UK regulator monitors neo-brokers’ game-like features targeting Gen Z

The UK Financial Conduct Authority (FCA) is closely monitoring the game-like features of neo-brokers aimed at young investors. The online trading apps are on the FCA’s radar, demonstrated by its multi-firm review published on April 11.

This followed enforcement actions by European national authorities in 2024, and compliance weaknesses spotted by the International Organization of Securities Commissions (IOSCO) in March.

“The term ‘neo-brokersʼ has become more popular in recent years. It refers to a new wave of fintech companies that use app-based platforms to allow their clients to trade. Traditional brokers and trading platforms are also extending their services in a similar way — most are now doing it via apps,” said Michael Thomas, a partner in the financial services team at law firm Hogan Lovells in London.

With 27 responses to the review from neo-brokers, the FCA found that some online-only trading apps do not “sufficiently” categorise their high- and lower-risk products for targeted customers. Some neo-brokers operate without “appropriateness tests”, meaning many customers were offered products outside their financial knowledge.

The regulator also raised concerns that individuals targeted by these apps might not fully understand the complexities of financial products they are investing in, such as leveraged securities.

Gen Z investors

Investors using trading apps are more likely than the UK general population to hold personal loans, motor finance or mortgages, according to the FCA’s occasional paper published on April 11.

Neo-brokers are popular among younger and less experienced retail investors. Almost half (47%) of trading app users were aged 18 to 34, said the FCA’s Financial Lives 2024 survey. IOSCO members reported that the platforms also tend to attract smaller and more frequent transactions.

“Young people are often in a position to take on more risk with their investment strategies, because they’ve got a longer timeframe over which to save and build up their investment portfolios,” said Thomas. “Sometimes, higher-risk investments can lead to higher returns over the long term.

“A quick investment into individual shares via a neo-broker might seem appealing, especially if people see a chance to make higher gains more quickly. But the laws of financial gravity haven’t changed. Just as you can make money on a trade, you can just as easily lose it.”

Gamification

The game-like features used by neo-brokers to attract the attention of retail investors are known as “digital engagement practices” (DEPs). For example, trading apps often include trader leader boards and flashing prices, similar to in-game rankings, which encourage users to search, scroll or click. While these features may seem harmless, the layout encourages investment behaviour similar to that of online gambling.

Hogan Lovellsʼ Thomas explained: “Whatever features firms are offering, they still need to ensure that customers are being given clear, fair, and not misleading information.

“Dashboards, for instance, can actually improve the level of information available to clients and are often helpful. They’re typically designed to be user-friendly — but firms need to be cautious. The way potential trades are presented shouldnʼt unduly incentivise clients to enter into transactions that arenʼt suitable for their needs,” he warned.

The FCA previously expressed concerns about the gamification of investments, reporting in June 2024 on an online experiment it conducted comprising more than 9,000 consumers. The research highlighted that DEPs affect both trading frequency and the level of risk preferences. The following month, the European Securities and Markets Authority (ESMA) also warned of the dangers of gamification.

With higher trading frequency, investors tend to experience poorer financial returns, as they are more exposed to behavioural biases, such as the disposition effect, of holding on to losing investments. A high risk appetite could also lead to investment in risky assets, resulting in unexpected or unmanageable losses.

Hyped financial products

Neo-brokersʼ game-like features further contribute to the narrative of “hyped” investments among younger customers, where individuals are drawn to an “intensive, sometimes spectacular” form of promotion, according to the FCA.

Thomas explained: “There have also been issues with things like finfluencers — people promoting certain products or even individual financial instruments online without necessarily realising that what they’re doing could be classed as regulated activity or fall under financial promotion rules. That’s one of the risks associated with this kind of app-based or online trading environment.”

The FCA’s young investor survey in 2024 found that two in five UK investors had regretted buying a “hyped” investment product.

While game-like features are not always harmful, the UK regulator has warned that the Consumer Duty requires firms to “avoid causing foreseeable harm to retail customers” and to “support retail customers in pursuing their financial objectives”. Any breaches could result in fines and/or the revocation of licences.

The UK Treasury Committee will hold an evidence hearing on finfluencers on April 30, 2025.