In this photo illustration, the Robinhood Markets Inc. website is displayed on a computer in Chicago, Illinois on June 6, 2024.
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Online brokerage platform Robinhood launched a stock lending program in the UK on Wednesday that will allow British consumers to earn passive income on stocks they own, the company’s latest move to expand market share overseas.
The stock trading app, which launched in the UK last November after two previous attempts to enter the market, said its new feature will allow retail investors in the UK to lend out any stocks they own directly in their portfolios Interested borrowers.
You can think of stock lending as “renting” your shares to get extra cash. When you allow another party (usually a financial institution) to temporarily borrow stock that you already own. In return, you will receive a monthly fee.
Institutions typically borrow shares for trading activities such as settlement, short selling, and hedging risk. The lender retains ownership of its shares and can sell them at any time. And, when they sell the stock, they still realize any gain or loss on the stock.
In the case of Robinhood, stocks loaned out through the app are considered collateral, and Robinhood collects interest from the borrower and pays the interest to the lender each month. Clients can also earn cash owed on a company’s dividend payments—usually from the person who borrowed the stock, rather than the company that issued the dividend.
Robinhood said customers can sell loaned shares at any time and withdraw the sale proceeds after the trade settles. However, there is no guarantee that shares loaned through its loan program will always match individual borrowers.
“Stock lending is another innovative way for our UK customers 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 provide retail customers with greater access to financial systems, now available within our intuitive mobile app.”
niche product
Stock lending is not unheard of in the UK, but it is rare.
Several companies offer securities lending programs, including BlackRock, Interactive Brokers, Trading 212 and Freetrade, which just launched a stock lending program last week.
Most companies offering such schemes in the UK pass on 50% of the interest to the customer. That’s higher than the 15% rate Robinhood offers lenders on its platform.
Stock lending is risky – not least because the borrower may ultimately be unable to meet its obligations and be unable to return the value of the stock to the lender.
But Robinhood says on its stock lending landing page that its goal is to hold cash “equal to at least 100% of the value of the stock you loaned at a third-party bank,” which would mean if Robinhood or the institution that borrowed the stock were suddenly unable to return it.
A spokesperson for Robinhood told CNBC that the company deposited the cash collateral into a trust account with the National Association’s Wilmington Trust, using JP Morgan Chase & Co as a custodian.
Simon Taylor, head of strategy at fintech Sardine.ai, said the risk to users of Robinhood’s stock lending program would be “pretty low,” given that Robinhood is responsible for risk management and selecting which individuals and institutions can borrow customer stocks.
“I doubt consumers understand the product, but they don’t need to,” Taylor told CNBC via email.
“What happens is, you push this button and you earn an extra 5% on your existing stock. It feels like a given.”
He added: “This is also common in large finance, but not accessible to the mainstream.”
New product launches could be a test for Robinhood when it comes to gauging how open local regulators are to new product innovations.
The UK’s financial regulators are very strict on investment products and require companies to provide customers with sufficient information to ensure that they correctly understand the risks associated with the products they purchase and the trading activities they engage in.
Under the UK Financial Conduct Authority’s consumer responsibility rules, companies must be open and honest, avoid causing foreseeable harm and support investors’ ability to pursue their financial objectives. Guidance published on the FCA website Last July.
Still, the move is an opportunity for Robinhood to try to expand its presence in the U.K. market, which is its only major international market besides the U.S. aside from some EU countries
UK domestic trading companies have faced difficulties for many years. Hargreaves Lansdown, for example, agreed last month to be acquired by a group of investors including CVC Group for £5.4 billion ($7.1 billion).
The company has been grappling with regulatory changes, new entrants to the market such as Revolut and expectations of falling interest rates.
Unlike Robinhood, which charges no commission, Hargreaves Lansdown charges a variety of fees for consumers buying and selling stocks on its platform.
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