European regulators not playing along with trading apps’ gamification

Confetti drops and other online rewards designed to drive retail investor trading should be treated like traditional investment recommendations, European regulators say.

A paper from the European Securities and Markets Authority (ESMA) said techniques that encourage addictive trading behaviour are completely offside as it proposed policy measures to beef up retail investor protection.

The proposals for the European Commission are intended to improve disclosure to retail investors while enhancing protections from aggressive marketing techniques and other “detrimental” practices.

“Increased retail participation in financial markets provides opportunities both for savers and for companies seeking financing, and we are encouraged to see that digital trends and new business models are contributing to making investing more accessible to the general public,” said Verena Ross, chair of ESMA, in a release.

“These developments do not however come without risk,” she added, as trading apps and recommendations on social media may cause retail investors to trade without understanding the risks.

ESMA is recommending the EC beef up investor protections in several areas, including in the use of so-called “gamification” techniques to encourage retail trading.

“Gamification often comes in the form of introducing competition elements into an everyday process and these elements may be designed in such way to encourage habits that are difficult to shake: by hooking and holding the clients using the app and nudging them to, for example, making more and riskier investment trades,” the paper said.

To the extent that these kinds of behavioural “nudges” lead to addictive trading, this is “never in the best interest of the investor,” the paper said. It can also never be considered compliant, it added.

Moreover, nudges designed to encourage an investor toward a transaction in a specific investment can be considered a “recommendation” as far as the regulators are concerned, which then also requires a suitability assessment, the paper suggested.

“If the firm does not take into account the personal circumstances of the (potential) client but still does nudge the client towards a (specific) instrument, this may put into question whether the firms’ behaviour is consistent with its [regulatory] obligations,” it noted.

To address these concerns, ESMA said it should be given explicit power to provide guidance to the industry on the use of digital disclosure and engagement tools, including firms’ use of social media influencers, or “finfluencers,” and on possible future developments such as firms engaging with investors in the “metaverse.”

Alongside steps to address gamification and digital engagement techniques, ESMA is also recommending measures to require corporate disclosure documents to be “machine readable” to enable the development of searchable databases; to address information overload by defining “vital” information; and developing standardized cost reporting disclosures.

ESMA also said it supports the commission’s proposal to prohibit the use of “payment for order flow” to address the “serious investor protection risks arising from this practice.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.