Robinhood slapped with record US$70 million penalty from FINRA
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Investor platform Robinhood seems to have stealing from the rich part down but hasn’t quite lived up to its namesake.
The platform has been ordered to pay US$70 million to the US financial industry regulatory authority (FINRA) for “systemic supervisory failures and significant harm suffered by millions of customers.”
This consists of a $57 million fine, plus Robinhood will have to pay around $12.6 million in restitution (plus interest), to thousands of harmed customers who received false or misleading information, were affected by the firm’s systems outages in March 2020, and or who were approved trade options when they didn’t satisfy the criteria.
Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
“The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers,” FINRA’s department of enforcement head and executive VP Jessica Hopper said.
This included whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or ‘negative buying power’ customers had, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls.
Due to Robinhood’s misstatements, thousands suffered more than $7 million in total losses and tragically, one customer who had turned margin ‘off’, took his own life in June 2020.
In a note found after his death, the customer expressed confusion as to how he could have used margin to purchase securities because, he believed, he had not ‘turned on’ margin in his account and Robinhood also displayed to this individual inaccurate negative cash balances.
FINRA also found that the firm failed to exercise due diligence before approving customers to place options trades, essentially because Robinhood relied on algorithms or ‘option account approval bots’ to approve customers for options trading.
The problem was the bots often approved thousands of customers who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been the best idea for them.
Robinhood also experienced a serious outage on March 2 and 3 2020 when its website and mobile applications shut down, preventing customers from accessing their accounts during a time of historic market volatility.
Talk about bad timing.
Because of the firm’s inability to accept or execute customer orders during the outages, individual customers lost tens of thousands of dollars, and FINRA ruled that the firm pay more than $5 million in restitution.
In a blog published yesterday, Robinhood said it takes its responsibilities to customers seriously – probably a good move after it awkwardly failed to report tens of thousands of written customers complaints during 2018-2020.
The firm says it has invested into expanding customer support and is now offering phone support (including services to options and margin customers).
Robinhood said it currently has around 2,700 customer support staff – more than triple the number in March 2020.
A more rigorous criteria for customers’ eligibility for options trading has been implemented, as well as an improved options approval process including ongoing customer eligibility.
The firm has also taken steps to address the root causes of the March 2020 outages, and they’ve enhanced in-app educational resources so customers can learn about the basics of investing, why people invest, and what the stock market is and how it works.