The FCA has warned stock trading app operators about game-like elements in their trading applications potentially breaching Consumer Duty requirements. The regulator is specifically concerned about product features that encourage app users to trade by frequently sending market updates and providing them “with in-app points, badges and celebratory messages for making trades”.

What the FCA is describing here is gamification, an element of persuasive system design (PSD), which is a framework intended to create systems that are capable of influencing users’ attitudes and behaviours. PSD underpins the success of many smartphone apps and, because of the ubiquity of smartphones and tablets, means that users have become used to the presence of PSD features in most, if not all, the apps and software that they use or purchase. Effective PSD features will often distinguish what is considered a good digital product from a poor one.

User engagement

The reason for this is simple – the more effective the PSD features are the higher the usage numbers and user engagement is likely to be. The research undertaken by the FCA before engaging with the stock trading app operators cites the well-known apps Duolingo and Strava as two examples of apps whose success can at least partially be attributed to “game design elements” that “make tasks more engaging and attractive.”

It is difficult to imagine Strava, for example, being as successful as it is without features such as KOM (King of the Mountain) or CR (Course Record) and the ranking and sharing of these statistics.

A common thread of regulatory concern is that product design features that are appropriate in a learning environment or that are connected to sport, leisure or entertainment may not necessarily be appropriate in the context of market trading by retail consumers.

The FCA’s concern about the place of gamification in trading apps follows in the footsteps of the IOSCOs Retail Market Conduct Task Force Consultation Report which identified the use of gamification techniques “to attract retail investors and influence their trading behaviour and decisions” as an important recent development and one that was a cause of concern because of its potential detrimental impact on retail investor protection. In its report IOSCO cited ESMA’s Call for Evidence relating to retail investor protection, which also signalled deepening concern about “the use of gamification elements to steer clients to trade [risky and complex] products or to trade too often”.

A common thread of regulatory concern here is that product design features that are appropriate in a learning environment or that are connected to sport, leisure or entertainment may not necessarily be appropriate in the context of market trading by retail consumers. The difference is reasonably clear – gamification in these other contexts can lead to net positive outcomes (learning another language, improving fitness levels), while gamification features in the context of trading may lead to outcomes that are negative – in effect they encourage user behaviour that is more closely analogous to gambling than investing.

Vulnerable investors

What is especially of concern to the FCA is that the subset of retail investors who are vulnerable is also the most likely to exhibit “problem gambling-like behaviour”. This subset of investors is more likely to incur significant financial harm by pursuing investment strategies that are either completely inappropriate or beyond their risk appetite. Financially, of course, the consequences can be both far reaching and devastating especially because “being ‘at-risk’ of problem gambling behaviour is correlated with other commonly used indicators of vulnerability such as low financial resilience and low financial literacy.”

And this is where things get a little muddy. The FCA says its research suggests that potential gambling-like behaviour is “associated with apps that have more gamification” elements, but that this research does not indicate “whether the design features themselves are causing poor outcomes”. According to the FCA many of those using trading apps “were new to investing and younger than traditional investors”. In other words the user demographic rather than the design features themselves may be the reason for more risk taking and more frequent trading. It is possible that younger investors may be aware, but also more comfortable with the risk that they are taking. The FCA suggests that it will continue to conduct research in this area.

It is possible that younger investors may be aware, but also more comfortable with the risk that they are taking.

Another issue for the regulators must surely be how far to interfere with product design. It could be argued, for example, that trading apps are actually helping fulfil an important socio-economic objective by making investing more widely available and attractive. And so are democratising trading by encouraging wider and more representative market participation.

Given what younger user expectations are in terms of user experience, it is entirely possible that coming down too hard on trading apps that are regulated is simply going to encourage younger and vulnerable investors to move to areas of the digital economy that are far less closely scrutinised or regulated. For example, gamification of finance is taken to another level by crypto games. In these games users are able to earn, buy, trade and lose cryptocurrency entirely within a virtual gaming world – but with real-world financial consequences.

Where this all goes next is not entirely clear. What is clear is that the FCA Consumer Duty, by zeroing in on consumer harm, potentially has a far broader reach than simply retail banking.