Robinhood, the popular online brokerage platform, has expanded its global presence by introducing a new share lending feature to its users in the United Kingdom. This new program allows consumers in the UK to earn passive income on stocks they already own, marking Robinhood’s latest effort to grow its market share abroad.
### Share Lending Program Launch in the UK
The stock trading app, which first launched in the UK in November of last year after two previous attempts to enter the market, announced the rollout of its share lending program. This new feature enables retail investors in the UK to lend out any stocks they own outright in their portfolio to interested borrowers.
Share lending is essentially like renting out your stocks for extra cash. By allowing another party, typically a financial institution, to temporarily borrow stocks that you already own, you can earn a monthly fee in return. The borrower typically uses the borrowed stocks for trading activities such as settlements, short selling, and hedging risks, while the lender retains ownership over their shares and can sell them at any time with full control over any gains or losses.
### How Robinhood’s Share Lending Works
In Robinhood’s case, shares lent out via 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 company dividend payments, typically from the person borrowing the stock rather than the company issuing a dividend.
Customers are able to sell the lent stock at any time and withdraw proceeds from sales once the trades settle. However, it is important to note that stocks lent out via Robinhood’s lending program may not always be matched to an individual borrower.
“Stock Lending is another innovative way for our customers in the UK to put their investments to work and earn passive income,” said Jordan Sinclair, President of Robinhood UK. “We’re excited to continue to give retail customers greater access to the financial system, with the product now available in our intuitive mobile app.”
### Niche Product in the UK Market
While share lending is not unheard of in the UK, it is still considered a niche product. Several firms in the UK offer securities lending programs, including BlackRock, Interactive Brokers, Trading 212, and Freetrade, which recently debuted its own stock lending program.
Most companies that offer share lending programs in the UK typically pass on 50% of the interest to clients, which is higher than the 15% that Robinhood is offering to lenders on its platform. Share lending does come with its risks, particularly the possibility that a borrower may default on their obligation and be unable to return the value of the share to the lender.
### Risk Management and Safeguards
To mitigate these risks, Robinhood aims to hold cash equal to a minimum of 100% of the value of loaned stocks at a third-party bank. This means that customers should be covered in the event that either Robinhood or the institution borrowing the shares is unable to return them.
Cash collateral is kept in a trust account with Wilmington Trust, National Association, through JP Morgan Chase & Co acting as custodian. According to a spokesperson for the firm, Robinhood is responsible for risk management and selecting which individuals and institutions get to borrow customer shares.
Simon Taylor, head of strategy at fintech firm Sardine.ai, believes that the risk to users of Robinhood’s share lending program will be quite low due to the oversight provided by the U.S. firm. He emphasizes that the product offers users an opportunity to earn additional income from stocks that are already in their portfolio.
### Regulatory Landscape in the UK
The introduction of the share lending program in the UK also serves as a test for Robinhood to gauge how open local regulators are to accepting new product innovations. Financial regulators in the UK have stringent requirements for investment products, ensuring that firms provide ample information to clients to make informed decisions about the products they are buying and the trading activities they are engaging in.
Under Britain’s Financial Conduct Authority’s consumer duty rules, firms must be open and honest, avoid causing foreseeable harm, and support investors’ ability to pursue their financial goals. This regulatory framework ensures that customers are protected and informed when participating in investment activities.
### Building Presence in the UK Market
Robinhood’s expansion into the UK market comes at a time when domestic trading firms are facing challenges. Companies like Hargreaves Lansdown have been grappling with regulatory changes, new market entrants like Revolut, and the expectation of falling interest rates. In contrast to Robinhood, which does not charge commission fees, Hargreaves Lansdown imposes various fees on consumers for buying and selling shares on its platform.
The launch of the share lending program in the UK is part of Robinhood’s strategy to build out its presence in the market. Apart from a select number of European Union countries, the UK is the only major international market for Robinhood outside of the U.S. This move highlights the company’s commitment to offering innovative financial products to customers in the UK and expanding its global footprint.
In conclusion, Robinhood’s introduction of the share lending feature in the UK is a significant step towards providing retail investors with new opportunities to earn passive income on their investments. With robust risk management measures and regulatory compliance, Robinhood aims to empower customers to leverage their stock holdings for additional financial gains. This move not only enhances Robinhood’s presence in the UK market but also demonstrates its commitment to delivering innovative financial solutions to customers worldwide.