The US Financial Industry Regulatory Authority (Finra) has handed Robinhood Financial a $57m (£41m, €47m) penalty and ordered the firm to pay $12.6m plus interest in compensation to “thousands of harmed customers”.
This is the largest fine ever imposed by Finra.
The regulator said that millions of the company’s clients were affected by the platform’s system outages in March 2020 and that they received “false or misleading information from the firm”.
Additionally, thousands of customers were wrongly approved to trade options.
These customers either failed to satisfy the firm’s criteria for trading options or had red flags on their accounts indicating that it was not suitable for them, the watchdog said.
Finra said that the misleading information relates to whether clients could place trades on margins; how much cash was in their accounts; how much buying power, or ‘negative buying power’, they had; the risk of loss customers faced in certain options transactions; and whether they faced margin calls.
Robinhood “failed to exercise due diligence” before approving clients to place options trades, Finra added, as it relied on algorithms with very limited oversight by its principals.
The watchdog also found issues with the platform’s technology, as it “failed to reasonably supervise” it. Between 2018 and late 2020, Robinhood experienced a series of “outages and critical system failures”. The most serious incident took place on 2 and 3 March 2020 when its mobile app and website shut down, preventing clients from accessing their accounts “during a time of historic market volatility”.
Robinhood did have a business continuity plan at the time of the outages, but it did not apply it “because the plan was unreasonably limited to events that impacted the firm’s physical location”, the watchdog said.
A series of failures
“Robinhood’s inability to accept or execute customer orders during these outages resulted in individual customers losing tens of thousands of dollars, and Finra is requiring that the firm pay more than $5m in restitution to affected customers.”
During the same period of time, the investment platform failed to report to the regulator “tens of thousands of written customer complaints”, as it was required to.
The watchdog continued: “The settlement resolves numerous other charges against Robinhood, including the firm’s failure to have a reasonably designed customer identification programme and its failure to display complete market data information.”
Robinhood neither admitted nor denied the charges.
“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,” said Jessica Hopper, executive vice president and head of Finra’s department of enforcement.
“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. 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.”
A spokesperson for the platform said: “Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams. We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratising finance for all.”
