Robinhood, the U.S.-based brokerage known for its no-fee stock trading app, made headlines Thursday for a new checking and savings account offering, but one regulatory agency says it raises “red flags,” according to a report by Bloomberg News’ Julie Verhage.
The Securities Investor Protection Corp, an agency aimed at protecting the rights of brokerage clients, said deposited funds for the new Robinhood product might not be eligible for protection.
“I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC, told Verhage. Robinhood has said the accounts would be SIPC insured. “Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.” The product, unlike other checking and savings account offerings, is not FDIC insured. Still, it promises a sweet interest rate of 3%.
Others on Wall Street see the move as risky if not reckless.
“The first thing companies usually do is check with their regulators to make sure they are on solid footing. It doesn’t look like they did this. It raises questions about how the whole damn business operates. They don’t use prudent judgement or caution,” said Tyler Gellasch, executive director of Healthy Markets.
Robinhood, which gatecrashed the volatile market for cryptocurrency earlier this year, is a darling among younger investors, but the firm has come under scrutiny for some of its business practices. For instance, it is not clear exactly where Robinhood routes crypto order flow, and its crypto product has significant “fine print“. In addition, some market participants have criticized the product being marketed as free, given it includes exchange fees in the price of a trade.