Fair Gamification in Financial Services

Feb 10th '22

The term “gamification” has been frequently used by regulators over the past year. While the use of gamification is not new, its application in the financial services industry grew exponentially during the pandemic and raised a lot of red flags. So, what is gamification and why is it a concern?


Gamification defined

Gamification, a type of digital engagement practice (DEP) used by investment advisers and broker-dealers, is generally referred to as the use of technology tools such as game playing, point scoring, competition, and rules of play. These tactics are meant to digitally engage investors and make trading easier and more fun. Gamification often uses things like badges, rewards, challenges, and leaderboards to encourage investor behaviors.


These tools may employ artificial intelligence (AI) technologies, including deep learning, supervised learning, unsupervised learning, and reinforcement learning processes. All of which observe investor behaviors and interactions with the platform to customize the investor’s experience and adapt to appeal to investor preferences.


The SEC [Securities and Exchange Commission] is concerned that gamification may prompt investors into more frequent trading, riskier investments, and trading complex securities that they may not be educated on.


The “dark side” of DEPs

While gamification features have been credited with engaging retail investors, particularly younger retail investors, by making investing more accessible and providing education, they also encourage potentially harmful behaviors. A survey conducted by CNBC found that 12% of new investors ages 18 to 35 stated they invested because it “feels like a game” and over 25% stated that “it’s exciting.”


The SEC is concerned that gamification may prompt investors into more frequent trading, riskier investments, and trading complex securities that they may not be educated on. It is important, and frankly a requirement, that firms consider the audience with whom they are communicating and their level of sophistication.


A recent study by Oxford found that retail investors may be exposed to “dark patterns” where technologies are purposefully designed to confuse users, make it difficult for them to set their user preferences, and manipulate investors into taking action. The study found that dark patterns could manipulate investors into subscriptions and more costly services.


Image: Smarsh® – www.smarsh.com/report/gartner-magic-quadrant-2022


Probing questions

The SEC has committed to better understanding the use of gamification through digital engagement practices and is probing financial service providers and investors on their use of DEPs, including gamification, with a Request for Information and Comment. By reviewing the comments from firms and investors, the SEC seeks to assess if regulatory actions may be needed to protect investors and maintain fair market conditions.


Firms should think holistically about their use of gamification and the potential risks associated with it. Start by considering the following:


  1. Does your use of gamification encourage or discourage certain behaviors — particularly regarding opening accounts, trading, saving and increased engagement?
  2. Do they influence good decision making or are decisions emotional instead of rational?
  3. Does your use of gamification increase investors’ knowledge and education?
  4. Are you promoting or directing investors to specific securities, strategies or services?
  5. Is your objective for using gamification to optimize investor returns or increase revenue?
  6. Are you acting in the investor’s best interest, and have you considered the application of Regulation Best Interest (Reg BI) and Form CRS?
  7. Have you properly disclosed risks, fees, costs, conflicts of interest, and influence over the investor’s behaviors?
  8. Do you have the proper guardrails in place to protect and educate investors about trading?
  9. Do you have policies and procedures in place to monitor communications with investors?
  10. How are you supervising the use of gamification?


Not all bad

The use of gamification can be used to break down barriers and connect with investors in a way that is more engaging. It’s crucial that firms implement policies and procedures that address their use of gamification and its intended, or even unintended, effects. If used properly, gamification can provide additional value to investors.


Firms that can find meaningful ways to offer investor education that increases their understanding of the securities markets and investing can empower investors to make thoughtful investment decisions.


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Source: Smarsh – Author: Tiffany Magri


About the author

As a Regulatory Advisor at Smarsh, Tiffany Magri monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.


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