FCA prioritises consumer harm reduction as fintech app usage climbs

Some UK consumers are making poor investment decisions — either holding a lot of money in cash or investing in high-risk products that may not reflect their risk tolerance or their ability to afford the losses. These are concerns voiced by the UK’s Financial Conduct Authority (FCA) in a recent report.

The FCA’s research found that investors often have high confidence and claimed knowledge. However, it also found a lack of awareness and or belief in investment risks. A total of 45% of those surveyed did not view “losing some money” as one of the risks.

The research, Understanding Self-Directed Investors, carried out by insight and strategy consultancy BritainThinks surveyed more than 550 consumers making investment decisions on their own behalf rather than those taking financial advice.

Sheldon Mills, executive director, Consumers and Competition at the FCA, said in a press release: “Much of the consumer investments market meets consumers’ needs. But we are worried that some investors are being tempted — often through online adverts or high-pressure sales tactics — into buying higher-risk products that are very unlikely to be suitable for them.”

A priority of the FCA’s 2020–2021 business plan is reducing harm in the consumer investments market.

5 investment questions

The FCA advises consumers to consider five important questions before they invest:

• Am I comfortable with the level of risk?
• Do I fully understand the investment being offered to me?
• Am I protected if things go wrong?
• Are my investments regulated?
• Should I get financial advice?

Pinar Ozcan, Ph.D., professor of entrepreneurship and innovation at Oxford Saïd Business School in the UK, told FM the rise of fintech and mobile financial apps has meant a variety of financial services have become increasingly available to people outside the financial industry. She explained: “[It’s] actually quite easy for someone to open an investment account and to start investing without really having a background in it.”

Ozcan suggested it wasn’t a case of young versus older investors but more a case of experienced versus inexperienced investors. The FCA’s research showed that a significant loss in investments for consumers could have a fundamental lifestyle impact on 59% of self-directed investors with less than three years’ experience, who are more likely to own high-risk investment products, compared with 38% of investors with greater than three years’ experience.

The report said emotional and social motivators tend to be key in driving those investing in high-risk, high-return investments, with four in ten (38%) driven solely by these types of motivating factors. In contrast, those investing in traditional longer-term investment types such as stocks or ISAs (individual savings accounts) tend to be driven more by functional motivators such as the desire to make their money “work harder”.

Fake news

Ozcan said social media is clearly a source of real and fake news, and that means “it’s very difficult, especially now with new technologies … for the human eye and human brain to tell these two apart”.

“We haven’t shifted our minds to checking the source and the background of the information, so therefore social media in general is not a good source of financial information and education,” she said.

It’s also difficult for consumers to differentiate commercially oriented information from what is wholly for educational purposes. Education is even more important when investing in cryptocurrency markets, which are highly volatile and have a great deal of hype associated with them, she said.

Fintech apps

The FCA report said: “A more diverse audience appears to be getting involved in self-directed investing, potentially prompted in part by the accessibility offered by new investment apps.”

These investors are skewed more towards female, younger, and BAME (Black, Asian, and minority ethnic) than the more traditional, experienced investors, the FCA found.

The use of fintech sites and apps has grown rapidly. Data from app marketing platform Adjust and intelligence provider Apptopia points to an 88% increase in investment app sessions in the first half of 2020 compared with the same period in 2019.

“The advantages are that [fintech apps] are very easy to use and they’re intuitive, and that’s great because opening an account in order to invest … [was very difficult] in a traditional bank,” Ozcan said.

One problem, however, she added, is that many fintech sites and apps that have come to the market have algorithms set up in a way to encourage customers “to actually engage in a lot of activity, but that's not necessarily always financially sound for the people who are engaged in the activity”.

“A lot of these investment apps have … ‘digital confetti’ that they throw at you once you make an investment, making you feel good for having done it,” Ozcan said.

Artificial intelligence can manipulate human behaviour, and these behavioural nudges are largely not monitored by regulators, she added.

‘Educator’ role for banks

Established banks have adopted an “initial defensive approach” by saying consumers shouldn’t trust fintechs, as customers can’t be sure how their money will be looked after, Ozcan said. Instead, banks can become a new source of trust for consumers, she suggested.

“If they assume the role of the educator, because they do have the resources to do so, then they would build a new kind of trusted relationship with their consumers and potentially be able to even play the role of a matchmaker between the consumer and some of these more innovative services and actually operate like a platform like Amazon matches you to a seller,” she said.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.