In a series of reports, global securities regulators set out their approach to dealing with emerging risks from the rise of finfluencers, social trading, gamification and other digital engagement practices.
The umbrella group of global regulators, the International Organization of Securities Commissions (IOSCO), issued a trio of reports stemming from a strategic initiative to enhance retail investor protection in the face of online innovation.
In those reports, IOSCO highlights a growing intersection between finfluencer activities and imitative trading (copy trading, mirror trading, social trading) strategies, which are sometimes complicated by gamification techniques and other practices designed to drive retail investor behaviour.
These innovations, which create new opportunities for retail investors to access markets, can also “blur the lines” between regulated advice and the provision of generic financial information, it said, “creating further risks for retail investors.”
When it comes to finfluencers, IOSCO’s report highlights potential regulatory gaps — primarily the risk of unregistered, unqualified people impacting retail investors’ decisions.
The growing risks posed by finfluencers include “the possibility of spreading misleading or biased information, promotion of higher-risk or complex products, and inadequate disclosure of any conflicts of interest,” it said.
To address these risks, the report sets out practices for regulators, industry firms and finfluencers that “aim to foster a more transparent and accountable environment” — including guidance on applying existing regulatory frameworks to finfluencer activity, and enhancing monitoring and enforcement through data analytics and social media surveillance tools.
It also calls for demanding more disclosure from industry firms that utilize influencers, and for ongoing education for both investors and finfluencers.
The report on imitative trading practices highlights the risks posed by automated strategies, which can lead to investors adopting approaches that don’t match their specific financial situations (such as risk tolerance or loss-absorption capacity) that “might result in significant losses, especially when lead traders engage in high-risk strategies or fail to provide adequate disclosures about the risks and costs involved.”
It also noted that these strategies often involve short-term, higher-risk trading practices that use more complex, volatile financial products, such as foreign exchange and crypto assets.
“This can expose retail investors to significant risks, including losses from leveraged products and erosion of returns due to high transaction fees from frequent trading,” it said.
To address these risks, the reports set out best practices for firms that offer imitative trading strategies, including overseeing the conduct of lead traders, establishing procedures for selecting and removing lead traders, assessing and addressing conflicts of interest, and monitoring their marketing activities to ensure compliance with disclosure and conduct standards.
Finally, the report on digital engagement focuses on the risks posed by the impact of these practices on investor behaviour and decision-making. It stresses that these tools must not be used in ways that put industry firms’ interests over investors’ interests, and advocates for disclosure that prioritizes investor protection and market integrity.
“The digital transformation of financial markets has reshaped the way retail investors interact with financial products and services. The good practices outlined in the three reports provide IOSCO members with a framework to address the challenges while maintaining the benefits of innovation,” said Derville Rowland, chair of IOSCO’s retail investor coordination group that led this work.
“From finfluencer promotions to gamified apps and imitative content, these reports set out globally aligned expectations for ethical conduct and effective oversight,” said Jean-Paul Servais, IOSCO chair and chair of the Belgium Financial Services & Markets Authority.
“They reflect our commitment to fostering innovation that serves the public interest, ensuring that technology enhances trust, rather than undermining it, in financial markets,” he added.