Multi-firm review of trading apps: high-level observations

We issued a survey to 28 firms and received 27 responses, although 2 firms had not started trading at the time.

The table below shows:

• The main investments offered by these firms at the time of survey completion.
• 11 firms had plans to introduce new products in future.

*These include cash ISAs and stocks and shares ISAs. Firms may offer either or both. 

• CFDs: contracts for difference
• FX: foreign currency exchange
• ISAs: individual savings accounts
• SIPPs: self-invested personal pensions

Through our survey and a more detailed review of 12 of these firms, we found that trading app firms operate in a range of different ways.

Some of the firms we reviewed were set up as introducer firms, where their primary role was to introduce customers to another firm which operated the trading app. Firms that received these introductions were in some instances affiliates; that is, part of the same group of firms as the introducer. For the firms in our sample, these were based in the USA. 

Whatever the business model, the regulated firm needs to ensure it understands the requirements that apply to manufacturers and distributors as set out in the Handbook. Where affiliates are based overseas, firms should make it clear to customers their trading agreement is with the overseas entity and whether there is any loss of protection on their assets.

Firms are likely to be both manufacturers of a trading app and distributors of products sold on it. They should consider PRIN 2A.3[4] and PROD 3[5], which set out relevant rules about, amongst other things, the need to identify a target market for the products and services they manufacture and distribute. The target market should be specified at a sufficiently granular level.  

A firm manufacturing a trading app needs to take all reasonable steps to ensure the app is distributed to the target market. And a firm distributing a product subject to PROD 3 must regularly assess, at least, whether it remains consistent with the needs, characteristics and objectives of the target market and the distribution strategy remains appropriate.

Good practice

Some firms had defined their target markets comprehensively, showing for which groups of customers specific products were designed. Examples included, but were not limited to, criteria based on customers’ age profile, characteristics, experience, objectives and, in some instances, the relative wealth or likely income.

We also saw evidence of firms using risk indicator scoring and classifications to help define their target market. This could help determine the extent to which customers might be able to bear loss for different products. It could also enable products to be targeted at relevant customer groups.

Some firms had also clearly identified their ‘negative target markets’. These are any groups of retail customers for whose needs, characteristics and objectives the investment or service is not compatible. Having a negative target market helps prevent customers accessing complex or higher-risk products that were not designed for them.

Poor practice

We found that some firms, however, had not specified their target market at a sufficiently granular level. In some instances, lower-risk and less complex products were offered alongside more complex or high-risk ones. This meant high-risk products were potentially accessible by customers outside the target market. This could lead to harm where they invest in products with complexity or risk not appropriate for them. 

Trading apps generate revenue for firms in several ways, including transaction fees on trades, subscription fees and interest earned from cash balances on customer accounts. Firms must identify, prevent and manage potential conflicts when considering their revenue drivers to deliver good customer outcomes.

Trading apps typically offer low commission or commission-free trading. However, where trades involve overseas investments, foreign currency (FX) transaction fees are also generally applied. Some trading apps offer the option of a subscription fee model with different charging tiers available. Higher subscription levels generally offer access to a greater range of features or products and cover transaction fees for a higher number of trades.

Our rules on price and value in PRIN 2A.4[6] require firms to ensure products deliver fair value. This means ensuring the price of a product or service is reasonable, compared to the overall benefits customers can reasonably expect to get.  

Good practice

We saw some examples of good practice in this area. Some firms with subscription models showed they had considered whether a customer’s choice of subscription level and their level of trading volumes implied fair value. Customers were prompted to move to a different tier where appropriate.

Poor practice

Regardless of the pricing structure in place, some firms did not show how they had assessed fair value across products and services. This could result in customers paying fees that are not in line with the value they receive.

We expect firms to assess whether a product or service provides fair value. They should also consider whether cross-subsidies between different products and services and different groups of consumers affect this. 

Where firms use DEPs on their trading apps, they should consider if the DEPs are inappropriately manipulating or exploiting retail customers’ behavioural biases. It is important they monitor and review the way features work to ensure they support positive customer interactions and good outcomes.

The firms we reviewed did not use a significant number of DEPs. All firms showed awareness of the need to use features in a responsible way.

Some firms used push notifications, such as pop-up messages about price movements of shares or market indexes. Where these were used, customers had control over what they were informed about. Within some apps, notifications were switched on by default, meaning that customers had to actively switch these off. However, we did not identify notifications or other DEPs being operated in a way likely to be harmful.

Good practice

A small number of firms were using analytics tools and made the analytical data available to their customers. This allowed customers to track their trading activities and patterns.  

Allowing customers access to information showing where they were making losses and gains is likely to improve consumer understanding and support good customer outcomes. 

Trading apps allow access to a range of products. Some of these may be high-risk or complex for retail customers to understand. So, firms must ensure these are appropriate for retail customers, using appropriateness tests (as applicable under COBS 4.12A.28R[7] or COBS 10/10A[8]).

These tests are required to assess if a customer has the knowledge or experience in the relevant investment field to understand the risks involved. They help ensure products are being distributed to the target market. So, it is important firms collect relevant information to assess appropriateness.

Good practice

We observed some good practice, including firms having clear eligibility criteria to ensure customers had sufficient assets and income prior to sitting the appropriateness test. This helped ensure products and services reached the appropriate target market. Some of the appropriateness tests firms used consisted of complex questions from multiple question banks, with high pass marks. This ensured an adequate range of questions with appropriate complexity to test knowledge and understanding.

Where customers did not pass the appropriateness test, we saw a variety of lockout periods applied. Some firms chose to apply longer lockout periods to give customers more time to reflect and acquire the necessary knowledge. Some firms collated management information (MI) showing pass and fail rates of initial and subsequent tests. Firms may find it helpful to monitor MI to assess differences in trading behaviour and outcomes for customers that don’t pass an appropriateness test at the first attempt.

Poor practice

We noted that some firms, however, did not have robust appropriateness tests. This meant some customers were able to access products or services for which they did not have appropriate knowledge or experience. It also meant some products were potentially being distributed to customers outside the target market.