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BaFin Issues Warning For Investment Advice And Tips Using Social Media Or Messenger Services – Financial Services

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Overview

The German Federal Financial Supervisory Authority
(BaFin) on 1o February 2022 published its consumer
protection warning to investors relying on investment tips in
social media and investment platforms.1 The BaFin’s
rationale for publishing its new warnings stem not only from recent
action at the EU-level2 (see standalone coverage from
PwC Legal’s EU RegCORE) but specifically in its observations
that “many consumers make their investment decisions based on
information they find in social media.” The increased interest
in financial markets grew rapidly during the COVID-19 pandemic. The
same is also true in respect of bad actors in traditional but also
social-media powered trading activity in traditional financial
instruments but equally crypto-assets/currencies.

BaFin’s warning (while not explicitly stating so) is not
limited to just Germany i.e., its warnings apply to content made
available to German domiciled (notably retail) investors regardless
of where the author of such content is located.

The aims of BaFin’s warning is to provide information on how
to deal with risks that arise when relying on investment-related
commentary (whether tips or investment advice) available on social
networks, forums and messaging services when investing money
(including copy trading). Specifically, BaFin sets out a
non-exhaustive summary of what alarm bells should go off for
investors in light of bad actors as well as inappropriate
conduct.

The BaFin’s tone is that while there are very much multiple
good reasons for investors to consider social media platforms,
doing so is not free from risk and thus should not be over-relied
upon. Accordingly, the BaFin summarises this as follows:

“Which financial products should one buy to achieve the
highest possible returns? Which start-up will be the new stock
market star? Which crypto stocks will see their prices multiply?
Which precious metals belong in every portfolio? Various platforms
such as YouTube, Facebook, Twitter, Instagram, Telegram, Reddit,
TikTok and Pinterest offer contact points for financial topics and
quick answers to the questions described. Social networks do offer
good information about investing and advice with a serious
background. However, there are also countless false or only
partially correct representations circulating there. Therefore,
investment tips are often not reliable. This is because not all
tipsters know enough about financial topics. In addition, the
motivation of some of them is dishonest. Those who blindly follow
such tips risk capital losses or even total loss.”

The BaFin’s warning and its recommendation for investors
apply to both investments in traditional financial instruments but
also those active in respect of crypto-assets/currencies.
Consequently, this warning should be read in conjunction with the
BaFin’s recent revised and comprehensive warning on investments
in crypto-assets/currencies (see standalone coverage from PwC
Legal’s EU RegCORE). The principles that BaFin is concerned
with apply in both those areas of financial markets and trading
notably as various actors, notably certain nascent brokerage firms
and app developers (as well as providers of crypto-assets and
trading platforms), but also financial influencers and other
self-proclaimed experts, who often spread false promises. In
addition, BaFin warns against the often-aggressive marketing of
coins and tokens. Equally, BaFin expresses its worries that
important information for potential investors is often withheld in
posts, videos, etc.

The BaFin’s recommendations are therefore very much
jurisdiction-agnostic in as much as they are neutral and thus
applicable to any type of financial instrument.
Crypto-assets/currencies are already regulated under German law,
very much ahead of pending EU regulatory changes) as financial
instruments

BaFin’s recommendations for investors

BaFin has compiled the following recommendations on what to look
out for in investment tips in social media. Investors are thus
encouraged to:

  • check which social media channels/influencers are being
    “advised” by and who or what is behind it
    . The
    BaFin notes that there are many self-proclaimed experts in addition
    to genuine sources of expertise. The BaFin also introduces a
    concept of financial influencers (in short: FinFluencers), who
    regularly post information and investment tips with high frequency.
    BaFin cautions that those who are seriously active in social media
    on investing usually explain who they are and what their expertise
    is based on. If the actors are reputable, investors can check their
    information in many cases against other sources. In summary, the
    BaFin reminds investors that: If the identity of the author is
    not clear from a post and it is also not apparent what background
    the person has, the information should not be relied
    upon;

  • conduct a careful review of the investment advice so
    that the opportunities and risks can be fully surveyed and
    understood.
    Furthermore, BaFin reminds investors that they
    should not be “… blinded by (apparently) high approval
    ratings!”. Many followers, many likes and many positive
    comments are not a seal of quality. They say little or nothing
    about the seriousness or quality of a presence. Because it is easy
    to manipulate these values. Seemingly positive comments or
    references to supposed investment successes can be freely invented
    and placed on behalf of the author. As a rule, such contributions
    are not verifiable;

  • get a complete picture of the advertised
    investment.
    All investments offer opportunities and are
    associated with risks at the same time. BaFin reminds investors to:
    weigh both against each other and evaluate them with a view to
    individual investment goals. It is often difficult to assess
    whether the opportunities and risks presented in a post are
    complete and accurate. Therefore, investors should always use
    several sources to get a complete picture of the advertised
    investment. Part of the research should also include independent
    sources, such as consumer advice centres. Investors are reminded of
    the need to be extremely sceptical if only or mainly prospects of
    success are presented in social media and no risks.

  • not be put under time pressure. Investment
    tips on social media platforms may often be formulated aggressively
    and give the impression that investors have(t)o react quickly. The
    BaFin concludes that: This is intended to exploit
    investors’ fear of missing out on profits (fear of missing out
    – FOMO) and push them into an ill-considered investment decision.
    Investors should not allow themselves to be pushed and should check
    whether they have a complete overview of the opportunities and
    risks and also understand them;

  • consider the financial motives of the tipster.
    Investment tips on social networks are usually free of charge. This
    means that players like FinFluencers finance themselves from other
    sources. As a rule, they receive a referral commission from the
    company whose investment products they report on. The BaFin
    cautions that: investors trigger this by clicking on certain
    text and image areas and are taken directly to other websites. The
    problem: For prospective investors as a user, this is often not
    readily apparent. Therefore, investors should keep in mind that
    there are such remuneration models that can be a strong motivation
    for the tipster.

  • adopt caution in that very high profit promises mean
    that applying scepticism is advisable
    . The BaFin reminds
    investors that: There is no such thing as “safe, quick
    money”. Are investors promised extraordinary profits? Then
    they can be sure that the risk is also extraordinarily high. Such
    tips usually conceal highly speculative investment products where
    investors lose a lot – or even all – of their capital. Often there
    is even fraud behind it. Social media make it easy to spread false
    information and thus also attract criminals
    ;

  • consider that time and again, dishonest actors in the
    social media influence courses and prices of financial instruments
    such as shares.
    They try to create or increase demand for
    shares, for example through false or misleading investment tips,
    without disclosing that they hold these investment products
    themselves and therefore profit greatly from price gains
    themselves. BaFin summarises this in stating that such actors:
    spread these dubious investment tips with the intention of
    profitably selling their investment again after the price increase
    caused by them. As a result, the price usually falls again and all
    other investors lose money
    ;

  • when switching to private messenger services for
    investment tips, caution is important
    . The BaFin cautions
    investors that: This will expose private contact information.
    This is because you are giving away your private contact details.
    After that, you are likely to receive some unsolicited,
    unauthorised calls offering you investment products and, in many
    cases, callers also creating a lot of pressure to act;
    and

  • in advance of relying on any investment advice those
    providing it should be due diligenced for indications of potential
    scams using social media
    . The BaFin provides the stark
    warning that: Criminals try to lure investors to dubious,
    unlicensed online platforms, for example, by offering investment
    tips or contacting them in social media. It is not always about
    investing money right from the start. Investors are often
    contacted, for example, via enquiries in chat boxes and dating
    platforms or via friend request and only later directed to dubious
    online platforms. There, they are led to believe – often through
    technical tricks – that the money they deposit there will be
    invested and generate profits. In reality, however, no profits are
    possible, because the transferred amounts do not flow into a
    capital investment. This often affects investments in crypto assets
    such as Bitcoin or Ether, but also transactions with financial
    contracts for difference (CFDs).

BaFin concludes its recommendations by also reminding investors
that in the event of scams and fraud its may be very difficult for
investors (and or law enforcement or other authorities) to rapidly
identify and pursue those responsible. Such bad actors often steal
an identity and hide behind it. On the platforms of providers often
based outside the EU, the fraudsters often pretend to have the
authorisation of a supervisory authority. Sometimes these
authorities exist, sometimes they are invented. They also often
pretend to be connected to companies with well-known brand names or
pretend that the platform works for public authorities such as
ministries and the police.

Outlook

While BaFin’s warning does not (and equally nor does the
activity at the EU level) seek to limit social-media driven
trading, the risks it does highlight will probably trigger further
revisions to existing warnings and ultimately rules. Regulated
firms (employing social media advertising but also operating or
participating in social media trading, messaging boards and similar
forums) but also social media platforms will want to consider
whether they need to revise their rules on appropriate conduct in
use of such platforms or in the alternative how to translate aims
and outcomes of regulatory warnings (such as that of BaFin) into
their own client-facing and other forms of public risks
warnings.

Financial services firms operating into or from Germany may also
want to consider stepping up their preparatory measures including
their horizon risk management for further rulemaking in this area
along with sanctions on individual regulated firms but more
importantly bad actors who contravene rules and supervisory
expectations. This might help firms in forward-planning the impact
but also differences between the BaFin’s rules as well as those
supervisory expectations set by the EU-level authorities across the
EEA, in particular on MiFIR/MiFID II suitability and
appropriateness.3

While some of these rules and expectations may be overlapping,
and some may stem from common EU principles or rulemaking, there
are still a number of jurisdiction-specific requirements but also
unintended conceptual divergences that firms are nevertheless
expected to comply with, irrespective of EU-level aims of improving
supervisory convergence of both the body of rulemaking, including
in its Single Rulebook for financial services across the EU’s
Single Market but also the supervisory culture across relevant
authorities.

Footnotes

1. Available here – albeit (at the time of writing)
only in German.

2. In particular publications of activity
available here.

3. For further details of PwC Legal’s
dedicated client-centric online services to help with horizon
scanning, risk mapping (including with data lakes) and compliance
framework documentation please contact PwC Legal’s EU
RegCORE.

Originally published March 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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