They were essentially testing the fences. That isn't bad, especially when it's done completely in the open. It gives the regulators an opportunity to say "no" and shut it down immediately if they want to, or say nothing and let it proceed.
If they say no, it doesn't happen long enough for anybody to really come to any harm.
And the alternative is that nobody is willing to try anything new just because there is no existing precedent explicitly saying that it's OK.
The part that was grossly problematic was Robinhood falsely claiming it was SIPC-insured. SIPC insurance isn’t automatically granted. There isn’t any useful innovation limited by telling people “try new things, but don’t lie about having certifions you don’t have.”
This is slack laziness and cavalier disrespect for their userbase. I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Why is that supposed to be necessary? The government is more than capable of telling you if it's a problem, and if it's not a problem -- which is the default -- it would only waste resources on the part of everyone.
What I suspect may have happened here is that the traditional banks soiled themselves when they saw the announcement and started calling around to see who they could get to put a stop to it.
The head of the SIPC essentially said as much in the article: "This has gigantic ramifications for the banking industry." As if his role is to save the mortgage banks from competition.
> I had started toying with Robinhood; I immediately pulled everything I've got back out. They aren't trustworthy custodians.
Presumably they're SIPC insured. :)
If I say “I’m insured by AIG,” I actually need to be insured by AIG. It’s not AIG’s job to tell me I’m lying. SIPC coverage isn’t automatically granted. Robinhood already has SIPC coverage through their brokerage products; this is abundantly clear to everyone there. Whether through fuck-up or will, they ignored a clear regulatory line.
But that's the weird thing. This new product is essentially a combination of two things.
1) A brokerage account instructed to hold safe treasury-related securities. This is exactly the sort of thing the SIPC normally insures. Expecting them to refuse that is really bizarre -- it's their main purpose. And as you note, they already do have that insurance for their brokerage accounts.
2) An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation, but it doesn't affect the risk to the insurer in any apparent way or really have much to do with them at all. Withdrawing the insurance over this only makes sense if it was done out of politics. Punishing them for failing to anticipate a political backlash seems particularly unjust.
Car accidents are the sort of thing most insurers usually insure. That doesn’t make it okay to lie about whether you have insurance. If this is still somehow confusing you, please stay away from banking and healthcare.
> An ATM card and bank routing number that makes it easy to transfer to/from the brokerage account, so that it can be used as a checking/savings account. This is the real innovation
I have a Fidelity Cash Management Account that does exactly this. The cash deposits are swept into FDIC-insurer accounts. The brokerage products are SIPC insured. I have a debit card I can spend against the cash deposits.
The difference is Fidelity applied for and obtained SIPC protection. This involves installing various auditing and safety mechanisms. Approval isn’t guaranteed. Automatically forcing the SIPC to insure everything that looks like a brokerage account would be a horrible idea.
Would you be ok with that?
> Would you be ok with that?
When I'm in the insurance business and the party making that claim is paying me insurance premiums under the same terms that I'm already insuring existing things with a commensurate level of risk? That is how insurance works.
If you have renter's insurance and you buy a new television on credit, telling the creditor that you have renter's insurance before you tell the insurance company that you have a new television is not some kind of fraud. If the insurer then suddenly threatens to cancel your insurance if you try to add the television, you have to go back to the creditor, but why would you have reasonably expected them to do that?
But the second one is the one that applies to a future product you haven't actually provided yet.
No one was harmed here. This is fine.
Which is why something between slap on the wrist and massive fines is in order.
The FDIC and SIPC work through public trust. When a broadly-marketed consumer product sets a precedent for degrading that trust, it causes real harm. Robinhood grabbed users through marketing this affiliation and gained tangible value from it. The last thing we need is the next growth hacking scheme involving falsely marketing trusted affiliations before pulling the product, customer lists in hand.
False advertisement shouldn’t be acceptable even in the case where it didn’t go far enough for people to actually obtain the product.
It was not mere talk, it was talk about a waitlisted feature used to induce signups to (and because of a “referrals move you up the line” policy, also to induce providing personal information if third parties as referrals to) Robinhoods existing service.
That is, it was false representation used to induce people providing Robinhood things of value, and thus, arguably, commercial fraud.
That's assuming they knew the representation was false. If they reasonably expected to be able to get the insurance, claiming that they would get it was a true statement of their intentions.
Above, people are suggesting that we need regulatory and/or criminal charges. There isn't any harm to customers and there isn't any evidence of fraud or criminal wrongdoing.
RH harmed themselves by looking stupid in front of the world. That's it. The rest is misguided hysteria.
They just got 600k people to signup. Even if they convert 10% of those for brokerage accounts (and not checking) it's probably worth it.
This reminds me of Lance Armstrong and Trek Bicycles. Trek doesn't have to return any of its record profits for all of the years they sponsored a cheater. (for the record, I own several Trek bikes and they're fantastic)
I'm a fan of Robinhood. But this calls for more than a slap on the wrist. Not punishing someone misrepresenting their FDIC or SIPC insurance status is a horrible precedent. Not only does it show a green light to scammers. It also corrodes the protective, anti-run value these programs provide to depositors and investors.