#Notfinancialadvice

Answer

It’s becoming increasingly common to see financial advice on social media. Those who provide financial advice on social media are often called 'finfluencers'. Searching ‘#investmentadvice’ on any large social media platform will show thousands of videos being uploaded every day by these 'finfluencers'. Often, these are accompanied by ‘#notfinancialadvice’ hidden at the bottom of the description. According to a poll by Savanta, 46% of 18- to 24-year-olds use TiKTok for financial advice. Unfortunately, much of this advice isn't accurate at all.

One example is Lauren Goodger (a former cast member of The Only Way Is Essex) who boasted having information on the price movement of an asset (called 'signals'), which gave "consistent profits" to her three quarters of a million followers. In court, her victims proved they’d suffered significant losses rather than the promised profit.

In a review by Almond Financial, it was found that 87% of the videos it reviewed on TikTok that were giving financial advice were at least “misleading”. This could be anything from missing key risks (eg, lack of protection from the Financial Services Compensation Scheme  if the provider goes insolvent) to exaggeration of the facts. With 90% of those same videos not encouraging the viewer to do their own research, there’s a growing trend for many 18- to-24-years olds to lose significant money or even be outright scammed following finfluencer advice. Against this backdrop, the key question is who, if anyone, can be held liable when reliance on finfluencer advice results in financial loss?

Criminal liability

Fraud

For those finfluencers who defraud their audience, it’s trite law that they’ d be criminally liable for fraud. Fraud carries a maximum of 10 years imprisonment. It should also be noted that a 'wider' impact fraud (eg, those done to a community of people on social media) is an aggravating factor when sentencing those convicted of this offence. Additionally, for victims, it’s likely that the court will order compensation. However, for many the negligent advice they act on doesn't fall within the definition of ‘fraud’ or isn't prosecuted by the state. Despite this, it doesn't mean that a crime hasn't been committed. 

Financial Service and Markets 2000

Much of the financial advice online surrounds the financial markets. Many promote their 'stock picks', highlighting the merits of their stock, cryptocurrency and even Contracts for Difference (CFDs), where the person investing can be liable for sums beyond the amount they initially invested. For CFDs, specifically, the Financial Conduct Authority (FCA) estimates that 80% of customers lose money.

In terms of liability, shares are a 'specified investment' under the Financial Services and Markets Act 2000 (FCMA). This means that a person arranging deals in, managing or advising on the merits of, or arranging deals in such investments (the 'specified activities') must be registered with the FCA. Advice is broad enough to cover opinions and recommendations regarding a specific course of action – such as buying Apple shares or divesting from Nvidia shares – but doesn’t extend to more general advice, such as preference for buying UK shares over US shares. Without being registered with the FCA or being exempt, providing this advice is likely to be deemed a criminal offence under Section 19(1) FSMA.

In recent years, the FCA, alongside its international counterparts, has intensified enforcement activity against unlawful finfluencer content. By way of example, Aaron Chalmers, formerly of Geordie Shore, recently pleaded guilty to the unlawful promotion of financial products on social media. The FCA has also increased its public warnings to make clear that those who breach the law may face up to two years’ imprisonment and an unlimited fine. Additionally, where there’s been a breach of FSMA, the relevant agreement may be unenforceable, and the other party may be entitled to recover sums paid under it together with any loss suffered as a result.

Despite these potential consequences, the deterrent effect of criminal enforcement in this area appears limited. In a combined prosecution at Southwark Crown Court, seven social media influencers pleaded guilty to unauthorised financial promotion of an investment scheme. The sanctions imposed were modest when compared with the scale of the audiences involved. By way of example, Goodger, who currently has one million Instagram followers, was fined £3,750 and ordered to pay costs of £5,778.18. Rebecca Gormley (also known as ‘Miss Newcastle’ who appeared on Love Island) received a conditional discharge and was ordered to pay £2,866.42. Her Instagram following is approximately 324,000.

Given estimates that Instagram advertising costs around £7.94 per 1,000 impressions, such penalties are viewed by many as insufficient to deter criminals as they fail to impose any meaningful financial penalty derived from online promotion even if the finfluencer is caught and prosecuted. For instance, Gormley appears to have lost only £300 from the conviction.  Accordingly, although enforcement under the FSMA has increased, many finfluencers are unlikely to face substantial criminal consequences. In those circumstances, individuals will have to rely on the civil system to provide compensation and justice.

Civil remedies

Contract

Many finfluencers sell courses to directly profit from their success online. This has the effect of forming a contract for services between the consumers and the finfluencer as a trader. Many offer outlandish claims such as 'guaranteed profit', thus putting them in breach of the express terms of the contract when this inevitably isn't the case. Additionally, this provides them with the inalienable implied terms  under the Consumer Rights Act. The most prominent of which is that the finfluencer must act with "reasonable care and skill" (Section 49(1) Consumer Rights Act 2015 (CRA)). It’s almost certain that the provision of illegal financial advice would fall below this. As such, there’d be a breach of contract here.

Finfluencers may try to rely on their general exclusion clauses found at the end of their videos or at the bottom of their posts such as ‘#notfinancialadvice’. However, the law makes it clear that knowledge of that term doesn’t mean the consumer has voluntarily accepted the risk (Section 65(2) CRA). Additionally, any term that tries to restrict the liability of the finfluencer will be seen as causing a significant imbalance between the parties and therefore not binding on the consumer (Section 62 CRA). This means that the consumer can rely on the contract. Broadly, the aim of damages in contract is to restore the claimant to a position they’d have been in if the contract had been performed (Robinson v Hardman). This in essence means the law will force the finfluencer to put them into a position that reasonably skilled financial advice would’ve put them. However, many who fall foul to finfluencers don't have a direct contractual relationship, meaning they must rely on tort.

Tort

Many individuals who suffer loss as a result of finfluencer content have no contractual relationship with the finfluencer, having only viewed the content on social media meaning their claim must therefore be framed in tort.

The most logical tort is a claim for economic misstatement. However, claiming for negligent misstatement under English Law is met with almost insurmountable hurdles. This is because English Law is notoriously cautious about allowing a claim for ‘pure economic loss’ (eg, a loss that’s not consequentially caused by personal injury or property damage). This is for two reasons.

Firstly, to establish liability, there must be an ascertainable class. The larger the class of affected persons, the less likely it is that a duty can be established. This is because the requisite proximity is unlikely to be present. In Preston v Torfaen BC, the claimant failed in their claim because they existed as merely a potential purchaser of a house in an unidentified general class of potential purchasers of the house. For social media users, they exist in a significantly greater class making such proximity even harder to establish.

Secondly, in terms of establishing liability, the usual disclaimers, such as ‘#notfinancialadvice’, make establishing liability an extremely difficult exercise. As Lord Devlin said in Hedley Byrne v Heller: "A man cannot say to be voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it, he declares that in fact he is not". Accordingly, many finfluencers avoid liability for negligent content because of the disclaimers they use and the broad class of social media users they address.

Practical reality

Even where a victim has a strong claim, obtaining redress in practice is often prohibitively difficult. Social media is inherently cross-jurisdictional. It’s unclear on social media which jurisdiction the finfluencer is based. Where the finfluencer is based in another jurisdiction, there’s the further question of whether any legal action can be enforced against them and whether pursuing it is commercially worthwhile.

Furthermore, litigation is also extremely expensive. For individuals who’ve already lost substantial sums, the cost of solicitors, counsel, court fees and expert evidence may place redress practically out of reach. With these practical barriers making claims inaccessible in practise, there’s a growing focus on whether the platforms hosting it should be liable.

The future: platform liability

Increasingly, social media companies are being held liable for the content that’s on their platform. In the defamation case of Tamiz v Google Inc, Lord Justice Richards said that where reported blogging content isn't taken down, the platform could be seen as "associated itself with, or to have made itself responsible for, the continued presence of that material". Although that case concerned defamation, the reasoning can principally be applied here. If an online service can become liable for the defamatory content on its platform, it can also (by failing to remove after notification) logically be held liable by victims as a tortfeasor for the illegal financial content it allows to freely circulate and even actively promotes via its hyper-targeted algorithms. Such liability is yet to be substantially explored by the court. However, the law is changing to place more liability on social media companies.

Recently, the Online Safety Act (OSA) has come into effect creating a suite of duties for social media companies to comply with. Included in these duties is the duty to take proportionate measures in the design and operation of their apps to prevent contact with fraudulent content or those in breach of FSMA's general prohibition (Section 10 OSA). Failure to comply can lead to the imposition of a fine of up to 10% of global turnover and even an 'access restriction order' (Section 146 OSA). Although, enforcement actions by Ofcom have been very limited. This order blocks access to the site from the UK. Although there’s no direct compensation for victims, the very high price of failing to abide these duties is stark showing that increasing liability is being placed on social media platforms.

Summary

In summary, this answer has analysed liability for harmful financial advice shared by 'finfluencers'. While criminal liability may arise under fraud or FSMA 2000, enforcement remains limited and (under FSMA) lacks any meaning deterrence. Civil claims in contract are viable. For those who don't have a contract, tort law imposes high hurdles such as disclaimers and lack of proximity. Practical barriers such as jurisdiction makes both contract and tort claims hard to pursue in practice. There’s precedent in defamation to hold social media platforms liable, but this hasn’t yet been tested within this context. However, OSA 2023 platforms are becoming increasing responsible for the posts on their platforms even if not directly to the victims.

Ben Ledwith is a trainee solicitor at DWF Group Limited.