Image © FCA

The UK's financial services watchdog is closely scrutinising retail trading platforms amid concerns that they are pushing vulnerable customers into taking unnecessary risks.

The FCA has found that certain engagement activities to encourage customer engagement could increase trading activity by up to 12%.

The findings are the result of an experiment conducted by the FCA, in which the authority created its own experimental trading app platform. The aim was to mimic existing platforms available for the UK market.

The findings revealed digital engagement practices (DEPs) used by trading apps, such as push notifications and prize draws, increased the number of trades by 11% and 12%, respectively.

"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," said Sheldon Mills, Executive Director of Consumers and Competition at the FCA.

Push notifications and points & prize draws increased the proportion of trades that were in risky investments by 8% and 6% respectively.

"The findings of the FCA are extremely worrying and it’s not surprising the watchdog has put some practices under review," says Susannah Streeter, head of money and markets at Hargreaves Lansdown.

The FCA found that those with low financial literacy increased their trading by more than those with high financial literacy in the presence of flashing prices and trader leaderboards.

Women increased their trading frequency by more than men when push notifications and points & prize draws were introduced.

Younger participants (18-34) increased their end-of-trading portfolio riskiness by more than older participants (35+) across all DEPs (except flashing prices).

Research by Hargreaves Lansdown found that among Millennial and Gen Z households in arrears, 70% of people are investing or speculating.

"Push notifications, gamification and prize draws risk turning trading into a game, when instead the priority should be placed on taking long-term, well thought through decisions to benefit client outcomes and future financial resilience," says Streeter.

She points out that the more established platforms steer clear of such digital engagement practices highlighted by the FCA and, crucially, also don’t have chat rooms, which can lead to risk decisions based on herd behaviour.

"Although trading apps have democratised the whole investment process and opened up what was seen as an industry closed off to ordinary people, there is a responsibility to ensure that the most vulnerable in society aren’t prompted into making decisions which could lead them into even deeper financial problems," says Streeter.

She warns that it is "extremely tempting" to get carried away, especially as so many people already run their lives through apps.

"From fitness and health through to holiday bookings and bank accounts, the phone in the pocket has become our personal digital assistant. Many people already manage money on an app, so managing a trade is seen as the natural next step. Many of the new trading apps have been designed based on the interactions people already have on social media, including push demand attention. Some apps have even congratulated users for making trades with celebratory animations," says Streeter.