Social trading and influencer marketing: towards a stricter regulatory framework? What is “social trading”?
Social trading refers to the use of a trader’s experience to carry out financial transactions. Democratized since the emergence of new technologies enabling the development of specialized platforms, social trading is nonetheless an activity with both advantages and limitations.
The two main modes of social trading are ‘Copy trading’ and ‘Mirror trading’. Copy trading involves imitating a specific operation performed by another trader, while mirror trading copies the entire strategy and financial operations performed by another trader. Thanks to specialized platforms, mirror trading can now be carried out using an algorithm that identifies winning strategies and trades. That said, these two social trading practices leave the door open to abuse and market manipulation.
As early as 2017, a link between ‘Mirror trading’ and money-laundering techniques was established, with the questioning of Deutsche Bank’s actions and its internal operations with various currencies. Since then, it appears that one of the European Union’s priorities is to define a regulatory framework to harmonize European markets, limit misconduct on the part of brokers and protect consumers of financial products. However, it still seems difficult to determine where responsibility lies, especially when individuals act as third parties between the broker and the individual investor.
The influencer’s role in social trading
Numerous scandals have erupted since last year, regarding the promotion of complex financial products by influencers and content creators for their audiences. These include the influencer couple Marc and Nadé Blata, who have been accused of organized fraud from their social networking platforms.
The couple promoted ‘copy trading’ to their audience without any tangible preliminary experience of investing in complex, high-risk financial products. As a result, individuals who had placed their trust in what appeared to be trustworthy investment advice lost out on their capital. In reality, the commercial partnership with the trading platform was disguised, and the risk-taking surrounding the complex financial product concealed.
The growing notoriety of certain individuals on social networks has enabled a number of abuses, of which gullible private investors have fallen victim. To understand the mechanisms behind such (not always conscious) breaches of trust, we can turn to the principles of compliance set out by Robert Cialdini in his book Influence: The psychology of persuasion, in particular chapter 5 on conditioning and association of ideas. According to him, when a connection is established, it will yield more consistent results if it is positive rather than logical. Applied to influencers, this means integrating that their audience will be more receptive to the products they offer. The individual who follows the influencer will imitate what the latter does and promotes, because he or she is already in a state of acceptance and assimilation of his or her content.
A framework for influencer marketing
If the influencer doesn’t need to be an expert in what he or she is promoting, he or she simply becomes a third party between the buyer and the marketing of a product. An unscrupulous broker, acting outside any regulatory framework (e.g., unregulated, offshore) would therefore have an interest in soliciting an influencer with the purpose of extending his commercial reach.
On June 09, the Law n˙2023-451 aimed at regulating commercial influence and combating the abuses of influencers on social networks came into force in France. Its aim is to identify the deviations committed by individuals with notoriety when it comes to online commercial practices, and to define a scope of action. Indeed, until now, it could be quite complicated to discern whether certain influencer testimonials constituted commercial communications. The first article of this law aims to define the notion of media influence:
“Natural or legal persons who, for a fee, use their reputation among their audience to communicate content to the public by electronic means for the purpose of promoting, directly or indirectly, goods, services or any cause whatsoever, engage in the activity of commercial influence by electronic means.”
This raises the question of responsibility: is the influencer, a commercial partner with no expertise, responsible for the product he or she promotes? Is the individual investor responsible for the trust he has placed in the promoter of a product? Here’s what the law says about promoting financial products:
“V.-The direct or indirect promotion of the following financial products and services is prohibited for persons engaged in the activity of commercial influence by electronic means:
1° Financial contracts as defined in article L. 533-12-7 of the French Monetary and Financial Code;
2° The supply of services on digital assets, within the meaning of article L. 54-10-2 of the same code, with the exception of those for the supply of which the advertiser is registered under the conditions laid down in article L. 54-10-3 of the said code or approved under the conditions laid down in article L. 54-10-5 of the same code;
3° Offers of tokens to the public, within the meaning of article L. 552-3 of the same code, except where the advertiser has obtained the visa provided for in article L. 552-4 of the same code;
4° Digital assets, with the exception of those linked to services for which the advertiser is registered under the conditions set out in article L. 54-10-3 of the same code or approved under the conditions set out in article L. 54-10-5 of the same code, or where the advertiser does not fall within the scope of articles L. 54-10-3 and L. 54-10-5 of the same code.
Failure to comply with the provisions of this V is subject to the penalties set out in the fifth paragraph of article L. 222-16-1 and the penultimate paragraph of article L. 222-16-2 of the French Consumer Code.
Quite clearly, it appears that the first solicitor (in our case, the broker) is globally responsible for the repercussions of his plot. If the broker is aware of the limits and dangers of the financial product he is offering, and decides to promote it through a novice third party, he is misleading both his commercial partners and the future clientele they will bring him.”
That said, non-compliant practices do not concern all brokers, and the responsibility of the European regulator is also to protect the financial markets. In fact, Article 6 of the Act stipulates that influencers are responsible for verifying the truthfulness of the product they are promoting and the information relating to it. As a result, the influencer can no longer be content to be an innocent third party with no attachment to the product he supports or his audience; he now has a share of responsibility in what he promotes, and a duty of transparency towards the individuals who follow his activity and are inclined to follow his advice.
To sum up the key points of this law, it is worth noting that a process of reflection on individual and collective responsibility has been launched. Under the aegis of ESMA and the MiFID II directive, brokers and other organizations offering the sale of financial products are subject to regulations, thus ensuring a balance between the need to develop one’s business and respect for customers and their personal interests.
Now, it must be said that the customer of such financial products is responsible for his investment and the choices he makes regarding his capital. Where this new law changes things is that it also makes the third party promoting this type of financial product responsible, as well as the media platform enabling this information to be shared. This is unprecedented not only in France, but in Europe, and we can only hope that similar measures will be taken on a European scale – both at EU level and in each member state.
Financial Fraud Lawyers defends victims of abuse
The lawyers in our network are dedicated to helping individuals who find themselves the victims of non-compliant practices when it comes to online trading. We have a proven track record of successfully representing the interests of our private investor clients. Whether it’s the sharing of non-transparent or even erroneous information, promises of secure profit, or market manipulation, our expertise will be at your service in resolving your dispute.
If you believe to be the victim of some malpractices, and have suffered a significant loss of your investment capital, contact us so that we can assess your chances of a positive resolution and recovery of your lost funds.
Disclaimer:
The Financial Fraud Lawyers network aims to inform private investors (traders) of potential malpractices by Forex and CFD brokers. Our mission is to assist and protect traders when they encounter brokerage practices that go against their interests.
Our articles are intended to warn, share and inform the public about the legal risks of Forex and its players. Trading financial products and CFDs as well as investing on online platforms carry legal risks.
The article was written in good faith, based on public information and client testimonials valid at the time of publication. Our articles concern the protection of the interests of individuals on online investment platforms and are published in accordance with our right to inform the public about our activity. This article is not to be considered legal advice.
