Robo advisors, online dealers and crypto platforms are using an array of troubling digital engagement practices to drive trading activity, a review by the Ontario Securities Commission (OSC) found.
In a staff notice, the regulator set out the results of a compliance review that it conducted to examine the use of so-called digital engagement practices — including gamification, design and behavioural tools — by online platforms with retail investors.
That review found firms deploying these kinds of tactics for good, and for bad, from the regulator’s perspective.
Positively, the OSC reported that some firms used digital engagement to help drive long-term investing behaviour by clients — such as helping investors track their progress toward long-term goals, providing investor education and promoting cybersecurity.
But it also flagged a variety of concerning uses too — including efforts to drive trading that could undermine informed investor decision-making and prompt risky, speculative trading.
Specifically, it reported that the review found examples of firms using, “overly promotional or unsubstantiated language in push notifications, rewards programs, contests and other user interface features to prompt clients to trade more, which would result in clients taking on additional risks and paying fees for trades they would not have engaged in if not for the DEPs.”
These kinds of issues raise “significant concerns about registrants’ compliance with securities laws,” the report said — particularly where these tools drove more-frequent trading and herding actions. Registrants could stray into the territory of providing advice without assessing suitability, or act beyond the limitations of their registration.
In certain cases, the follow-up to these findings led to the firms, “revising or revisiting their use of DEPs in influencing client behaviour, as well as establishing controls and governance over the use of DEPs with their regulatory obligations,” the notice said.
“We recognize that digital tools can help retail investors in a variety of ways to improve education, efficiency and promote smart decision-making,” said Matthew Onyeaju, senior vice-president, registration, inspections & examinations, at the OSC, in a release.
“However, it is important that firms have taken adequate measures within their compliance framework to address the risks of improper use which could harm investors by encouraging excessive trading or speculative behaviours. These safeguards help maintain market integrity and support responsible investing,” he added.
The paper sets out guidance to firms on the use of digital tools to benefit investors, and to avoid compliance issues. The OSC called on firms to review the findings and use the report as a “self-assessment tool to assess compliance with their regulatory obligations.”
The regulator also said that it will continue to monitor the use of digital tools through the normal compliance exam process.