FAIR Focus
October 2022
This month's newsletter discusses regulators clamping down on misleading social media “finfluencers” who promote investing and financial products to investors. We discuss growing concerns over borrowing money to pay for investments and some of the risks that come with this approach to investing. In addition, we highlight steps Canadian regulators are taking to try to protect crypto investors, as well as investors falling prey to “affinity” scams.  

Would You Take Financial Advice From Influencer Kim Kardashian?
In June 2021, reality TV star Kim Kardashian promoted the EthereumMax cryptocurrency on Instagram to her more than 250 million followers. The Chair of the U.K.’s Financial Conduct Authority said the post “may have been the financial promotion with the single biggest audience reach in history.”

Despite Ms. Kardashian’s ringing endorsement, not everyone was happy with their purchase of EthereumMax. In a class action lawsuit, investors claim the influencer and other celebrities made false statements about the cryptocurrency through social media, which led to investment losses.

In addition, Ms. Kardashian found herself in hot water with the U.S. Securities and Exchange Commission (SEC). The SEC fined her $1.26 million for failing to disclose that she was paid to endorse EthereumMax. As the SEC Chair stated, “this case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors.”

Regulatory initiatives targeting finfluencers are a welcome development, but it’s also important to take steps to protect yourself. 
Regulators Are Focusing on Finfluencers

The North American Securities Administrators Association (NASAA) recently issued an advisory warning investors about finfluencers. NASAA explained that finfluencers post entertaining, hyper-emotional investment endorsements, but many are not licensed financial professionals. They may also fail to mention they’re being paid to promote an investment opportunity.

The British Columbia Securities Commission (BCSC) has proposed new rules on investment promotions that would apply to finfluencers. Under the rules, anyone promoting companies with connections to B.C. would have to disclose any compensation they’re receiving, whether they own securities in the company, and other facts that could affect their objectivity. The Ontario Securities Commission has indicated that it is considering similar rules.

Although B.C.’s proposed rules are not yet in effect, the BCSC is examining social media posts under existing rules. In September 2022, the BCSC settled with three companies for violating the requirement to disclose that finfluencer promotional posts were issued on behalf of the companies.
Tips for Assessing Online Financial Advice

Regulatory initiatives targeting finfluencers are a welcome development, but it’s also important to take steps to protect yourself.

NASAA provides some helpful tips to help you assess advice from finfluencers:

  • Dubious advice: If something sounds too good to be true, it probably is. Beware of reckless advice such as “Avoid Paying Your Debts”.

  • Credentials check: If the finfluencer claims to have a financial certification, check to see if it comes from an accredited organization and if the individual is in good standing. You can also check with your local securities regulator to see if the person is registered to provide investment advice and recommendations.

  • Show me the data: Some finfluencers promise “to the moon” stock picks. While some recommended investments may increase in value, many others may lose value. Ask for the data to back up the finfluencer’s claims. If they only promote their incredible results, they are probably too good to be true. 

The next time you see a financial product endorsement, from a celebrity or otherwise, approach it with caution and do your research.
Borrowing to Invest: What You Need to Know
Fuelled by low interest rates, Canadians borrowed a record amount during the pandemic to invest in stocks and other financial products. Borrowing to invest may be a good strategy, but only when your investment increases in value. This is beneficial because you can invest more than you otherwise would have been able to. Assuming the markets are going up, the increase in your return is usually more than enough to cover the interest you will be charged.
This may be a strategy worth considering when stock markets are thriving, and borrowing is inexpensive. But it becomes risky when interest rates are rising, or as stock prices fall during a market downturn. 

Magnifies Your Losses
There are many ways to borrow money to invest, and they all come with risks. The key risk is that borrowing can magnify your losses—sometimes quite dramatically.


A simple example, which excludes any interest payments and transaction fees, helps to illustrate the risks:

Assume you use $1,000 of your own money and borrow another $1,000 to purchase $2,000 in stocks.
If the stock price dropped, for example by 25%, your investment would now be worth $1,500.

If you needed to sell the investment, you would be left with only $500 after paying off your loan. This would be the same as losing 50% on your original $1,000 investment (not 25%).

Other Risks
In addition to amplifying your losses, there are other risks you need to keep in mind. For example:
  • Can you pay off the loan if your investments fall in value?
  • Can you afford to make the interest payments when they become due?
  • Can you afford to lose any collateral you may have put up for the loan?
If you borrowed money from your dealer using a margin account, you may also take on the risk of having to respond to a margin call when the value of your investment falls below a pre-set level. Essentially, this means that you may have to sell part of your investment, or add cash to your account to meet the margin call.
If you fail to meet the margin call requirement, the dealer can sell the investments in your account to cover the required payment. Again, this can increase your losses and put you in an exceedingly difficult situation.

Before You Borrow
Before you decide to borrow to invest, here are some key things to keep in mind:
  • Understand the loan: Make sure you understand how the loan or margin account agreement works, including how the interest rate will be calculated.

  • Understand the risks: Make sure you can repay the loan, or make any margin calls, if the stock market goes down. Ask yourself whether you are willing to risk losing any collateral you may have put up for the loan.

  • Understand how it fits into your overall financial plan: Ask yourself how borrowing to invest could help you achieve your goals, but also how it could prevent you from reaching them. Think about how it fits into any other debt you may have, and whether it would be better to pay off your existing debt.

  • Talk to an advisor: If you are investing through a firm, your advisor and the firm have certain obligations that apply when they recommend borrowing, or become aware that you are borrowing to invest. This includes ensuring that you are aware of the risks and assessing whether borrowing as an investment strategy is suitable for you.
More Information
Borrowing to invest can be quite complicated. To learn more, check out the following resources:

Crypto Platforms Asked to Make Commitments to Regulators
In August, the Canadian Securities Administrators (CSA) announced that crypto trading platforms applying to become registered with Canadian securities regulators must commit to do certain things, pending approval. These commitments, known as “pre-registration undertakings”, require these crypto platforms to operate in a way that addresses investor protection concerns, similar to the rules for platforms that have already been registered.
Examples include commitments to:

  • Act fairly, honestly and in good faith.
  • Identify and respond to conflicts of interest.
  • Refrain from providing clients recommendations or advice.
  • Ensure clients do not exceed limits on how much they are permitted to invest.
  • Use plain language to explain material risks to their clients.

Platforms that fail to comply with these commitments may face enforcement action from the regulators. The commitments are a welcome step. They provide a needed layer of protection for investors who are engaging with these platforms before they are fully registered.
If you are investing using a crypto-trading platform, you can check the CSA’s website to see whether it is already registered in Canada.
To learn more about crypto asset investments please visit:

The Friendly Scam – Affinity Fraud
Did you know that according to the Canadian Anti-Fraud Centre (CAFC), investment scams topped the CAFC’s list of fraud types in 2021, with almost $164 million in reported losses? This compares to only $17 million of investment fraud reported in 2020. Given that they estimate only about 5% of fraud victims report the fraud, the total amount of investment fraud is likely significantly higher.

One type of scam that has been receiving regulatory attention of late is known as “affinity fraud.” These frauds take advantage of existing trust and friendship in groups that have something in common. For instance, the scams involve preying on members of identifiable groups, such as ethnic communities or members of a particular religion. Fraudsters pretend to be a member of the group to gain trust, or pick a trusted group member such as a community leader to recruit others. The person chosen is often unaware of the fraud and may also become a victim. The close-knit structure of these groups makes detecting affinity fraud difficult—victims are reluctant to report it to the authorities and may tend to try to work it out internally.

In January, the Ontario Securities Commission (OSC) announced that the Pakistani-Canadian community was targeted with a fraudulent investment scheme exploiting shared cultural heritage. The fraudster was accused of allegedly taking about $2 million, on the pretense of investing the funds and to generate returns for community members. Some people borrowed money to invest in the scheme by using their homes as collateral, or getting loans from family members.

In another case, the OSC announced that an individual who spoke Telegu solicited members in the Telugu-speaking community, promising them investment lessons and trading on their behalf. In this case, some members even shared confidential account log-in details, which the accused used to access their funds directly. 

Tips to Avoid Affinity Fraud

Guarding against becoming a victim of fraud is never easy, particularly when the fraudster may be involved in a community that you trust. Here are some tips to help you avoid falling victim to affinity fraud:

  • Check to see whether the person is registered or licensed: Individuals and the company that is providing investment-related advice need to be registered in each province and territory. Taking five minutes to check whether they are properly registered may save you from making a decision you could regret later.
  • Do your research: It is always prudent to take some time to do your own research, or ask an independent financial professional whether an investment would be suitable for you. This is particularly true when someone from your community group has approached you with a “great investment opportunity”.

  • Ask for it in writing: Do not invest based on word of mouth. Ask for the investment details in writing, including how the investment works, the risks, and how and when to get your money out.

  • Get a second opinion: Seek professional advice from neutral parties outside of the group offering the investment, such as a financial planner, financial advisor, or your accountant.

  • Don’t rush: Do not feel pressured to invest before a particular date. Claims that the investment opportunity is “once-in-a-life time” can be a sign of fraud.

Helpful Fraud Prevention Resources:
Investor Education Month and World Investor Week
October is Investor Education Month. Be sure to check out your local financial regulator’s website, social media channels, and newsletters to learn more about investing. They may also provide free online events about investing basics and how to avoid fraud.

The first week of October is also World Investor Week (WIW), a global campaign aimed at raising awareness on the importance of investor education and protection. As part of the WIW kick-off events, FAIR Canada’s Executive Director, Jean-Paul Bureaud, was the keynote speaker at an event organized by the World Bank and hosted by the Bangladesh Securities and Exchange Commission. Jean-Paul discussed FAIR Canada’s advocacy in support of investor resilience and sustainable investing. He also spoke about FAIR Canada as a potential model for investor advocacy in other countries.

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