The Financial Conduct Authority (“FCA”) continues scrutinising trading app designs, releasing its latest feedback on 20th June 2024. Alongside its ongoing review, the FCA’s Research Note: Digital Engagement Practices: A Trading Apps Experiment provides new insights into how digital engagement practices can affect investor behaviour, particularly among specific user groups. These findings underscore the critical importance of ensuring that trading apps are designed to align with the FCA’s Consumer Duty, avoiding practices that exploit behavioural biases or cause foreseeable harm.

Key Findings from the FCA’s Review and Research Note

  1. Digital Engagement Practices and Behavioural Biases: The FCA’s experiment app tested digital engagement practices (“DEPs”), such as flashing prices, push notifications, trader leaderboards, and points-based rewards. These practices significantly influenced trading behaviours, particularly by exploiting behavioural biases. For instance, push notifications and points-based prize draws led to an 11% and 12% increase in trades, respectively. These practices can lead to impulsive trading decisions, especially among users with lower financial literacy, women, and younger participants (aged 18-34).
  2. Impact on Vulnerable Subgroups: The FCA’s research highlighted that certain DEPs disproportionately impact specific subgroups. Participants with lower financial literacy were more likely to increase their trading activity in response to flashing prices and leaderboards. When exposed to push notifications and points-based rewards, women increased their trading frequency more than men. Younger participants (18-34) were more prone to increasing the riskiness of their end-of-trading portfolios across most DEPs, except flashing prices. These findings highlight the importance of considering vulnerability characteristics when designing trading apps.
  3. Consumer Duty and Avoiding Harm: The FCA emphasises that trading apps must be designed and tested to meet consumers’ needs, avoiding practices that exploit behavioural biases or cause foreseeable harm. Under the Consumer Duty, firms are expected to act in good faith and enable users to make timely and adequately informed investment decisions. Of particular concern are digital design practices that lead to deceptive outcomes, such as defaulting investment amounts or leverage to inappropriately high levels, making it difficult for investors to find crucial information due to poor layout, and creating unreasonable barriers to actions like unsubscribing.
  4. Deceptive and Friction-Laden Design: The FCA’s review also builds on findings from its 2022 report, revealing that some trading apps employ deceptive design practices that work against users’ best interests. Examples include setting default investment amounts or leverage at levels that may not be suitable for retail investors and designing layouts that obscure essential information, requiring excessive scrolling or searching. Furthermore, some apps introduce “sludge” or friction, making it disproportionately tricky for users to take specific actions, such as unsubscribing or withdrawing funds.
  5. Market Growth and Ongoing Review: With the usage and popularity of trading apps continuing to grow, as indicated by the creation of over 2.47 million accounts across the UK based on MiFID reporting data, the FCA has signalled its intent to keep these platforms under close review. Sheldon Mills, Executive Director of Consumers and Competition at the FCA noted the importance of ensuring that customers can make investment decisions that suit their needs in this evolving landscape.

Implications for Firms

In light of these findings, firms should urgently reassess their trading app designs to ensure compliance with the FCA’s expectations, particularly under the Consumer Duty. Key actions firms should consider include:

  • Avoid Exploiting Behavioural Biases: Firms must critically evaluate their use of DEPs, such as flashing prices, leaderboards, push notifications, and rewards systems. It’s crucial to avoid using these features to exploit behavioural biases, especially among vulnerable subgroups like those with lower financial literacy, women, and younger investors. Instead, firms should explore ways to use these digital tools to promote responsible trading behaviours.
  • Prioritise Vulnerable Consumers: When designing and testing app features, firms should consider the impact on vulnerable consumers. This includes ensuring that high-risk prompts do not unduly influence users with lower financial literacy and that information is presented in a manner accessible to all user demographics. The design should empower users to make informed and appropriate investment decisions, reflecting an understanding of their potential vulnerabilities.
  • Enhance Clarity and Accessibility: Firms should eliminate deceptive design practices and “sludge” that create friction in the user experience. This includes avoiding defaults to inappropriately high investment amounts or leverage and ensuring critical information is easily accessible without excessive scrolling or complex navigation. The aim should be to facilitate a seamless, transparent experience that aligns with the consumer’s best interests.
  • Implement Effective Risk Warnings: Risk warnings should be clear, prominent, and strategically placed. They should be designed to enhance understanding and prompt users to consider the risks, especially before making high-risk trades. Interactive and engaging formats can be more effective in conveying risk than static text alone.
  • Ongoing Testing and Improvement: Given the dynamic nature of digital engagement practices, firms should regularly test their app designs and gather user feedback to identify areas of potential harm. Continuous improvement processes should be in place to adapt the app to changing user behaviours and regulatory expectations.

Need Assistance with Your Systems and Controls?

If your firm is grappling with the challenges of aligning your trading app’s design with the FCA’s expectations, we can help. With extensive experience in regulatory compliance, we can assist you in developing systems and controls that meet the demands of the Consumer Duty, ensuring that your app not only complies with regulations but also fosters a transparent and user-friendly trading environment. Whether it’s reviewing your current digital engagement practices, enhancing risk disclosures, or improving user journey design, our team is here to support you.

To learn more about how we can assist, contact us today.

Conclusion

The FCA’s recent feedback and research note emphasises the critical need for trading apps to be designed with consumer protection at their core. Firms must avoid practices that exploit behavioural biases, particularly among vulnerable subgroups, and ensure that users are empowered to make informed investment decisions. As the use of trading apps continues to expand, firms must remain vigilant in aligning their platforms with regulatory expectations and the evolving needs of their user base.

References

  1. Research Note: Digital Engagement Practices: A Trading Apps Experiment, Financial Conduct Authority (20th June 2024).