The FCA has carried out a review of trading apps. It says that a growing number of retail customers now access financial products and services through desktop and mobile applications. The review assessed the business models, product offerings and services of 12 trading app firms, identifying both positive practices and areas needing improvement. Its key findings were:
- Business models: Some firms act as introducers, directing customers to other platforms or an affiliated firm. Firms are encouraged to fully understand their obligations as both manufacturers and distributors, as set out in the FCA's rules.
- Revenue drivers: Firms generate income in a range of ways, including transaction fees on trades, subscription fees and interest earned from cash balances. Some firms may need to reassess whether their current pricing structures provide good value for consumers.
- Digital engagement practices: All firms demonstrated awareness of the need to use digital features, such as notifications, responsibly.
- Appropriateness testing: While some firms had strong processes for assessing customer understanding of high-risk investments, others lacked adequate checks, potentially exposing consumers to unnecessary risks.
In addition, the FCA has issued a research paper looking at the links between the use of specific features, known as digital engagement practices (DEPs) and trading outcomes for retail customers with the Consumer Duty in mind. DEPs include design elements or features designed to engage retail investors on digital platforms and are similar to online choice architecture, which the CMA and ICO have also been investigating. Examples of DEPs include celebratory messages accompanying trades, trader leaderboards highlighting the best performing traders, and extremely frequent push notifications with price updates.
In terms of consumer financial outcomes, the study found that returns are significantly worse among consumers using high-DEP apps. In addition, large losses are 4.8 percentage points more common on the high-DEP apps than low-DEP apps, once demographics are accounted for.
Compared to users of low-DEP apps, consumers of high-DEP apps (and to a lesser extent, medium-DEP apps) are more likely to:
- Be younger and male.
- Display higher levels of engagement on the app.
- Trade more frequently on the app.
- Be in financial distress – but less likely to be so than the population overall.
- Display elevated, erratic, or concerning trading behaviour.
The findings show an association between using high-DEP apps and adverse financial outcomes. However, the FCA says that the results should not be read as evidence that usage of high-DEP apps causes adverse financial outcomes. There may be a variety of channels linking high DEP apps and the financial circumstances of consumers. Individuals with existing financial distress and precarity may be more likely to use high DEP apps compared with other apps. Use of high DEP apps might also be correlated with other attributes which worsen consumer outcomes, such as vulnerability or poor financial literacy. The product offerings of high DEP apps differed to medium and low DEP apps; notably, contract for difference (CFD) products and cryptoassets (which in the sample were only offered on high DEP apps) appear to play a substantial role in investment outcomes. Further research needs to be carried out.
Firms should consider these findings when designing trading apps and improving consumer protection practices. They should also bear in mind that online choice architecture and DEPs should not be used in a misleading way or to direct consumers to make decisions that may not be in their best interests.
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