The Pitfalls of Finfluencers: AFM Exploration of Investor Protection Rules on Social Media

The Pitfalls of Finfluencers AFM Exploration of the Handling of Rules in the Field of Investor Protection on Social Media December 2021 AFM.nl/finfluencers

2 The Pitfalls of 'Finfluencers' Table of Contents Table of Contents 2 1 Summary of the Finfluencer Exploration 3 2 Introduction 4 3 Findings from the Exploration 5 3.1 The Playing Field 5 3.2 Activities 6 3.2.1 Giving Tips 7 3.2.2 Offering Courses and Training 7 3.2.3 Offering Self-Written Books or Reports 7 3.2.4 Selling Signals 7 4 Risks 8 4.1 Investment Advice Without a License 8 4.2 Insufficient Due Diligence in Investment Recommendations 9 4.3 Promoting Risky Products 10 4.4 Collaborating with Unlicensed Parties 10 4.5 Compensation for Introducing Clients 11 5 Next Steps 13

3 The Pitfalls of 'Finfluencers' 1 Summary of the Finfluencer Exploration The AFM conducted an exploratory investigation into approximately 150 financial influencers (finfluencers) who comment on investing on social media. In total, these finfluencers have a reach of 1,162,000 followers. The average finfluencer has around 11,000 followers. The number of followers varies by channel (YouTube or Instagram), and the reach ranges from a few dozen to tens of thousands of followers.

Although these finfluencers provide low-threshold information about investing and thereby meet a need, there are risks associated with the working methods of almost all finfluencers. Identified risks in the working methods of finfluencers are: • Investment advice without a license • Insufficient due diligence in investment recommendations • Promoting risky products • Collaborating with unlicensed parties • Compensation for introducing clients

Regarding the above-mentioned topics, rules apply that are also applicable to finfluencers. Not all finfluencers, nor the investment firms that pay them, comply with these rules.

4 The Pitfalls of 'Finfluencers' 2 Introduction A significant group of finfluencers is active on social media, commenting on investing. They produce podcasts, write blogs, and/or are active on channels such as Instagram, YouTube, or Facebook. The AFM conducted an exploratory investigation into what is happening on social media regarding investing and whether this is a cause for concern.

The reason for the AFM to investigate what is happening on social media regarding investing is that this is a relatively new and emerging phenomenon that likely influences the investment choices made by many young and beginner investors. The AFM has also received several questions and signals about this. The AFM sees that the number of young investors is increasing. Partly due to the rise of investment apps, investing is becoming increasingly low-threshold. More and more people are investing themselves, without the help of an investment advisor. Some of them state that they use information from social media for this.

The AFM considers it a positive development that information about wealth accumulation has become more accessible via social media than before. At the same time, there is reason for concern because the applicable legislation and regulations are not always followed correctly.

5 The Pitfalls of 'Finfluencers' 3 Findings from the Exploration 3.1 The Playing Field Finfluencers In the exploration, the AFM looked at approximately 150 financial influencers (or content creators) in the field of investing. In this report, this group is described as finfluencers. 1 These finfluencers report on a wide range of financial products: shares, bonds, exchange-traded funds (ETFs), but also riskier products such as forex, Contracts for Difference (CfDs), or crypto2. The focus of the exploration lies on finfluencers who are active in the Netherlands and communicate with their followers in Dutch. The AFM expects that with this group of 150 finfluencers, it has captured the most prominent finfluencers.

These finfluencers provide information and tips on investing via social media. Via various channels such as YouTube, Instagram, Facebook, Twitter, Spotify, and websites, they reach their audience. They share knowledge about investing or discuss their investment portfolios, but they also offer services ranging from training, courses, and meetings to subscriptions for a protected online community. Sometimes followers are recommended to become clients of a specific investment firm, generally via affiliate programs3.

The 150 finfluencers from the exploration are a very diverse group, regarding the number of followers, the services offered, and the investment products reported on. The degree of professionalism also varies greatly, from hobby projects to companies with employees.

About half of the finfluencers carry out their activities from a company registered in the trade register of the Chamber of Commerce. It is striking that a large part of the finfluencers have not followed a relevant financial education or gained work experience in the financial sector before becoming active on social media. Finfluencers mostly post about their own experiences. There are very few finfluencers4 who are neutral in their reporting or have no additional interests (such as selling their own products, such as books or courses, or receiving (introduction) fees).

This exploration concerns finfluencers who deal with investing. Part of this group focuses on personal finance and also reports on saving, borrowing, and insurance. The AFM has not investigated whether finfluencers comply with the applicable legislation in that area.

1 In this exploration, we have defined the term finfluencer as: natural persons who, via their private account or the account of their company on social media, websites, and/or in podcasts (in a personal capacity), comment on investing, regardless of size and reach. 2 Crypto's and crypto service provision are currently not subject to financial supervision (with the exception of anti-money laundering supervision). This will change with the entry into force of the Markets in Crypto-Assets Regulation. 3 Affiliate programs are online marketing programs in which advertisers pay third parties based on the number of 'leads', visitors, or sales they generate. 4 The AFM has seen two finfluencers who only provide objective and general information, without additional interests.

6 The Pitfalls of 'Finfluencers' Followers The average finfluencer has around 11,000 followers. The number of followers varies by channel, and the reach ranges from a few dozen to tens of thousands of followers. Followers of finfluencers are generally not professional investors. Most choose to invest without advice and manage their own transactions. This form of investing is called execution-only5. It is the most accessible form of investing because costs are lower and service provision is online, usually via an investment app.

Financial Enterprises Finfluencers advertise all kinds of financial enterprises in their statements. Especially via Instagram and on websites, references are made to financial parties or trading platforms. This also happens to a lesser extent via YouTube and Facebook. By using affiliate programs, the finfluencer receives compensation for introducing clients to a financial enterprise. It is striking that some finfluencers are not transparent about this or even claim that they do not receive introduction fees from a financial enterprise, while this is the case.

In addition to promoting licensed parties, a number of finfluencers also promote financial enterprises that are illegal and encourage followers to invest there. These parties do not have a license or registration to operate in the Netherlands. This concerns, for example, illegal brokers based outside Europe (including in 'tax havens') where one can trade in (very) risky products such as CfDs and forex.

3.2 Activities The activities of the 150 investigated finfluencers can be divided into different categories that do not exclude each other. Finfluencers give tips on investing, offer courses and training, sell self-written books or reports, and sell signals.

5 https://www.afm.nl/nl-nl/nieuws/2021/november/onderzoek-execution-only-beleggen Execution-only investors use social media as an information source Research by the AFM shows that the number of investing households increased from 1.4 to 1.9 million over the past two years. 10% of investors who have been investing for a maximum of 2 years state that recommendations or information via social media played a role in the decision to start investing.

The information sources that investors use when making their investment decisions are very diverse. Many investors state that they use one or more sources of information provided or issued by financial enterprises or securities publishers. Furthermore, we see that 9% of execution-only investors use social media or influencers as an information source. Of the execution-only investors with a maximum of 2 years of investing experience, 15% use social media as an information source. The AFM expects that the use of social media as an information source will increase in the coming years.

7 The Pitfalls of 'Finfluencers' 3.2.1 Giving Tips Almost all finfluencers (120 of the approximately 150) give tips on investing. These tips are spread on social media, for example in Instagram Stories, on YouTube, or in blogs. Finfluencers inform their followers more generally about investing, for example about the different types of products and which investment firms can be used for investing. Additionally, finfluencers also give more specific investment tips on (transactions with) financial instruments, for example an opinion on the current or future price of a specific share.

Occasionally, the giving of tips does not happen in the public part of the website or social media, but behind a protected part. Think of Discord, Telegram groups, closed Facebook groups, a paid community on the website or in reports, newsletters, and other communication tools where the consumer has to pay. The AFM has not conducted research into the protected part.

3.2.2 Offering Courses and Training Of the 150 investigated finfluencers, 50 offer courses or training, both paid and free. The content of the courses varies from general courses such as 'how to become financially independent' to specific courses such as 'how can I day trade'. The impact and scope also vary, from a free one-hour course to a multi-day training costing €1,000. Finfluencers also offer individual coaching and access to a 'unique closed community' or 'trading tools'. These services are also available in subscription form.

3.2.3 Offering Self-Written Books or Reports 17 of the 150 investigated finfluencers sell self-written books about investing, and 20 finfluencers sell self-written analyses or reports about investing. The content of these books, reports, and analyses is not part of this exploration.

3.2.4 Selling Signals Of the 150 investigated finfluencers, 24 sell 'signals', for example by having customers subscribe to daily text messages, videos, or SMS messages that give a buy or sell signal for a specific share.

8 The Pitfalls of 'Finfluencers' 4 Risks The AFM has identified the following risks in the working methods of finfluencers: • Investment advice without a license • Insufficient due diligence in investment recommendations • Promoting risky products • Collaborating with unlicensed parties • Compensation for introducing clients

4.1 Investment Advice Without a License Investment advice is an activity for which a license from the AFM is mandatory and which has high requirements, such as regarding the competence of the advisor and the method of remuneration. The AFM notes that finfluencers often use a disclaimer stating that they do not give financial advice. Nevertheless, the AFM sees that investment advice is sometimes given despite this disclaimer, for example during Q&As on Instagram. There is also a risk that finfluencers give investment advice in closed courses and training. Without a license from the AFM, this is not permitted.

None of the investigated finfluencers have an AFM license, and a large part of the finfluencers have not followed a relevant financial education. Nevertheless, these persons are seen by their followers as experts in their field, and their tips are followed. The AFM received dozens of signals last year from consumers who lost a lot of money as a result of a tip from a finfluencer. 6 6 The examples and account names mentioned in this report are fictitious.

When is there investment advice? Investment advice is defined in the regulations as: 'making personalized recommendations to a client, either at the client's request or on the initiative of the investment firm, regarding one or more transactions involving financial instruments.'

This concerns advice that addresses the personal situation of the client. This is quickly the case: 'in your case, I would...'.

So not like this: Q: I recently received a windfall of 10,000 euros. I am 30 years old and have started cautiously with investing, specifically shares Y and Z. Is it a good idea to buy more shares Y? A from Metmijmeerrendement6: If I were you, I would swap share Y for share X, especially because you have such a long horizon. Share Y has really seen its best days, and share X has enormous potential.

9 The Pitfalls of 'Finfluencers' 4.2 Insufficient Due Diligence in Investment Recommendations As described in Chapter 3, the AFM sees finfluencers giving specific investment tips on financial instruments that can be regarded as investment recommendations. This is particularly the case when giving tips (§ 3.2.1), offering self-written reports or analyses on investing (§ 3.2.3), and selling signals (§ 3.2.4). When making investment recommendations, certain due diligence requirements must be met.

When making investment recommendations, finfluencers do not always comply with the rules that apply for this, mostly because they do not present the information sufficiently objectively. There are various due diligence requirements that they do not always meet, such as: • Facts must be clearly distinguished from interpretations, estimates, advice, and other forms of information that are not based on facts. • All essential information sources must be clearly and prominently mentioned. • All information sources are reliable, and if there is doubt about whether a source is reliable, this is clearly stated. • All projections, forecasts, and target prices must be clearly and prominently identified as such. Essential assumptions are stated when preparing and using them. • The date and time when the recommendation was completed must be clearly and prominently stated.

Furthermore, the AFM also sees a risk that finfluencers are not transparent about their own interests in a specific recommendation. They might tip a specific share to buy or sell – sometimes even implicitly – but may themselves have an interest if many followers also enter or exit. Or they are paid or receive compensation in other ways to promote certain products. According to legislation, finfluencers must disclose this if it can affect the objectivity of the recommendation.

Also, various finfluencers operate under an alias. It is not publicly known who manages these accounts. Nevertheless, these accounts have thousands of followers. According to legislation, the identity of the person giving an investment recommendation must be known. This must be recognizable in all communications containing an investment recommendation. This does not work well in the case of anonymous accounts.

It is important that finfluencers meet the due diligence requirements when making investment recommendations. If they do not, investors may be influenced to make an investment decision without the objective and/or fundamental grounds on which they normally base an investment decision. Finfluencers are thereby in violation of the rules applicable to them.

What is an investment recommendation? An investment recommendation is defined in the regulations as: 'any information distributed through distribution channels or to the public that explicitly or implicitly recommends or suggests an investment strategy regarding one or more financial instruments or issuing entities, including any opinion regarding the current or future value or price of such instruments.'

Unlike investment advice, an investment recommendation is not directed at one person, but is intended for a distribution channel or public. There is no threshold for the size of such a distribution channel or public. Regardless of the size of the group involved, there can be an investment recommendation, as long as no personal investment advice is given. Expressing an opinion on the value or price of a share on social media can quickly constitute an investment recommendation.

10 The Pitfalls of 'Finfluencers' More information about investment recommendations and social media can be found in the third edition of the AFM Market Watch.7

4.3 Promoting Risky Products A number of finfluencers report on risky products such as forex, turbo's, CfDs, and crypto's. The AFM has warned multiple times about the risks of such products, which are generally not in the interest of (beginning) retail investors.

Trade restrictions have been placed on the sale of turbo's and CfDs in the Netherlands to protect investors.8 9 Crypto's currently fall largely outside financial supervision. The AFM has regularly warned consumers against trading in crypto's, due to the highly fluctuating prices and because crypto's are vulnerable to deception, fraud, and manipulation.

The AFM has noted that some finfluencers refer to enterprises that offer leveraged products with crypto's. Given the high volatility on the crypto markets, trading with leverage can lead to significant losses in a short time. Such products are not suitable for retail investors, but are nevertheless promoted by finfluencers.

4.4 Collaborating with Unlicensed Parties Furthermore, we have seen that various finfluencers promote products from financial enterprises that are not allowed to operate in the Netherlands because they do not possess the necessary license. This concerns, for example, unlicensed investment firms based outside Europe (including in 'tax havens') where one can trade in (very) risky products such as CfDs and forex. In some cases, finfluencers receive very high compensation for bringing in new clients and thus have a (personal) interest in introducing followers. The client is usually not aware of this. For one of these providers, the AFM issued a warning in November 2021.10

The AFM considers referring to unlicensed parties very undesirable. If things go wrong, a consumer cannot rely on investor protection, and recovery options abroad are usually complicated. On the AFM website, it can be checked whether an enterprise possesses a license.

7 AFM Market Watch - Investing and social media in the context of GameStop: AFM Market Watch | Subject Information from the AFM | AFM Professionals. 8 Better protection for investors against risks of turbo's | June | AFM 9 AFM prohibits binary options and restricts CFD sales | April | AFM 10 https://www.afm.nl/nl-nl/professionals/nieuws/2021/november/waarschuwing-grinta

So not like this: Metmijmeerrendement: I see that share X is going to the stock exchange. This one will surely triple and hit $20. Are you joining in?

11 The Pitfalls of 'Finfluencers' 4.5 Compensation for Introducing Clients Various finfluencers promote brokers or banks on social media. In her investigation, the AFM established that there are investment firms that pay finfluencers based on the number of new clients that come in via the finfluencer's channel. This is in violation of the commission ban for investment firms, as we know it in the Netherlands.

In practice, this is certainly the case if the investment firm provides compensation, for example to a finfluencer, if these introduced clients: • Are in the onboarding process for opening an investment account, • Have opened an account, OR • Have opened an account AND made a first deposit.

In this context, the provision of introduction fees to all third parties, not just finfluencers, is also in violation of the commission ban regarding investment services. There is also an introduction fee if existing clients receive compensation for introducing friends, acquaintances, and others. This applies to both monetary compensation and rewards such as shares.

General compensation for advertising brokers and/or banks is permitted. But rules apply here as well. There is the Dutch Advertising Code (NRC). This 'is a set of rules, drawn up by the advertising business, which responsible advertising must comply with'.11 The NRC consists of a general part and various special advertising codes. In the general part, it states among other things that advertising must always be recognizable and 'not misleading and not contrary to the truth'. Also, advertising 'must not unnecessarily offend and must not be contrary to good taste and decency'. In addition to these general rules for all advertising communications, there are special advertising codes; in this case, relevant is the specific Advertising Code for Social Media & Influencer Marketing.12 This states among other things that advertising via social media must clearly

11 Source: FAQ - Stichting Reclame Code 12 See for more information: www.reclamecode.nl/social

Commission Ban The Netherlands has a commission ban for investment firms. This commission ban ensures that the obligation for investment firms to act in the interest of the client is not undermined by the incentives arising from commissions.

Compensations that investment firms provide to third parties for introducing clients to the investment firm are to be regarded as commissions. That is not allowed. There is already a commission if the investment firm provides compensation for new clients who have at least started the onboarding process for opening an investment account.

So not like this: Finfluencer Metmijmeerrendement receives