(mis)Conduct, Money & Reputation

Kardashian, Finfluencers & Crypto

• Lansons & Katten • Season 1 • Episode 7

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As social media and generational shifts reshape the world of investment and financial advice, asset managers are facing a new and growing challenge: finfluencers. These social media personalities represent both opportunity and risk. Active on platforms like Instagram and TikTok, they can make finance more accessible, but also present reputational challenges when they promote financial products without following regulations. In this episode, David Masters and Neil Robson together with Emily Allen in the US, explore the impact of finfluencers on the asset management sector, focusing on the UK and US regulatory risks and misconduct issues they can trigger.

With cases like Kim Kardashian’s $1.26 million fine for promoting EthereumMax, the trio unpack the risks posed by finfluencers and discuss what asset managers can learn to protect their brands. Tune in for insights on safeguarding reputation in an age where financial advice is just a click away. 

Recorded and produced at the Lansons Studios

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Podcast Narrator:

This is Misconduct Money and Reputation. A podcast by reputation specialists Lansons and law firm Katten.

David Masters:

Hello and welcome to the episode. This is our seventh episode in a new series for those working in financial services, particularly in and around asset and wealth management, where we seek to navigate a path through some of the more complex issues where regulation and reputation overlap. My name is David Masters, Director and Asset Management Lead at Reputation Consultancy Lansons Team Farner.

Neil Robson:

And I'm Neil Robson, Regulatory Compliance Partner at law firm Katten.

David Masters:

And today we are joined by my colleague from Lansons New York office, Emily Allen. Welcome, Emily.

Emily Allen:

Hello, thank you for having me, david and Neil.

David Masters:

Pleasure to have you here, Emily. So, to get us started, we're going to be diving into the emerging issue of thinfluencers and also the particular threats and opportunities presented by social media and how different regulators around the world deal with this issue. We'll focus on the regulatory and reputational challenges businesses face. It's a timely topic, as the use of finfluencers by financial services companies is growing as financial services firms and investment businesses in particular seek to directly engage with their client audiences through social and digital channels. So, first up, what is a finfluencer? Well, they're a specific type of influencer the word itself is a portmanteau word coming from finance and influencer and Finfluencers offer guidance for people on how to manage and maximize one's personal finances, including investments. They also talk about things like cryptocurrency and property management quite a lot. So they are gaining credibility as a trusted source of information and advice and they attract many thousands, and in some case, millions, of loyal fans and followers. But why all the fuss? Well, the digitization of financial services is well underway and they are seen as having very good direct access to younger generations that investment businesses and wealth managers need to gain traction with, particularly given the declining loyalty to traditional financial institutions.

David Masters:

Post-gfc Studies have found that over 60% of US investors under 35 use social media as a source of investment information, and I think that comes from FINRA use social media as a source of investment information, and I think that comes from FINRA. In particular, finfluencers provide an easy way for providers to tap into the uptick in popularity of short-form video on social channels, and all this against the backdrop of a challenging economic context. Finfluencers are particularly prominent on Instagram, tiktok and YouTube are particularly prominent on Instagram, tiktok and YouTube. Their presence on X has waned, but that's not surprising, because a lot of people are no longer using that platform. Many Fintfluencers have their own websites and run their own blogs, and many of them an increasing number, roughly a third, maybe more have their own podcasts, which often feature other finfluencers as guests. So with that in mind, neil, perhaps you could give us a flavour of some recent misconduct and related issues involving finfluencers. I think we're all keen to hear about the Kardashian connection.

Neil Robson:

Yes, thank you, david. Well, to kind of set the scene as we go through this discussion a bit further, the concept, the phenomenon of influencers is not restricted to the US or the UK. It's an absolutely global phenomenon. There's been scandals in just about every major developed financial services economy, anywhere, from India, where the newly minted middle classes are looking in their millions of people that they trust on social media, through, of course, to the newly minted middle classes are looking in their millions of people that they trust on social media, through, of course, to the US and, as you say, kim Kardashian, and through to every other economy you can think of. There's a social media platform where somebody can connect and meet somebody they value and trust and they will listen to their opinion. So, just to set the scene a little bit further, so it was actually May last year the Financial Times was reporting that there'd been an enormous documented jump in self-directed investing, mainly because, I think of the pandemic people stuck at home and focusing on their own research rather than accessing traditional third party financial advisors, but also because of the massive increase in social media advisors, but also because of the massive increase in social media. The FCA's perspective is that this huge growth in retail accounts is really a major point that there needs to be better education of the masses. Now, if we jump to your Kardashian case that you've referenced, I think a lot of people are going to be quite familiar with Ms Kardashian, formerly Mrs Kardashian West.

Neil Robson:

She found herself on the wrong side of an investigation by the Securities and Exchange Commission in the States. So a few years back, she'd been promoting the crypto token Ethereum Max on her Instagram account. Now she'd violated SEC rules because she failed to tell any of her Instagram followers that she'd been paid a quarter of a million dollars for putting that post up on her page. The result for her was that she ended up with a $1.26 million settlement with the SEC. So just goes to show that if you get the rules wrong in the States, you have to say if it's a paid financial advertisement. She got that wrong and she ended up with a massive fine.

Neil Robson:

Equally, in the States, there's a lot of scandals around FTX, the high profile crypto platform. That collapsed, of course, and here it was American footballer Tom Brady and American basketball star Stephen Curry. The two of them ended up being sued for promoting the exchange in an inappropriate way. Again, they were being paid to do so and they didn't disclose properly. So in those scenarios, quite obviously, the individuals in question were not financial experts, but they were putting out information. That said, this looks really good to me. I think you guys, as my followers, should look into this. It was a promotion here we're looking at.

Neil Robson:

Okay, these are inappropriate promotions and in some ways, that's actually the focus of regulatory investigations. So if we stay in the US a minute before I jump around the rest of the world a little bit, as well as the SEC, in the States there's been a huge amount of enforcement smaller in scale, admittedly, but a lot of enforcement by FINRA, which is the broker dealer regulator in the US, and they did a targeted exam sweep, as they call it, an examination of a number of firms on a particular focused, narrow topic, focused, narrow topic, and they've actually done enforcement action and fined a considerable number of firms for using Finfluencers and, again, failing to disclose that these were paid for financial promotions, paid for advertisements, and there's some great, great snippets of information in those judgments and the publications that have come out Quite clearly. They've been saying you know if a firm or representative pays for a publication or a production or distribution of a communication of any form, then it must be identified as an advertisement. And that's where they keep hammering broker dealers who got it wrong. And that's been running now for three years. And that's usually the fundamental point here that these influencers are being paid to say things they don't understand foreign exchange trading scheme, which they've promoted very, very widely on Instagram.

Neil Robson:

But these reality TV celebrities in parenthesis, they had a combined Instagram following of four and a half million people, mostly UK, based mostly in their twenties and thirties. So the guy who sort of set up this scheme was a gentleman called Emmanuel Nuanzi and he was running an unauthorized investment scheme, according to the FCA's claim against him and the others, and he was encouraging the reality TV stars, again in parenthesis, to make unauthorized financial promotions and and in doing so, they were putting out on Instagram that they should effectively enter into conflicts for differences in relation to FX transactions. That is not permitted number one to retail investors in the UK. But equally, their Instagram posts became financial promotions. They became finance adverts for Mr Nuanzo's scheme at that time and that ran for three years effectively, from May 2018 all the way through to April 2021. Each of them put out at least once, these financial promotions on their Instagram pages, and so the FCA is claiming well, every one of these people all nine defendants was issuing unauthorized financial promotions.

Neil Robson:

Interestingly, the case is very much ongoing, so it's live as we speak now, at the end of September 2024. Everybody except Ava Zepico have pleaded not guilty. She hasn't yet actually put her plea in. She's got a hearing set next week, and the trials, interestingly, will not be until 2027, because the UK court service is so underwater at the moment. So we've got two and a half years to go before there's any sentencing or any judgment against them. If they are convicted, though, each could face up to two years in prison and or really significant fines.

David Masters:

It's very interesting because this is something which is a relatively new phenomenon and actually for a lot of investment businesses if we think of traditional investment businesses it's something which is quite it's the antithesis of how they normally operate, but it is becoming, you know, a much bigger, important part of how they reach out to that next generation of investors and existing generation of investors. I mean, there's a lot of research now that says that even the boomer generation are much more comfortable with digital communications. Emily, you're out in the field in New York and in the US, so what are the sort of things that you're seeing in New York and in the US? So what are the sort of things that you're seeing? Where's the sort of you know, what are you sort of? What's your view overall of where things are at the moment?

Emily Allen:

Yeah, well, what I think is really interesting here is the accessibility factor, and it's really, I think, a fundamental change into the democratization of investment information and financial advice. I think that platforms like social media and TikTok and YouTube have really lowered the barrier to entry, I think, both for the creators producing the content and for audiences consuming it, and that's really a paradigm shift, I think, in the way that financial knowledge is disseminated and internalized and consumed. And I think you know, especially in the US, we're really on the cusp of a massive generational wealth transfer. So I think more than 80 trillion is expected to move from the baby boomer generation down to younger generations, millennials and Gen Z alike younger generations, millennials and Gen Z alike and also, I think the boomer generation also holds a significant portion of US equity, so the implications are kind of multifold there and those younger generations so they're really inheriting not just wealth and capital but sort of a different market dynamic as well. So I think we also have to acknowledge that the investment behaviors of the younger generations are different. They're interested in digital assets and alternative investments much more so than equities and bonds, which again is another shift and I think also speaks a bit to a higher risk tolerance in many ways and probably a likelihood to value the cutting edge over what's been a proven playbook in terms of portfolio construction and advice. So they're more susceptible to be finfluenced, if you will, if you will.

Emily Allen:

But I think that another important piece of that is that, while platforms like YouTube have laid the groundwork, tiktok, in my estimation, is really a game changer in the sense that it's algorithm driven, it's content discovery and it's the concept of going viral, and the almost boundless organic reach is really to a whole new level.

Emily Allen:

And for the purposes of our discussion here, I looked up how many videos on TikTok currently have the hashtag investing, and it's over 2.5 million videos. So clearly there is just a mass of content and I think, for younger investors, who are inheriting this money and have a different sensibility when it comes to what they're looking for in terms of assets, I think the speed, the accessibility and probably, quite frankly, the entertainment value of the content is maybe outweighing the traditional methods of obtaining advice. So I think it's really interesting. I think there's a massive opportunity for firms to follow the money and to reach the new generations where they are looking and where their eyeballs are. But you know, as we've well documented the many, many risks as well. So I think it's a big challenge and I think the rate of evolution of these platforms as well is something really interesting to contend with.

David Masters:

It is, isn't it?

David Masters:

Because when we think of financial scams and this is probably a bit of a UK perspective we tend to think of things which are targeting vulnerable people, often older people, often pensioners.

David Masters:

But obviously the rise of social media and these digital platforms is creating a whole new and these digital platforms is creating a whole new sort of genre of scams. And you know Neil's already mentioned FTX. Now, whether that was set out to be an intentional scam or not, I don't really know. Obviously there is this huge transfer of money going on, so there are clearly people out there looking to exploit that, some of them, for you know, through fair means, by being a finfluencer and providing what they believe is good and valuable advice, but also other people who maybe whose views aren't quite as slightly. From a slightly more amoral perspective, how are companies in the US, where obviously there is so much financially at stake, are you beginning to see any trends emerge where they're beginning to see greater degree of caution or companies being more circumspect about how they operate with influencers? Or is this still very much the Wild West and it's really all about discovery, test and learn?

Emily Allen:

I think from my perspective, I think it's it's a lot of uh, test and learn.

Emily Allen:

And I, going back to your point about um, the scams, I I came across an interesting stat from the from the ftc um in the us that nearly almost 3 billion in losses from related scams and actually primarily most of those were from people aged 20 to 29. So I think there's also a bit of an interesting and maybe incorrect assumption that younger generations have more of that media or social media literacy to know when they're being targeted with good advice or bad advice. And I don't know that that's it's maybe not a correct assumption at this stage, but I mean, I think for a lot of firms they see the power in and they see the potential to leverage the really highly curated audience in a lot of ways, of these Finfluencers. So if you're looking to target certain demographics, these many Finfluencers who have their own platforms have already laid the groundwork in terms of bringing together this highly curated audience of specific demographics. So I think they see the real value proposition of it.

Emily Allen:

I think a lot of firms are quite scared off by all of the headlines and all of the risks that we've seen and a lot of them don't quite know how to put in place proper compliance and wrap their arms around the risks. So it's a little bit of everything. I think the opportunity is, is identified and it's there.

David Masters:

but, um, how we actually put into practice guardrails I think is is is another question so, if I can, neil, bring you back in so, um, if you're a financial services company and you're thinking of engaging with a Finfluencer and utilising a Finfluencer for your marketing, what are sort of the key regulatory things to do? What are the key regulatory requirements you need to check off?

Neil Robson:

Okay, well, let's focus on this from a UK perspective. Focus on this from a UK perspective. So starting point, sort of building block number one, right at the bottom of the structure is section 21 of the Financial Services and Markets Act financial promotion rule.

Neil Robson:

I know it's a bit techie to go into the actual legislation, but bottom line is is that a person must not, in the course of business, communicate an invitation or an inducement to engage in investment activity unless the person issuing the communication is themselves FCA licensed or an appropriate FCA licensed firm has approved the communication. Now, interestingly, this year the FCA has changed that rule and they've now required actually, if you're an FCA licensed firm, you need an extra license to approve third party communications in financial promotions. They've really restricted who can do it. But that's your starting point, because actually the next point is that there's a base principle that all such financial communications must be fair, clear and not misleading. Now, one little Instagram post it's going to be pretty hard to be fair, clear and not misleading all in one spot, make it clear that it's a financial promotion and comply with all the rules. So this is where influencers are going to get tripped up, and that's why the FCA is being so aggressive in pursuing the UK's reality TV stars' cases against them, those nine influencers I was talking about earlier. Now, what's really interesting, in fact, is, david, look back through the mists of time back to 2015. That's actually when you and I first met because now Lansan's Team Fana, you invited me to speak at one of your asset management forums because there was some new guidance from the FCA at that point in time on how to do financial promotions if you're an asset manager or another financial services firm, how to do it on social media. Back then we were talking about Facebook, youtube, pinterest, linkedin and, of course, twitter as it was at that time YouTube, pinterest, linkedin and, of course, twitter as it was at that time. Now the FCA has actually enhanced those rules just in the last 12 months, because the FCA recognizes that how do you do a financial promotion when you've only got so many characters on one screen, or indeed it might just be some sort of little image with a snapshot of text underneath? So what they've really done is again focus in and in fact they've flagged at the start of their new guidance that it's technology neutral. It doesn't matter how the information is being disseminated, you still have to meet the standards. So the FCA's new guidance, much enhanced, even tackles the point that influencers, if they're being used, even tackles the point that influencers, if they're being used, must adhere to these standards. So I'll read you a really good little excerpt.

Neil Robson:

Firms working with affiliate marketers, such as influencers, should take proactive responsibility for how their affiliates communicate financial promotions. Influencers are subject to regulation. Without the approval of an FCA-authorized person may be committing a criminal offense. And in fact what they do is they go through and explain how they would expect risk warnings to be shown. And, interestingly, what the FCA has also done is say hold on a minute. If you're a FIM influencer, you need to make sure you're adhering to the advertising standard, authorities guidance as well and the expectation that an advertisement is labeled as such. So they're making clear now that they're going to enforce against somebody who's violated the rules. So it's quite interesting to see that the FCA has tried to get themselves bang up to date, tried to become technology neutral, but the message remains the same Fair, clear, not misleading. That's the absolute standard and it's got to be clearly labeled and it's got to be appropriate for the audience in question. Most of the time. If you're a reality TV star, you probably can't do that in all reality.

David Masters:

Thanks very much. Now, that's really interesting, really important that the marketing people really understand the sort of regulatory requirements, because it's one of those things that's there to trip you up. And it is quite an interesting challenge for the asset management industry in particular, I think, because for many, many years, asset managers have wanted to remain in complete control of their brand, in complete control of their messaging. But by entering into the realm of influencers, you're effectively delegating the responsibility for your brand and the messaging around your brand to other people. I mean, Emily, in terms of the work you're doing with your clients, is this something you're seeing?

Emily Allen:

Yeah, I think there's something really interesting where we have really high standards.

Emily Allen:

For any firm that we would work with and be a consultancy for, we would ensure that all of their spokespeople are very well briefed, very well prepared, understand what they can and cannot say, are prepared with material and really tight messaging guidelines and go forth into the world all you know we call it singing from the same hymn sheet or being able to tell the same story really well and with all of the proper vetting. And I think there is something really interesting where the guardrails are not necessarily the same if you are engaging with finfluencers, because you're essentially handing over the reins for them to be a spokesperson for your company, for your firm, to be a spokesperson for your company, for your firm, and they're not necessarily put to the same preparation or standards in some ways. So part of what we're starting to guide clients on is having almost media training style sessions where if you're to engage with any Finfluencers, it really needs to be that they are put through the same rigorous process as anyone who is an assigned spokesperson for the firm.

David Masters:

Thanks very much, Emily. That's really important. I think it's a really important part to note and it sort of brings us to this whole idea of what happens if something goes wrong. What do you do about it. Well, if we step back and think about reputation, reputation is driven primarily by behavioral issues, and the behavioral issue here is that you really haven't done the right level of preparatory work, you haven't really vetted your influencers properly and you maybe haven't thought the whole thing through as well as you might. But having got to that stage, what can you do about it? I think that's a really interesting challenge because it sets up a whole series of question marks about why you've done it and what you're doing.

David Masters:

Clearly, if somebody is out there operating in a way which is harmful to your brand, the first thing you really need to do is you need to close that down is harmful to your brand. The first thing you really need to do is you need to close that down. You need to make sure that the audience for that is aware that this you know that this was not correct. You really need to issue some form of apology. But really it's as in with all sort of issues and reputation management. You know, what you say is really driven by what you need to do.

David Masters:

You know, are people likely to have lost out financially as a result of what this person is doing? So, you know, might you face regulatory fines, but also, you know, might you also need to be compensating people. So there are a whole series of questions which come to mind. You know, in terms of how you deal with these sort of issues, neil, what's the regulator's take on? You know, in terms of, because a lot of this is still, I guess, at quite an early stage, and you know the regulation is there, but necessarily not always the actions have been taken. But I guess, if we think about financial promotions rules, you know what, historically, have been the sort of responses to these sort of failings by the regulator.

Neil Robson:

Well, it's not just the FCA with the financial promotion rules here in the UK. I said earlier on in the podcast, the SEC and FINRA in the US are very, very unhappy with people being set free on social media, people being paid by financial services firms to go and illicitly promote financial products which they shouldn't be where it's not clear it's an advertisement, where it's not clear that this person has been paid to say good things about that particular product. So bottom line is if you get it wrong, if you are a regulated financial services institution and you have engaged somebody you know you've paid a finfluencer to say something good on their Instagram or on wherever, whichever platform, you could be significantly at risk of very large fines and that finfluencer they need to also understand they're at risk potentially of two years in jail and also significant fines.

David Masters:

I think that's really that think that's really important. What we're talking about here is because there is an upside to the use of influencers. This is a really important way of getting access to the next generation of investors and savers and for that next generation of investors and savers, it's a way of getting access to information that you need to know. That is going to be really useful. We know that there is a lack of understanding, a lack of education around these financial topics. There are a lot of exciting, innovative things happening, but TikTok and X are already becoming quite reputationally interesting, shall we say. What we need to say is that Finfluences doesn't come without its risks, but it's a really good opportunity for a lot of providers out there to reach a new audience. So that's everything from me. Thank you very much. My name is David Masters, and goodbye from my colleagues as well. Thank you very much. My name is David Masters, and goodbye from my colleagues as well. Thank you very much.

Emily Allen:

Thanks David, thanks Neil.

Podcast Narrator:

You've been listening to Misconduct, money and Reputation. Please do stay tuned for further episodes by subscribing on your favourite podcast app. You can find us by searching Lansons or Katten. This episode was recorded in the Lansons studios and brought to you by reputation specialists Lansons and law firm Katten.