Robinhood is launching an equity lending product in Britain

Online brokerage platform Robinhood launched a stock lending program in Britain on Wednesday that will allow consumers there to earn passive income on the stocks they own, in the company’s latest attempt to grow its market share abroad.

The stock trading app, which launched in Britain last November after two previous attempts to enter the market, said the new feature would allow retail investors in the UK to cash out any shares they own in their portfolio. lend to interested borrowers.

You can think of stock loans as “renting out” your shares for extra money. It’s when you allow another party (usually a financial institution) to temporarily borrow shares you already own. In return, you will be paid a monthly amount.

Institutions typically borrow shares for trading activities such as settlements, short selling and risk hedging. The lender still retains ownership of their shares and can sell them at any time. And if they sell, they still realize any gains or losses on the stock.

In Robinhood’s case, shares lent through the app are treated as collateral, with Robinhood collecting interest from borrowers and paying it out monthly to lenders. Customers can also earn cash owed on company dividend payments – usually from the person borrowing the stock, rather than from the company paying a dividend.

Customers can sell lent shares at any time and withdraw the proceeds from the sale once the trades are settled, Robinhood said. However, there is no guarantee that shares loaned through the lending program will always be linked to an individual borrower.

“Equity lending is another innovative way for our customers in Britain to put their investments to work and earn passive income,” Jordan Sinclair, president of Robinhood UK, said in a statement on Wednesday.

“We are pleased to continue to give retail customers greater access to the financial system now that the product is available in our intuitive mobile app.”

Stock lending is not unheard of in Britain, but it is rare.

Several companies offer stock lending programs, including BlackRock, Interactive Brokers, Trading 212 and Freetrade, which launched its stock lending program last week.

Most companies offering such programs in Britain pass 50% of the interest on to customers. That’s higher than the 15% that Robinhood offers to lenders on its platform.

Share lending is risky, not least because of the prospect that a borrower may ultimately default on their obligations and be unable to return the value of the share to the lender.

But Robinhood says on its stock lending landing page that it aims to hold cash “equal to at least 100% of the value of your loaned stock with a third-party bank,” which means customers should be covered if Robinhood or the institution that borrowed the shares, she was suddenly unable to return them.

Robinhood keeps cash in a trust account at Wilmington Trust, National Association, through JP Morgan Chase & Co acting as custodian, a company spokesperson told CNBC.

Simon Taylor, head of strategy at fintech firm Sardine.ai, said the risk to users of Robinhood’s stock lending program will be “quite low” as the US company stands behind risk management and selects which individuals and institutions can lend customer shares. .

“I doubt consumers understand the product, but they don’t have to,” Taylor told CNBC via email.

“It’s a matter of pressing this button to earn an extra 5% on the shares that were already there. It feels like a no-brainer.”

“It’s also something that’s common in big finance, but just not available to the mainstream,” he added.

The new product offering could be a test for Robinhood when it comes to gauging how open local regulators are to accepting new product innovations.

Financial regulators in Britain are strict when it comes to investment products and require companies to provide sufficient information to their customers to ensure they are properly informed about the risks associated with the products they buy and trading activities that they practice.

Under the UK Financial Conduct Authority’s consumer duty rules, companies must be open and honest, avoid foreseeable harm and support investors’ ability to pursue their financial goals. guidance published on the FCA website in July last year.

Yet the move is also an opportunity for Robinhood to try to build its presence in the UK market, which – apart from a select few European Union countries – is the only major international market outside the US.

It comes as domestic UK trading firms have faced difficulties over the years. For example, Hargreaves Lansdown last month agreed to a £5.4 billion ($7.1 billion) takeover by a group of investors including CVC Group.

The company is grappling with issues such as regulatory changes, new entrants to the market, including Revolut, and the expectation of falling interest rates.

Unlike Robinhood, which doesn’t charge commission fees, Hargreaves Lansdown charges various fees for consumers who buy and sell stocks on its platform.