Securities Investor Protection Corp (SIPC) Shares ‘Serious Concerns’ On Robinhood’s New Banking Service

The SIPC Has “Serious Concerns” About Robinhood’s New Banking Service

Robinhood is a promising fintech startup that aims to disrupt the banking sector. However, the Securities Investor Protection Corp (SIVP) recently released a statement expressing concern about one part of Robinhood’s services.

Robinhood is offering a checking and savings account that pays users 3% interest on their funds. The service was unveiled this past Thursday. Today, the service is available for anyone using Robinhood’s no-fee stock trading app.

However, the SIPC claims that the new service raises red flags. The problem is with the way the funds are insured. Funds stored in Robinhood’s Checking & Savings service are not insured by the Federal Deposit Insurance Corp; instead, Robinhood claims the funds are insured by the SIPC.

The SIPC, however, appears to be refuting that claim. Funds stored in Robinhood aren’t insured by the SIPC.

“I disagree with the statement that these funds are protected by SIPC,” said Stephen Harbeck, president and CEO of SIPC, in an interview with Bloomberg on Friday. “Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.”

Typically, the money in bank accounts is insured through the Federal Deposit Insurance Corp. However, Robinhood’s Checking & Savings service is run through Robinhood’s brokerage arm – not a bank. Robinhood exchange news claims this means the funds are insured with SIPC. The SIPC, however, now claims that isn’t the case.

Harbeck claims that Robinhood never contacted the SIPC. Harbeck had not heard about Robinhood’s banking service until Thursday, when the product was released. Upon hearing about the service, Harbeck called the SEC to determine if the government regulatory authority agreed with his view that the funds would not be protected.

“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities.”

There’s also a problem with the way Robinhood is advertising its Checking & Savings service. Robinhood’s website claims that users do not need to invest to use the Checking & Savings services. However, Harbeck claims this statement is incorrect:

“On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”

Your Money Should Be Fine

This past week, Robinhood’s Checking & Savings service was criticized for being “a money market fund in disguise”.

Typically, the SIPC protects money market mutual funds just like they would protect securities. That’s the “loophole” Robinhood is using to guarantee protection of users’ funds. As indicated above, the SIPC believes this isn’t the case and that the money in Robinhood’s bank accounts will not be protected.

Robinhood is investing in short-term securities using the money users invest in their Checking & Savings accounts. Fortunately, treasury bills are the closest thing to a risk-free asset and they are unlikely to decline sharply in value. Few brokerage firms fail.

For all of these reasons, your money should be safe – but it’s not a guarantee.

Robinhood has not responded to a request for comment.

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