06 February

Potential hazards of being a ‘FinFluencer’

Man recording a video for social media using his phone mounted on a tripod

Introduction

In the current digital age, social media and the online world has made information easily accessible and disseminated. Similarly, communication between people is now literally available at people’s fingertips.

As a consequence of the rise of social media and the online world, there has been influential people who are able to captivate an audience on a large scale.

In particular, there is a sub-type of influencers referred to as ‘FinFluencers’ which is a colloquial reference to someone on social media or on the online world who provides financial advice, products or services generally without having the required licence.

This article will outline a decision handed down on 20 December 2022 of Australian Securities and Investments Commission v Scholz (No 2) [2022] FCA 1542 in which a ‘FinFluencer’ was found to be carrying on a financial services business without an Australian financial services licence in contravention of section 911A(1) of the Corporations Act 2001 (Cth) (the ‘Act’) between March 2020 and November 2021.

This article is general in nature and should not be construed or relied upon as legal advice, and we recommend that you obtain independent legal advice about your matter. If you are the subject of proceedings by ASIC, our firm would be happy to discuss your matter on a confidential basis.

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Brief Background

From about March 2020, Mr Scholz posted positive stories on an Instagram account about particular companies, which often indicated that he had acquired shares in that company or that he thought that shares in that company would be a good investment. A likely consequence of his conduct was that it would influence viewers of his stories to acquire the shares and his shareholding would increase in value when that occurred.

By no later than mid-2020, Mr Scholz was engaged in selling private “tips” about shares to clients for $500. Mr Scholz also promoted on Instagram and ran seminars designed to teach attendees about how to trade on the Australian Stock Exchange. He charged $500 for these seminars, which were held over Zoom or in person at Mr Scholz’s residence.

The seminars were described by Mr Scholz as “Stage 1” with attendees being encouraged by him to progress to “Stage 2”, which was an online group on Discord in which messages were exchanged by members about share trades

Mr Scholz expressed numerous views via the Discord channel about whether particular shares should be acquired or sold, and when, and at what price – both to the group as well as in direct messages exchanged with group members, who sometimes asked for his particular guidance and advice as to what they should do about certain shares.

What does Section 911A(1) of the Act say?

Section 911A(1) of the Act states:

911A Need for an Australian financial services licence

Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services.

Exemptions from Section 911A(1) of the Act

Section 911A(2) sets out circumstances in which a person is exempt from the requirement to hold an Australian financial services licence for a financial service.

Mr Scholz relied on section 911A(2)(eb) which states as follows:

(2) However, a person is exempt from the requirement to hold an Australian financial services licence for a financial service they provide in any of the following circumstances:

(eb) the service is the provision of general advice and all of the following apply:

(i) the advice is provided in the course of, or by means of, transmissions that the person makes by means of an information service (see subsection (6)), or that are made by means of an information service that the person owns, operates or makes available;

(ii) the transmissions are generally available to the public;

(iii) the sole or principal purpose of the transmissions is not the provision of financial product advice;

Substantive Issues considered by Justice Downes

Justice Downes considered the following substantive issues:

Whether Mr Scholz carried on a financial services business within the meaning of section 911A of the Act; and
Whether the exemption in section 911A(2)(eb) of the Act applies.

Determination of the substantive issues by Justice Downes

In relation to whether Mr Scholz carried on a financial services business within the meaning of section 911A of the Act, in summary Justice Downes found that:

The manner in which Mr Scholz conducted his activities had many features of a commercial enterprise, and constituted a business;
Mr Scholz’s activities were conducted using particular branding which cultivated an image of a successful share trader;
The respective stages of the business were promoted and were interrelated (for example, Stage 1 seminar participants were encouraged to progress to Stage 2);
The overall operations were continuous and systematic;
The transactions engaged in by Mr Scholz were commercial in nature, and there was a profit making purpose.
The advice which was given by Mr Scholz was not a one off but formed part of the continuous and systematic business operations by which Mr Scholz derived profit.

In relation to whether the exemption in section 911A(2)(eb) of the Act applies, in summary Justice Downes found that:

As accepted by the Australian Securites and Investment Commission (‘ASIC’), there was no evidence that any advice which Mr Scholz gave constituted personal advice with the consequence that Mr Scholz was required under section 911A(1) of the Act to hold an Australian financial services licence, which means that based on the evidence, the advice provided by Mr Scholz constituted general advice.
It was established that the general advice provided by Mr Scholz was provided in the course of, or by means of, transmissions that Mr Scholz made by means of an information service.
It was not established that all transmissions made by Mr Scholz were generally available to the public;

It was not established that the sole or principal purpose of the transmissions by Mr Scholz was not the provision of financial product advice.

Consequently, while Mr Scholz was able to satisfy that the advice he provided was general advice and that he provided that advice in the course of, or by means of, transmissions that Mr Scholz made by means of an information service he was unable to establish that all transmissions made by him were generally available to the public and that the sole or principal purpose of the transmissions by him was not the provision of financial product advice.

Current status of matter

At the time of writing this article, this matter has been listed for a case management hearing on 31 January 2023 to progress the proceeding to a further hearing to determine the remaining issues.

Conclusion

This matter serves as a reminder to anyone promoting, engaging in, or discussing the provision of financial advice, services or products about the potential hazards of being a ‘Finfluencer’.

A copy of the judgment can be found here: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2022/2022fca1542

At the time of writing this article, ASIC have a webpage and an information sheet (Information Sheet 269) in relation to discussing financial products and services online which can be accessed here: https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/discussing-financial-products-and-services-online/

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