Retail investment firms need policies in place to ensure that their use of social media, finfluencers and gamification techniques comply with their fundamental regulatory obligations, the European Securities and Markets Authority (ESMA) says.
The regulator published a discussion paper on Thursday on the digitalization of retail investment services and the investor protection concerns that arise as a result of these trends, including disclosure issues, conflict of interest considerations and the impacts on investor behaviour.
“This includes examining the recent surge in the adoption of digital tools and social media by firms and retail investors following the Covid-19 pandemic, and an exploration of how technology impacts retail investor behaviour and decision-making,” it said.
Among other things, the paper examines online disclosures, including ways to make disclosures more individual and interactive. It also reviews online marketing tactics, including the use of social media and finfluencers by industry firms. And it looks at the investment industry’s use of “digital engagement” practices, such as nudging techniques, gamification and the design of choice architecture, to drive investors’ behaviour.
The paper details ESMA’s proposed approach to the issues that arise in these areas, such as setting out its expectation that firms have clear policies in place for working with finfluencers, including provisions to address disclosure of these arrangements, dealing with conflicts, and the processes for vetting and overseeing finfluencers and their content.
It also sets out its expectations for firms when deploying digital engagement practices. For instance, the paper said these practices should not intentionally favour products that are more costly for investors or that generate more revenue for the firm.
It also said, “Firms using gamification techniques should focus on long-term investor outcomes depending on the investor’s profile and investment strategy.” These kinds of tactics should be used to “encourage informed and sensible investment decisions which lead to well-diversified investment portfolios and long-term investing.”
The consultation will be used to inform potential regulatory reforms in this area, ESMA said, noting that it also plans to carry out a survey of retail investors to gather direct feedback from investors on their experience with the digitalization of investment services.
The deadline for feedback on the discussion paper is March 14.