In a novel experimental study the UK Financial Conduct Authority (FCA) has found common retail investment platform ‘engagement’ tools can increase the risk of consumer harm.
The FCA measured the impact of four ‘digital engagement practices’ (DEPs) – flashing prices, push notifications, trader leaderboard and ‘points and prize draws’ – on 9,000 plus retail investors using a regulator-built test trading app.
In particular, the study found push notifications (frequent pop-up messages about price movements) and points/prize-draws significantly increased trading volumes and exposure to risky investments.
Women, young people (aged 18-34) and those investors with lower financial literacy tended to be more readily influenced by the platform DEPs.
“The results presented here show that digital engagement practices… – including gamification… – in trading apps can increase trading volume and the amount of shares traded,” the FCA report says.
As in most jurisdictions, including NZ, the number of retail investors using share-trading platforms in the UK has sky-rocketed since the COVID-19 lockdown years of 2020-21.
In 2022 the UK regulator warned trading apps operating in the country to turn down gamification features ahead of new ‘consumer duty’ obligations that came into effect last year.
Sheldon Mills, FCA executive director of consumers and competition, said in a release: “Trading apps have the potential to transform retail investments, but some in-app features might be pushing consumers towards more frequent or riskier trading, which isn’t right for everyone.
“With usage and popularity of trading apps growing, we’ll be keeping them under review to make sure customers can make investment decisions that suit their needs.”
The first-of-its-kind experiment would likely be of interest to other regulators, too, with the online share-trading trend a global phenomenon.
“… this research suggests that firms and regulators should continue to closely scrutinise the effect of trading app design features on consumer investment decisions.”
But while the FCA study opened the lid on the impact of some nefarious app practices, the report says further research is needed.
“There are outstanding questions about the extent of the inverse relationship between trading frequency and trading returns…, under the low commission business models prevalent on trading apps today,” the report says. “In addition, there are also ethical questions… about whether consumers are aware of and – if aware -would be content with the effect of DEPs on their trading behaviour and outcomes. Both factors would be relevant to an assessment of consumer harm arising from DEPs.”