FINRA’s recent decision to impose $70 million in fines and damages on Robinhood Financial, provider (in its own words) of “commission free stock trading and investing apps”, highlights how standards of investor protection may be downgraded as small-but-vocal groups of retail investors clamour for participatory democracy and a brokerage firm sacrifices transparency in the name of access and innovation.
Robinhood’s marketing statements are lofty and ambitious, describing how the broker since its formation in 2012 has been on a mission to democratise finance for all. “Our values are in the service of our customers,” says its mission statement. “We strive to uphold our values every day”.
In scrutinising the brokerage company’s actions, the US overseer of market integrity and investor protection concluded that Robinhood fell short on multiple occasions of the standards and commitments made in its customer documentation.
The financial watchdog’s decision to fine Robinhood $57 million and to pay a further $12.6 million in damages, plus interest, to harmed customers, represents the largest penalty ever imposed by FINRA.
“The fine reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of customers,” says FINRA’s enforcement department head Jessica Hopper.
The regulator's sanction took into account the “widespread and significant harm suffered by customers”, including millions of customers affected by the trading platform’s system outages in March 2020 and the thousands that the firm approved to trade options even when it was not appropriate for those customers to do so.
During a number of periods since 2016, FINRA found that the firm had “negligently communicated false and misleading information to its customers” — for example, concerning whether customers could trade on margin, how much cash was in customers’ accounts, the potential losses customers faced when placing options trades, and whether they faced margin calls.
“Due to Robinhood’s misstatements, thousands of customers suffered more than $7 million in total losses,” said the financial regulator. Under the terms of its settlement, the company is required to pay more than $7 million in restitution to the customers affected.
At the forefront of its customer values, Robinhood describes itself as a “safety first” company. However, contrary to this declaration, FINRA found that the firm had failed to conduct appropriate due diligence when granting approvals to customers wishing to place options trades via its platform.
Often these approvals were granted by algorithms, or ‘option account approval bots’, and were not validated by the firm’s principals, FINRA said. In multiple cases, these bots approved customers for options trading based on illogical or inconsistent information, thereby granting consent to customers that did not fulfil Robinhood’s eligibility criteria or where the account contained red flags indicating that options trading was not appropriate for the customer.
Robinhood was also found guilty by the financial watchdog of falling short in its regulatory reporting obligations Over a three-year period from January 2018, Robinhood neglected to disclose to FINRA tens of thousands of customer complaints that it should have reported, including customer claims that the brokerage company had provided false and misleading information.
For the period January 2018 to February 2021, FINRA finds that the company failed to adequately supervise the technology that it employed to provide core brokerage services. The firm experienced a number of critical systems failures during this period and was unable to accept customers’ orders while these platform outages persisted.
This, according to FINRA, resulted in individual customers losing tens of thousands of dollars as a result of these technical failures. Robinhood was ordered to pay over $5 million in damages to customers affected by this issue.
Commenting on its conclusions, FINRA says: “This action sends a clear message - all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets.”
“Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” said FINRA’s Hopper.
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