Retail trading platform Robinhood has been ordered to pay more than $70m in penalties for its “systemic supervisory failures” and the “significant harm suffered by millions of customers”.
Wall Street regulator, the Financial Industry Regulatory Authority, has announced it was fining Robinhood $57m, and ordering it to pay $12.6m plus interest in restitution to its customers.
It’s the largest ever penalty imposed by FINRA, which has outlined a litany of failings.
FINRA says it has considered “the widespread and significant harm suffered by customers”, including millions who received “false or misleading information” from the firm, millions more affected by the firm’s systems outages in March 2020, and thousands who were approved to trade options even when it was not appropriate.
Jessica Hopper, executive vice president and Head of FINRA’s Department of Enforcement, 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”
A FINRA investigation found that, despite Robinhood’s self-described mission to “de-mystify finance for all,” it has negligently communicated false and misleading information to its customers at during certain periods since September 2016.
That false information covered a variety of critical issues, including:
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.
FINRA cites the tragic case of 20-year-old student Alex Kearns, a Robinhood customer who killed himself after the app showed he had lost $730,000, when his account was actually $16,000 in credit.
FINRA also found that Robinhood failed to exercise due diligence before approving customers to place options trades, and relied on algorithms called “option account approval bots”. These bots would often approve customers to trade options based on inconsistent or illogical information.
In addition, FINRA says Robinhood experienced a series of outages and critical systems failures between 2018 and late 2020, most seriously during the market crash of March 2020.
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 $5 million in restitution to affected customers.
Further… FINRA says that between January 2018 and December 2020, Robinhood failed to report tens of thousands of written customer complaints that it was required to report.
In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, the regulator adds.