due to both finfluencers and sophisticated digital engagement practices (DEPs).
According to the copy-trading report, DEPs are increasingly used “by market intermediaries in their distribution channels – directly or through third parties – to communicate and engage with retail investors”.
Meanwhile, the DEP paper itself points out the ability of online systems to hack into human psychological foibles presents a separate regulatory challenge.
“The growth in the use of DEPs merits careful consideration, as it can result in an increase in the speed of distribution of financial products,” the report says. “The DEPs phenomenon is expected to grow in combination with other technological developments, such as deployment of more advanced AI & ML [artificial intelligence and machine-learning] technologies, an issue which may require specific regulatory attention in the future.”
IOSCO board chair, Jean-Paul Servais, said in a release that the three final reports, representing years of background work, mark a “significant milestone” in the regulatory body’s efforts to protect retail investors.
“From finfluencer promotions to gamified apps and imitative content, these reports set out globally aligned expectations for ethical conduct and effective oversight,” Servais said.
Separately, IOSCO has also urged global platform providers – a group including Meta, TikTok, YouTube and the like – to work harder to eliminate digital grifters, noting retail investors “lose significant amounts of money to investment fraud orchestrated through online paid-for advertisements and user-generated content”.
“IOSCO welcomes and strongly supports current efforts by some Platform Providers in some jurisdictions, to disrupt the misuse of their products and services by bad actors who seek to target retail investors, but a continually improving approach is needed to achieve tangible success,” the statement says.