Robinhood App To Pay $70 Million For Harming Customers
The company behind the Robinhood app agreed to pay $70 million for causing customers “widespread and significant” harm. The Financial Industry Regulatory Authority (FINRA) ordered the company to pay the penalty. It said the company repeatedly inconvenienced its clients over the past few years.
RELATED: Robinhood Misled Clients, Will Pay $65M Fine
FINRA Finds Company Misled Customers
$70 million is the largest financial penalty handed down by FINRA. It’s a non-government agency that oversees brokers across the US. In particular, FINRA said that the company gave false or misleading information to its millions of customers.
This includes Robinhood app information on a customer’s account balance at the time of inquiry. It also includes contradictory rulings on when customers can place trades on margin.
These inaccurate statements cost users more than $7 million, FINRA found. Robinhood will need to give back this amount as restitution to affected users.
FINRA also said that the app approved risky trade options for thousands of users when it shouldn’t. It also proved negligent in preventing outages in March 2020, which also affected the transactions of millions of users.
Democratizing Finance For All
FINRA’s investigation also discovered that Robinhood’s customer service issues are more extensive than originally believed. Between 2018 and 2020 it failed to report tens of thousands of customer complaints to FINRA.
This violates the agency’s requirement to report all customer issues. In addition, the agency alleged that the company “negligently communicated false and misleading information” at different times since September 2016.
Company spokesperson Jacquelin Ortiz Ramsay issued an email statement about the settlement with FINRA. She said that the company made investments to improve the platform. It also began organizing its customer service team. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all,” Ramsay added.
Robinhood App Targeted FIrst-Time Investors
The Robinhood app was launched in 2014 and attracted millions of customers, many of them first-time investors. These investment rookies liked the easy-to-use app and industry-changing commission-free trades.
However, these features proved short-lived, as officials often changed the rules when trading became volatile. Recently, the app restricted trading during the time GameStop rallied in the stock market.
As a result, customers lost a lot of money due to misleading and false statements. One investor, 20-year old Alex Kearns, committed suicide after finding a negative $720 thousand cash balance. FINRA said that the balance displayed was inaccurate. In fact, his position value is half of what the account displayed.
No Due Diligence
Even as the company offered options trading beginning December 2017, FINRA says it “failed to exercise due diligence before approving customers to place options trades”, Instead, it relied on algorithms, rather than people, to approve customers for the risky investing move.
“As a result, Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been appropriate for them,” FINRA added.
Finally, the company failed to supervise the technology it uses to provide its core services between January 2018 and February 2021. This led to a series of outages and system failures, especially during market rallies when trading was high.
One of these outages occurred on March 2 and March 3, 2020, during extreme market volatility. These outages cost individual customers tens of thousands of dollars.
Neither Admit Nor Deny
Despite accepting the settlement order, Robinhood did not admit nor deny the charges. It remains under investigation by the SEC. Plus, the application continues to remain available for download and remains in use by around ten million users.
Watch the CNBC News video reporting that FINRA fines Robinhood $70 million for causing harm to customers:
Do you use the Robinhood app? Were you inconvenienced by the app’s failure, inaccurate information, or by arbitrary restrictions? Do you still use the app to trade?
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