Britain’s financial regulator FCA has announced it is keeping financial transaction apps “under review” due to gambling concerns, following an online experiment it carried out with more than 9,000 consumers. The FCA found in its experiment that digital engagement practices (DEPs) used by trading apps, such as push notifications and prize draws, can increase trading frequency and risk taking.
In what it called an “FCA first”, the regulator created an experimental platform of trading applications to test the effect of different DEPs on trading behaviour. It also found evidence that DEPs can have a greater impact on certain subgroups, including those with low financial literacy, women and younger participants (18-34).
In the online experiment, the FCA tested four digital engagement practices (DEPs) by examining their impact on trading frequency and investment risk. The DEPs he reviewed were:
- flashing prices,
- push notifications,
- trader leaderboard, and
- points & prize draw.
Under the FCA’s Consumer Duty, trading applications must ensure that services are designed and tested to meet the needs of consumers and enable them to make efficient, timely and well-informed investment decisions, including those with vulnerable characteristics.
In 2022, the FCA warned share trading apps to review game-like design features ahead of Consumer Duty.
Sheldon Mills, Executive Director of Consumer and Competition at the FCA, said:
“Trading apps have the potential to transform retail investing, but some in-app features may push consumers into more frequent or riskier transactions, which may not be right for everyone.
“As the use and popularity of trading apps grows, we will monitor them to make sure clients can make investment decisions that suit their needs.”
The FCA said it continues to educate consumers about making better investment decisions and understanding the opportunities and risks, through the InvestSmart campaign. It has also leveled accusations against “finfluencers” who promote financial products on social media.
Some of FCA’s key findings from the experiment include:
- Push notifications and points and prize draws increased the number of transactions completed by 11% and 12% respectively.
- Push notifications and points and prize draws increased the percentage of transactions that were risky investments by 8% and 6% respectively.
- Those with low financial literacy increased their trades more than those with high financial literacy in the presence of flashing prices and trader leaderboards.
- Women increased their transaction frequency more than men when push notifications and points and prize draws were introduced.
The regulator also noted that younger participants (18-34) increased their portfolio riskiness at the end of the trade by more than older participants (35+) across all DEPs (except flashing prices).
In 2022 the FCA warned of game-like design features in trading apps. It was reported at the time that in the first four months of 2021, 1.15 million accounts were opened at four merchant app companies.
Over the past three years, just four commercial app companies have created more than 2.47 million accounts across the UK. This is based on MiFID reference data. MiFID reference data includes all accounts that have been opened and continue to trade a MiFID instrument. Note: as they are generally not MiFID instruments, this excludes most accounts that exclusively trade currencies and/or cryptocurrencies.
The FCA Research Note: Digital engagement practices: an experiment in trading applications you can download it here.