It turns out that behavioural nudges — once hailed by policymakers as way to drive positive investor behaviour — can just as easily be used against investors’ interests, according to new research from the Ontario Securities Commission (OSC).
The regulator published a report Wednesday that found retail investors face a variety of hidden risks from so-called “digital engagement” practices — from mobile trading apps that use gamification to marketing prompts and social tactics.
The OSC reviewed measures used to drive investor behaviour online, and examined how these tactics can be used in ways that don’t align with investors’ best interests.
The report, prepared by the OSC’s Investor Office along with its Behavioural Insights Team, looked at “dark nudges”, sludge and targeted ads that firms could build into online investing platforms to steer investors into decisions that benefit the firms at the expense of the client.
These tactics can be used to facilitate client activity that generates revenue for the firm while reducing investors’ ability to think carefully about their decisions. Or they can be used to erect barriers that discourage clients from closing their accounts.
The report noted that there’s a lack of available information on these practices, but it found that “dark patterns are particularly prevalent and have the potential to negatively impact investor welfare.”
Specifically, the regulator’s concerns with these tactics include their use to hide fees, mask the cost of investing, obtain personal information without consent and prevent clients from cashing out their funds.
According to the report, regulators around the world are stepping up their efforts to understand potentially harmful online practices, with a view to ensuring investor protection.
“The OSC continues to explore the use of these practices, and we encourage registrants to consider how their clients’ investing decisions may be negatively impacted by their use,” said Meera Paleja, program head of investor research and behavioural insights at the OSC, in a release.