Investors using online trading apps with a high level of built-in digital ‘engagement’ tricks tend to suffer significantly more losses than peers on less hectic platforms, a new UK study reveals.
The Financial Conduct Authority (FCA) analysis of more than 176,000 online trading accounts across multiple online platforms over a seven-month period found a clear correlation between apps featuring high ‘digital engagement practices’ – or DEPs – and poor consumer outcomes.
“Moreover, the product offerings of high DEP apps differed to medium and low DEP apps; notably contract for difference (CFD) products and cryptoassets (which in our sample were only offered on high DEP apps) appear to play a substantial role in investment outcomes,” the report says.
In a first-of-a-kind dive into online trading behaviour in the UK, the study confirms earlier tentative findings that high-engagement devices such as prize-draws, push-notifications or even digital confetti encourage loss-making investor behaviours.
According to the FCA study, investors on “high DEP apps achieved significantly lower returns compared to those on the low DEP apps”.
Virtually all of the underperformance on high DEP apps could be attributed to trading in cryptoassets and CFDs which – in our sample of firms – were only available on high DEP apps,” the report says.
“This could still be consistent with our underlying hypothesis, since one of the key mechanisms through which DEPs could cause harm is by encouraging users to trade in products that are beyond their risk appetite, but further research is needed to understand to what extent this is the case.”
Furthermore, the FCA data shows investors on high-engagement platforms were twice as likely to exhibit problematic behaviours such as night-trading or making “ad hoc” account deposits.
But the UK regulator makes the usual distinction between correlation and causation, noting the high-DEP data could reflect entrenched behavioural quirks of investors.
“Individuals with existing financial distress and precarity may be more likely to use high DEP apps as compared to other apps,” the report says. “Use of high DEP apps might also be correlated with other attributes which worsen consumer outcomes, such as vulnerability or poor financial literacy.”
Nonetheless, the FCA has leant on the study and a wider review of the ‘neo broker’ sector to issue an early warning to investment apps to protect clients from undue risks.
“… firms need appropriate oversight and controls to build trust in the sector,” the regulator says.
“We want to see a consumer investments market where everyone can make well-informed investment decisions, understanding how they meet their needs and the risks they are taking.”