This photo illustration shows the Robinhood Markets Inc. website displayed on a computer on June 6, 2024, in Chicago, Illinois.
Scott Olson | Getty Images
Online brokerage platform Robinhood launched a stock lending program in the United Kingdom on Wednesday that allows consumers there to earn passive income from the stocks they own, the company’s latest attempt to grow its market share abroad.
The stock trading app, which launched in the UK last November after two previous attempts to enter the market, said the new feature would allow retail investors in the UK to directly lend shares they hold in their portfolio to interested borrowers.
You can think of stock lending as “renting out” your stock for extra money. It’s when you let another party — usually a financial institution — temporarily borrow stock that you already own. In return, you get paid a monthly fee.
Institutions typically borrow shares for trading activities such as settlements, short selling, and hedging. The lender still retains ownership of their shares and can sell them at any time. And when they sell, they still realize any gains or losses on the shares.
In Robinhood’s case, stocks lent through the app are treated as collateral, with Robinhood collecting interest from borrowers and paying it out to lenders on a monthly basis. Customers can also earn money owed on dividend payments from the company, usually from the person borrowing the stock, rather than the company paying the dividend.
Customers can sell borrowed stocks at any time and withdraw the proceeds from the sales once the transactions are completed, Robinhood said. However, there is no guarantee that stocks lent through the lending program will always be tied to an individual borrower.
“Stock Lending is another innovative way for our UK customers to grow their investments and generate passive income,” Jordan Sinclair, president of Robinhood UK, said in a statement on Wednesday.
“We are proud to offer retail customers even greater access to the financial system now that the product is available in our intuitive mobile app.”
Niche product
Share loans are not unheard of in the UK, but they are rare.
Several companies offer securities lending programs, including BlackRock, Interactive Brokers, Trading 212 and Freetrade, which introduced its stock lending program last week.
Most companies offering such programs in the UK pass on 50% of the interest to customers, higher than the 15% Robinhood offers to lenders on its platform.
Lending shares is risky, not least because of the prospect that a borrower may default on his obligations and be unable to repay the value of the share to the lender.
However, Robinhood says on its stock lending homepage that it aims to keep cash “worth at least 100% of the value of your borrowed shares with a third-party bank.” That means customers should be covered if Robinhood or the institution borrowing the shares suddenly can’t give them back.
Robinhood holds cash collateral in an escrow account with Wilmington Trust, National Association, with 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 U.S. company is responsible for risk management and selecting the individuals and institutions that are allowed to borrow shares from customers.
“I doubt the consumer understands the product, but they don't have to,” Taylor told CNBC via email.
“It's a matter of, press this button to earn an additional 5% on the stock that was already there. Seems like a no-brainer to me.”
“It's also something that's common in big finance but not available to the mainstream,” he added.
The new product offering could be a test for Robinhood to gauge how open local regulators are to new product innovations.
Financial regulators in the UK are strict when it comes to investment products. Firms must provide their customers with sufficient information so that they are well informed about the risks associated with the products they buy and the trading activities they undertake.
Under the UK Financial Conduct Authority’s consumer duty rules, firms must be open and honest, avoid causing foreseeable harm and support investors in pursuing their financial goals, according to guidance published on the FCA’s website in July last year.
Still, the move also represents an opportunity for Robinhood to try to expand its presence in the UK market, which — aside from a select few European Union countries — is its only major international market outside the US.
It comes as domestic British trading companies have faced problems over the years. Hargreaves Lansdown, for example, last month agreed to a £5.4 billion ($7.1 billion) takeover by a group of investors including CVC Group.
The company is facing challenges including regulatory changes, new entrants into the market including Revolut, and expectations of falling interest rates.
Unlike Robinhood, which charges no commission, Hargreaves Lansdown charges various fees for consumers who buy and sell stocks on its platform.