Regulation is inadequate protection against greed

Consider the following hypothetical example. A well-known blogger writes about how he managed to purchase an original Omega watch for Rs 1 lakh against the market price of Rs 5 lakh. Many people are influenced by this blog post to buy their Omega watches from the same establishment.

These watches are ultimately proven to be duplicates.

There is an outcry for taking criminal action against the blogger for his misleading post. Investigation reveals that the establishment had provided an original Omega watch to the blogger at Rs 1 lakh on the condition that he write about it. Effectively, the establishment had given the blogger a gift of Rs 4 lakh knowing fully well that many people would be influenced by him. The establishment could then palm off its counterfeit watches to such people. The blogger successfully argues that no criminal action can be taken against him as he had only shared his personal experience without asking anybody to buy from that establishment.

There is then a clamour for regulating such bloggers, so they stop misleading people. The concerned ministry creates rules for the registration of bloggers who write about good deals available in the market. As a result, many websites and bloggers who are doing great work in this area of providing information on good deals for consumers now need to register and comply with the new regulations. Their compliance cost goes up. Many of the smaller ones wind up their businesses. As a result, many consumers are deprived of information about good deals these players provided. Meanwhile, the original blogger who was the cause of these regulations shifts overseas and continues to remain unregulated.

I thought up this hypothetical example as I read many articles calling for more regulations on the so called finfluencers (financial influencers) in the wake of losses caused on account of closure of the crypto exchange Vauld. The Indian regulators have issued several public warnings to Indian investors about the risks and dangers of investing in unregulated crypto currency markets. These warnings were ignored amid the craze caused by rising prices of cryptocurrencies last year. Some investors were drawn into making such investments by their own greed and influenced by some finfluencers. Hence the question: Should regulations be made to regulate finfluencers?

At the risk of oversimplifying a complex subject, let me try and outline the principles that should govern decisions in this regard. A well-regulated market is good for any business or profession as it imparts confidence to consumers and leads to orderly development of markets for that product or service. But regulations can also create a false sense of security among consumers and lead them to take excessive risks. (Read my article on the fence paradox dated June 20, 2019 in Business Standard). Just imagine the consequences if these crypto exchanges had enjoyed the respectability of being regulated by an Indian regulator.

Overregulation increases costs and drives smaller players out of the market. And in this technology-led world, it also leads to some players shifting to low or zero-regulation markets.

So, regulation cannot be the sole answer to such issues. There also needs to be a concerted effort to educate the consumer so that she is better informed about the risks and rewards of what she is doing. 

But in the end, there also needs to be a recognition that no regulation can protect a person against the consequences of her own greed and the abandonment of common sense.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta