BaFin Issues Warning For Investment Advice And Tips Using Social Media Or Messenger Services – Financial Services | #youtubescams | #lovescams | #datingscams

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:

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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