Your feedback is essential to help us improve - click here to take our 3 minute survey.

Why is Robinhood being investigated by US regulators?

Why is Robinhood being investigated by US regulators?
Image source: Getty Images

Robinhood, the popular US stock trading company, is reportedly under investigation by the US Securities and Exchange Commission (SEC).

Here’s the lowdown on why the firm is under legal scrutiny and what this might mean for UK investors.

Why is Robinhood under investigation?

According to several news outlets, Robinhood is facing two separate SEC investigations.

The first investigation regards the brokerage’s handling of a major service disruption that took place back in March.

During the outage, customers couldn’t access Robinhood’s services (on both its website and mobile app) for more than an entire trading day. They could not execute trades or reach the company’s customer services for assistance. They were kept from securing profits as coronavirus-associated volatility led to a spike in stock prices.

At the time, Robinhood attributed the outages to stress on its tech infrastructure, high volume trading due to market volatility and a record number of sign-ups.  

Since then, the company has been trying to redeem itself to investors. Unfortunately, further tech issues such as another outage that took place on 31 August during the Tesla and Apple stock splits have only made investors angrier and more frustrated.

Robinhood is also facing an additional investigation related to a disclosure of its revenue practices.

As reported by the Wall Street Journal, the company is under SEC investigation for its failure to disclose its practice of selling clients’ orders to high-speed trading firms. Robinhood did not disclose these practices fully until 2018.

The Wall Street Journal further reports that this particular investigation is at an advanced stage. The company might have to pay a relatively hefty fine of $10 million (£7.8 million) if it chooses to settle the SEC’s probe (which would mean walking away without admitting or denying misconduct).

Does Robinhood’s investigation affect UK investors?

Robinhood does not operate in the UK. News about the SEC’s investigation should not therefore create much concern for UK investors.

Interestingly, just a few months back, the company was finalising plans to enter the UK market early next year before abruptly announcing that it was postponing the launch indefinitely. That was in July.

At the time, Robinhood had already received regulatory approval. It had even set up a UK wait-list which had managed to garner more than 250,000 signups.

The company’s most recent legal problems are likely to delay plans for a UK launch even further. This may come as a disappointment to local investors who might have been looking forward to taking advantage of the platform’s famous commission-free trading.

Is your money safe in a brokerage account?

It’s no fun hearing that your favourite brokerage is under investigation by a regulatory agency. Neither is it enjoyable to wake up to an outage in your brokerage like the ones experienced by Robinhood customers more than once this year.

If such experiences become too common, they can frustrate investors and hugely undermine trust in online brokerss. Investors might quite easily (and understandably) start questioning just how safe their money and investments are.

So, is there some sort of protection for the assets or investments in your brokerage account?

In a word, yes. The Financial Services Compensation Scheme protects investments and cash in your brokerage account.

Any cash you have in a share dealing account is protected and covered by the FSCS up to £85,000. The FSCS also covers investments up to the same amount. Investments can include direct shares, funds, investments trusts and ETFs.

These limits, however, don’t mean that you’ll lose any investments or cash above the limit if your brokerage goes under. There are several other protections in place to protect investors’ losses.

For example, brokers have to abide by strict rules from the Financial Conduct Authority (FCA) that require them to segregate clients’ money and investments from their own funds to prevent creditors from taking them in case of a collapse. The money and investments stays in a nominee account, which keeps it safe from creditors or administrators.

So, if you wake up to an outage in your brokerage or even news that your broker is under investigation (as is the case with Robinhood), don’t panic. There’s a good chance your money is still safe.

Final word

While the FSCS provides some protection for your cash and investments if your brokerage defaults, remember there are no protections for bad investment decisions that lead to losses. That’s why it’s a good idea to conduct sufficient research before you start online share dealing.

Of course, it also helps to work with a trustworthy broker that provides an exemplary level of service and other perks such as low trading fees. To find one that is a good fit, check out our list of the best online share dealing accounts.

Are you overpaying in broker fees?

Share dealing fees are not always straightforward. Use our free broker cost calculator to easily compare broker fees and see which providers listed offer the best value. 

Was this article helpful?

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.