In this photo, the website of Robinhood Markets Inc. appears on computer on June 6, 2024 in Chicago, Illinois.
Scott Olson | Getty Images
Online brokerage platform Robinhood on Wednesday launched a stock lending program in the UK that will allow consumers there to earn passive income from stocks they own, in the company’s latest effort to increase market share overseas.
The stock trading app, which launched in the UK last November after two previous attempts to enter the market, said its new feature would allow retail investors in the UK to lend any shares they hold in their portfolio to interested borrowers.
You can think of stock lending as “renting out” your stock for extra cash. It’s when you allow another party — usually a financial institution — to temporarily borrow shares you already own. In return, you are paid a monthly fee.
Institutions typically borrow stocks for trading activities such as settlements, short selling and hedging risks. The lender still retains ownership of their shares and can sell them whenever they want. And, when they sell, they still realize any gains or losses on the stock.
In Robinhood’s case, shares borrowed through the app are treated as collateral, with Robinhood receiving interest from borrowers and paying it out monthly to lenders. Customers can also earn cash owed on the company’s dividend payments — usually from the person borrowing the stock rather than the company issuing the dividend.
Customers can sell borrowed inventory at any time and withdraw the sales proceeds once the trades are settled, Robinhood said. However, it is not guaranteed that inventory borrowed through its lending program will always be matched with an individual borrower.
“Share lending is another innovative way for our UK customers to put their investments to work and earn passive income,” Jordan Sinclair, president of Robinhood UK, said in a statement on Wednesday.
“We are excited to continue to provide retail customers greater access to the financial system, with the product now available on our intuitive mobile app.”
Niche product
Equity lending is not unheard of in the UK — but it is rare.
Several companies offer securities lending programs, including BlackRock, Interactive Brokers, Trading 212 and Freetrade, which debuted its stock lending program just last week.
Most companies offering such schemes in the UK pass on 50% of the interest to customers. That’s higher than the 15% Robinhood offers lenders on its platform.
Equity lending is risky — not least because of the prospect that a borrower may end up defaulting and unable to repay the value of the equity to the lender.
However, Robinhood says on its stock lending landing page that it aims to hold cash “equal to at least 100% of the value of your borrowed stocks at a third-party bank”, meaning customers should be covered if either Robinhood or The institution that borrowed the shares suddenly became unable to pay them back.
Robinhood holds cash collateral in a trust account with Wilmington Trust, National Association, through JP Morgan Chase & Co acting as custodian, a company spokesperson told CNBC.
Simon Taylor, chief strategist at fintech firm Sardine.ai, said the risk for users of Robinhood’s share lending program would be “fairly low” as the US firm is behind risk management and chooses which individuals and institutions customer shares can be borrowed. .
“I doubt the consumer understands the product, but then they don’t have to,” Taylor told CNBC via email.
“It’s a case of, press that button to also earn an extra 5% of the stock that was sitting there anyway. It feels like a no-brainer.”
“It’s also the kind of thing that’s common in big finance but just not available in the mainstream,” he added.
The new product offering may be a test for Robinhood when it comes to gauging how open local regulators are to accepting new product innovations.
Financial regulators in the UK are strict when it comes to investment products, requiring firms to provide ample information to clients to ensure they are properly informed about the risk associated with the products they buy and the trading activities they engage in.
Under the UK’s Financial Conduct Authority rules on consumer duties, companies must be open and honest, avoid causing foreseeable harm and support investors’ ability to pursue their financial goals, guidelines published on the FCA website last July.
However, the move is also an opportunity for Robinhood to try to grow its presence in the UK market, which – apart from a select number of European Union countries – is its only major international market outside the US.
It comes as the UK’s domestic trading companies have struggled over the years. Hargreaves Lansdown, for example, last month agreed to a 5.4 billion pound ($7.1 billion) takeover by a group of investors including CVC Group.
The company was dealing with issues such as regulatory changes, new market entrants including Revolut, and the expectation of falling interest rates.
Unlike Robinhood, which does not charge commissions, Hargreaves Lansdown charges a variety of different commissions for consumers who buy and sell shares on its platform.
