Ready Trader One—Ensuring Positive Consumer Outcomes in Gamified Financial Services

As part of its commitment to support in-scope firms embedding the Consumer Duty, the FCA recently highlighted further good practice and areas for improvement, building on prior reviews of implementation plans and fair value.

One area of insight emerging from the above is the FCA’s comment on the use of gamification: specifically with regards to consumer support. The FCA indicated that it wants to see firms use this practice only where it supports the delivery of good customer outcomes.

This comment isn’t completely out of the blue, as the FCA raised similar concerns in November 2022, prior to the implementation of the Consumer Duty. So, what precisely is gamification and why is the regulator showing concern once again?

The Rise of Gamification in the Financial Services Industry

Gamification refers to the integration of game-like elements into non-game contexts and has become increasingly prevalent as a tool to encourage user participation and engagement with a particular topic. In the context of financial services, this approach raises its head most frequently via financial technology (“Fintech”) solutions (for instance, online trading applications) where behavioral psychology is sometimes leveraged to make the experience of buying and selling investments more fun, rewarding and, depending on how this is deployed, even addictive.

In research published in 2022, the FCA noted that it had seen the “rise in popularity of trading apps” and through its work with firms had seen features used that “caused concern,” in particular those trading apps utilizing approaches that may allow consumers to invest “potentially beyond their risk appetite” and those that may promote “problem-gambling” behaviors.

Of course, gamification can also result in positive behaviors and have its advantages if used in the right way. Examples of this are readily available in the banking sector, where it has been used to good effect to help encourage customers to save and to improve their money management skills.

Much like any tool, however, on its own, gamification is neither good nor bad. Poor outcomes come from how a tool is put to work, and based on the FCA’s recent comments, it seems that some market players have not, as part of their Consumer Duty considerations, adequately made improvements to ensure the use of gamification is not contributing to problematic investor behaviors.

What Type of Gamification Strategies is the FCA Worried About?

One of the key areas previously highlighted by the FCA is positive reinforcement. Behavioral psychology suggests that positive reinforcement may encourage people to make choices they otherwise wouldn’t and common examples of this include celebratory messages or the awarding of points and badges immediately after the consumer has made a trade.

In another example of positive reinforcement, leaderboards (for instance, top traders of the day) can further incentivize investors to make trades that they may not be able to tolerate (from a risk perspective) or financially afford in a poor outcome as they pursue gratification.

This suggestion finds its roots in the Social Comparison Theory, which suggests that people have an inherent drive to assess their own abilities and opinions, usually done by comparing themselves to others. Leaderboards can play to this inherent psychological need.

A further area of concern for the FCA is where the use of gamification may exacerbate a lack of understanding in consumers. For instance, should the design of the user interface (i.e., what consumers see, and which is an inherent element of gamification) result in an over-simplification of what are inherently complex financial products or concepts, consumers may be led to make decisions without fully understanding the underlying risks involved.

What Could Firms Do to Minimize the Risk of Adverse Outcomes?

Fintech firms often need assistance in designing and implementing measures to help ensure that gamification in financial services doesn’t lead to poor consumer outcomes. These measures should, for instance:

• Ensure the target audience for the product is clearly defined and, in addition, be clear about who the product is unlikely to be right for
• Consider customers with characteristics of vulnerability, in particular, obvious examples such as those who may have a history of gambling addiction
• Offer comprehensive education about the product alongside any gamified experiences, assisting new or existing customers to understand the risks and benefits and encourage customers to seek further support where necessary (e.g., a link to the National Gambling Helpline)
• Design gamification so that it provides balanced rewards and incentives such as encouraging responsible use of the app and prudent decision-making
• Use insightful management information to monitor customer outcomes and trends that can be identified and acted upon
• Revisit reviews of the end-to-end customer journey conducted as part of the Consumer Duty implementation, identifying points of negative friction and ensure the review considers all possible touchpoints along the way
• Train design teams to understand FCA expectations under the Consumer Duty and ensure ethical design is a central tenet of any gamification experience

While any and all of the above are excellent starting points, it should be recognized that one of the biggest challenges a firm will face is an increased regulatory expectation to understand behavioral psychology, with compliance and risk departments required to have a clear appreciation on how consumers operate, think and, ultimately, make decisions. This holistic understanding has a clear link to the Consumer Duty, in particular, the requirement for firms to prevent foreseeable harm. If firms are to effectively minimize the risk of adverse outcomes, they must understand what regulators now expect of them.

The FCA will expect firms to proactively review its products to ensure that customers are not receiving poor outcomes. Not only should this have happened as part of Consumer Duty readiness, but it should also form part of an ongoing and continuous process.

As the FCA is once again raising issues with gamification, it is clear the spotlight is likely to further turn towards the firms employing such approaches in the coming year. Firms need to assess if their existing approach will stand up to FCA scrutiny.

How Can Kroll Help?

Among our regulatory and compliance teams, we have former FCA supervision and policy experts who understand what the FCA expects, both in terms of gamification and, more widely, under the Consumer Duty. We have experience assisting firms implement measures and controls associated with gamification aspects and avoid unwanted outcomes. Please reach out for a conversation.