Robinhood launched its 3% interest “checking and savings” accounts last week. With 3% well over the average rate offered by conventional banks and some key differentials in the insurance that protects investors in Robinhood’s new products, U.S banking organizations are speaking out.
The new accounts from the trading platform, at first glance, appear to be like conventional savings accounts, with higher returns. However, savings accounts are normally protected by the Federal Deposit Insurance Corporation (FDIC). Robinhood’s accounts are instead protected by the Securities Investor Protection Corporation (SIPC).
Chris Cole, the senior regulatory counsel for the Independent Community Bankers of America (ICBA), told American Banker yesterday that Robinhood’s use of the terms banking, checking, and saving could be “deceptive.” Cole added:
This is supposed to be a brokerage account, but they’re running around making it look like a banking account.
Unlike FDIC coverage, SIPC coverage only guarantees an account holders balance to the value of their funds on the day of any insolvency. Cole said Robinhood:
Does not sufficiently explain the difference between SIPC protection and FDIC insurance.
Concerns Raised with Regulators
Stephen Harbeck, CEO of the SIPC, has already raised his concerns, telling news outlets he simply had not been consulted, and that he has already filed a complaint with the U.S Securities and Exchange Commission (SEC) over the matter. Harbeck told CNBC:
We want to make sure that investors know there’s some risk there.
Robinhood has yet to respond to the concerns raised. Its website FAQ’s for the new products outlined:
Your cash and securities in Robinhood are protected up to a total of $500,000 by the SIPC, $250,000 of which can be in cash, the rest in securities…Similar to FDIC insurance, SIPC protects cash in your account if the financial firm fails.
Sarah Grano, a spokesperson for the American Bankers Association, appears to also be taking note of this and told American Banker in an email that:
We appreciate any effort by regulators to clarify when deposits are fully insured and when they are not, and the need to respond quickly to misrepresentations.
An attorney, Brian Hester, said Robinhood is at risk of being classed as an “unlicensed banking business” if the new savings products are not viewed as “incidental” to its securities trading business by regulators. Hester explained:
Many state laws will have an exception for a registered broker-dealer to engage in banking activities, but only if it’s incidental to their brokerage business.
Robinhood is a broker-dealer and not a registered conventional bank. As such it hasn’t had to demonstrate the liquidity and risk management processes that regulated banks have to. It also does not have access to FDIC protection for its customers.
This combined with offering a rate far exceeding the average of 0.08% for checking accounts and 0.1% for U.S savings accounts is likely to continue to cause uproar amongst banks, associations, and likely regulators. Any resulting action by the U.S SEC or the SIPC could impact both the new products and Robinhood’s existing trading business.
Featured image from Shutterstock. Sarah Grano headshot from LinkedIn.
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