How to handle the gamification of investing
Regulators are fretting about the new breed of young day traders
THE EDITORIAL BOARD
Some might be surprised to learn that Britain’s financial regulator has an Instagram account.
Insiders joke that TikTok may not be far off.
Needs must, when the watchdog revealed this week that four out of 10 young people do not fully appreciate that high-return investments mean they might lose money.
They have to be warned somehow, and social media is where novice investors are gleaning tips.
The pandemic has brought an explosion in retail investing, driven sometimes by spare cash (bolstered in the US by government handouts), boredom, or despair. Jobs are scarce, above all for the young, interest rates puny and house prices out of reach.
Making a slow buck no longer makes sense.
Pair that with a global equity rally, bitcoin gaining 170 per cent in value in 2020, shrinking trading fees and a proliferation of new trading apps and it is hardly surprising that the number of retail investors has grown 15 per cent over the past year in the UK alone.
Fledgling traders are driving the rise, and are more likely to be drawn to high-risk investments, according to the UK Financial Conduct Authority.
They are enticed by a new breed of online brokers that have learnt from social media how to capture attention through encouraging frequent trading, and also offer part-purchase of shares; the so-called gamification of finance.
Sadly, retail investors who trade often are more likely to nurse losses.
Although the FCA research predates the US trading frenzy around GameStop, the saga underlined the benefits and dangers for neophyte day traders, as the stock reached dizzying heights — squeezing hedge funds with short positions — only to plummet.
The UK watchdog, which has a consumer-protection mandate, is right to sound the alarm.
It has also faced fresh criticism for its mishandling of complaints around London Capital & Finance, which pushed unregulated, high-risk mini-bonds on pensioners and retail investors, then collapsed.
An independent report found the regulator failed to effectively supervise LCF.
That scandal largely turned on those nearing retirement with lifetime savings to invest thanks to pension liberalisations.
The FCA’s attention is now trained on younger investors but several elements echo across the ages: an overconfidence in investing nous; the chase for yield in a low-interest environment; the proliferation of online advertisements; the dearth of affordable, independent advice; and the confusing thicket of UK rules around what is and is not regulated and therefore what carries protection.
An easy step to help protect investors would be for the government to include financial scams in its Online Harms Bill, which will require social media sites to take down harmful content or face hefty fines.
Currently, the FCA can only politely ask Google, Facebook and other platforms to remove blatantly fraudulent advertisements.
The watchdog and a committee of MPs have pushed for fraud to be included in the bill, yet the government has declined.
There is a difference between scams and products that are simply high-risk — an educational gap that the FCA must fill, on Instagram if need be.
It has certainly deployed memorable communications strategies before, including an animatronic head of Arnold Schwarzenegger to telegraph a mis-selling compensation deadline.
The FCA could also do a lot better when it comes to overseeing less risky, regulated products, as investors in Neil Woodford’s imploded fund can attest.
For now, the gamification of finance does not create better investors; it just encourages more frequent armchair trading.
Unless traders learn the risks, it might be game over.
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