FCA findings on multi-firm review of trading apps

The UK Financial Conduct Authority (FCA) has published a webpage summarising the findings from its multi-firm review of trading apps, together with a press release. The FCA notes that this is a growing sector allowing more retail investors easier access to a wider range of investments which can help to improve financial lives. Some trading apps, though, offer high-risk investments that were traditionally aimed at wholesale markets. The FCA's review made a series of findings, including on:

• business models: trading app firms operate in various ways. The FCA stresses that regulated firms must ensure they understand the Handbook's requirements for manufacturers and distributors, regardless of their business model, and that firms with overseas affiliates must clearly inform customers that their trading agreement is with the overseas entity and disclose any potential loss of asset protection.
• target markets: firms are likely to be both manufacturers of a trading app and distributors of products sold on it, and therefore should consider the relevant rules under PRIN 2A.3 and PROD 3 on the need to identify a target market for the products and services they manufacture and distribute. The FCA found some firms had not specified their target market at a sufficiently granular level and, in some cases, offered lower-risk and less complex products alongside more complex or high-risk ones.
• revenue drivers: the FCA calls for firms to identify, prevent and manage potential conflicts when considering their revenue drivers to deliver good customer outcomes. The FCA also expects firms to assess whether a product or service provides fair value, considering whether cross-subsidies between different products, services and consumer groups affect this.
• digital engagement practices (DEPs): firms should consider whether DEPs are inappropriately manipulating or exploiting retail customers' behavioural biases by monitoring the way the features work.
• appropriateness tests for high-risk products: some firms failed to apply robust tests, which resulted in customers accessing products and services of which they did not have appropriate knowledge or experience. The FCA concludes that firms must apply appropriate testing, as applicable under COBS 4.12A.28R or COBS 10/10A.

The FCA has also issued a research paper which examines the impact of DEPs on consumer investment outcomes.

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