Initial thoughts on Robinhood UK
This week, Robinhood, a US-based stock trading app, went live in the UK. As someone who is very much interested in investing and having tried out other app-based investment platforms in the past, I thought it would be a good idea to share my thoughts on the platform and if it’s worth using.
Funny enough, I had just watched Dumb Money, covering the GameStop sage in 2021 on a flight back from South Africa yesterday so Robinhood’s UK launch is a well-timed surprise.
The website
Let’s first have a look at Robinhood’s website for its UK launch.
The hero section
Upon the first visit to the UK Robinhood website, you’re greeted by a well-designed hero image of London, featuring Big Ben, the river Thames and a glimpse of the London Eye on the right. The main title features Robinhood’s key promised feature ‘Trade US stocks without commission or FX fees’.
Other Costs
Underneath that is a hyperlink stating ‘Other costs apply’ and that capital is at risk. Pretty standard for a stock trading platform. Clicking the ‘Other costs apply’ link takes you to a PDF that lists a few fees Robinhood does charge. Most of these fees are listed as $0 except for the Regulatory Trading Fees section and a single fee/rate under the Margin section.
The two fees under Regulatory Trading Fees are a regulatory fee of $8.00 per $1,000,000 of principal (sells only), rounded up to the nearest penny and a trading activity fee of $0.000166 per share (sells only), rounded up to the nearest penny and no greater than $8.30. These fees are set by US law and regulation outside of Robinhood’s control and there are similar fees when you buy UK stocks. Additionally, there are some small disclaimers for each of these fees.
Regulatory Trading Fees
For the regulatory fee, Robinhood doesn’t pass this fee on to you for sales with a notional value of $500 or less. For the trading activity fee, the limit on this fee is based on the execution of your order, which can occur in parts. Robinhood doesn’t pass this fee on to you for sales of 50 shares or less. Awesome news for people just getting into investing and those who are making smaller and infrequent trades via Robinhood.
Margin Fees
Under the Margin section is a single fee, a ‘Standard Margin Rate’ of 12%. I don’t personally do any margin trading, but I imagine this rate has to do with the interest rate charged for money borrowed for margin trading on Robinhood.
There is a small disclaimer stating that the ‘Margin interest rate shown is as of 26/7/2023 and is calculated by adding 6.5% to the upper bound of the Target Federal Funds Rate which is set by the Federal Reserve, and is subject to change. The formula used to calculate the margin interest rate is subject to change at Robinhood’s discretion.’
Pretty standard stuff.
Exchange Rate Fees
This one isn’t listed on the PDF but rather further down the home page under the comparison, table Robinhood has listed. Since Robinhood offers stock trading in US stocks, and most UK investors will not have access to a USD funding source, there’s going to be a need to convert pounds to dollars and vice versa.
Robinhood holds funds in USD and thus charges a 0.03% ‘third party cost’ (translation - fee by third party exchange provider) that will be included in the exchange rate. Technically this would mean that Robinhood has an FX fee, but this fee goes to the third-party exchange company that exchanges your money from pounds to USD as a service fee and that this is not something Robinhood themselves control or profit from.
By comparison, Trading212 charges a 0.15% currency conversion rate fee when buying shares that require a currency conversion (e.g. buying US stocks in USD via an account that holds funds in GBP). Robinhood’s fee is 80% lower in comparison.
Featured benefits
Scrolling down the main website, we can see the top 4 features Robinhood offers; trading stocks with no commission and FX fees, 5% interest on cash holdings, getting a free stock to get started and being able to trade stocks 24 hours a day, 5 days a week.
Trading US Stocks
Pretty self-explanatory and is the main feature of several other trading platforms. It will be interesting to see the stocks Robinhood offers compared to trading platforms, but now Robinhood boasts that it will be possible to purchase shares in over 6,000 companies listed on US stock markets.
Interest (on cash)
Robinhood currently offers 5% interest on cash held in their USD account. This is a rate that is only offered to Robinhood Gold members (which costs $5 a month), while regular Robinhood US investors earn 1.5% on cash.
At the time of writing this, the current base rate from the Bank of England is 5.25%. Most banks trying to acquire new deposits will offer a rate on instant access savings accounts that is just below the base rate in the UK.
Robinhood is doing the same thing here but since the money is held in a USD account, the interest being earned comes from the US Fed interest rate which currently sits at 5.50%, a little higher than the base rate from the Bank of England.
Additionally, Robinhood is making use of a partner bank network made up of 12 banks to offer a combined FDIC insurance coverage of 2.25 million USD. This isn’t mentioned on the UK website but if you check the FAQ section for Robinhood Gold on the US website, it mentions this and how it works
Just bear in mind that, if you have any accounts with any of these partner banks then the $250,000 FDIC insurance (per partner bank) is shared across all accounts to hold with this partner bank, but it is highly unlikely that this will apply to the majority of UK investors who will not have a USD checking account before signing up to Robinhood).
This also means that the UK’s Financial Services Compensation Scheme (FSCS), which protects up to £85,000 does NOT apply to this account since it is not a UK trading account (technically).
Excluding the 0.03% deposit and withdrawal ‘third party cost’ fee, this could make Robinhood a competitive savings account provider, although the FAQs on Robinhood Gold also mention that withdrawals can take up to 4-5 days (or pay a 1.5% fee for an instant withdrawal) but I didn’t see this mentioned anywhere on the UK website.
Free stocks
It’s quite normal for trading platforms to offer a free share if you’ve been referred to an account via a refer-a-friend program (which was funnily enough made popular by Robinhood in the US).
Surprisingly, also claims to offer a free fractional share when you sign up to Robinhood in addition to the Refer a Friend program (normally there are no free shares given if you do not sign up via a referral link with other investment platforms).
The terms state that you can be offered between $7-$175 if you sign up and fund your account. They also state that 96% of participants will receive a cash value of $7 to $8 (net), and provide a handy table to see your probability of what the value of your free share will be.
You’ll be able to apply this cash to purchase a share from 22 stocks (selected by choosing the 2 largest S&P 500 companies within the top 11 sectors based on market cap).
24-hour trading (on weekdays)
Robinhood also boasts that you can trade 24 hours, 5 days a week with a disclaimer that additional risks apply to trades made outside of regular market hours. A nice feature but personally I stick to making all my investment trading during regular market hours so this isn’t something I’m interested in.
Pricing and comparison
Moving on to the pricing and comparison table with other UK brokerages, I won’t go into too much detail here but I will say, that the comparison table includes Freetrade but purposely excludes Trading212, which also has zero commission fees, a small 0.15% FX fee on currency conversions, 5.2% interest on cash and 24/5 trading. The table here isn’t lying, but it’s clear they’ve omitted their true competitor from this table.
Other than that, Robinhood has a great page breaking down how its fees work, and I’m surprised this was not linked in the hero section and instead a PDF file was chosen to be linked to the ‘Other costs apply’ text (might be something to do with regulation stuff).
A nice bonus on this page, is that there is a link to another page that explains how Robinhood makes money. I would give it a read if you were curious. Seems pretty normal for a commission-free trading platform in my opinion.
Protection commitments
I’m going to skip over the interest on cash section since we’ve already covered it and the fractional shares call out since this is a pretty standard feature across trading apps now. Instead, let’s look at Robinhood’s ‘Protection commitments’. This is also standard across most trading platforms now. Password hashing and encryption and used as standard and they also offer two-factor authentication.
It should be noted that a strong and unique password should be used in combination with two-factor authentication. There were incidents in the past where Robinhood US accounts were hacked and drained due to password reuse (it’s up to investors to set a unique password) and not enabling two-factor authentication.
Robinhood faced a 20 million dollar class action lawsuit where around 40,000 customers said their accounts had been hacked. They also faced a data breach where the data of 7 million investors were stolen via a social engineering attack on a customer support employee.
Robinhood’s security practices seem to have gotten a lot better since then. Robinhood claims to cover 100% of direct losses due to unauthorised account activity that is not your fault (this is legal speak for, you better use a unique password and enable two-factor authentication).
What surprised me was that Robinhood offered me the ability to create a passkey for accessing my Robinhood account after I had created it. A nice (and secure) addition that gets a thumbs-up from me.
Learning
Below the protection commitments section is the final section on the home page, Robinhood Learn.
Robinhood Learn offers a large assortment of articles to learn more about the various parts of investing. If you’re new to investing, this is a great place to start.
The only thing I would skip is the option trading section. I don’t think this is relevant for most investors as there’s a higher risk of losing your money with options trading.
Signing up (via the app)
I decided to sign up for a Robinhood UK account and noticed a few things during the signup flow I thought were worth mentioning.
Pre-selected Margin Account Signup
Most of the signup flow is pretty standard (and well-designed in my opinion), but there was one part on the final step of creating the account that alarmed me. On the final part of the Brokerage account application page, I noticed that a box was preselected, ‘Robinhood Margin Account Agreement’.
Leaving this option ticked would create a margin account instead of a ‘Non-Margin account’.
I think it’s pretty sneaky having this option pre-selected without really explaining the risks that come with a margin trading account. There are large risks that come with margin trading and in addition to that Robinhood also charges that 12% margin rate they mentioned in their ‘other costs’ if you end up using this feature.
Turns out that I was right to be alarmed by this because, on the same day, Robinhood announced it was going live in the UK, they ended up pausing their plans to lend to UK-based customers pending talks with regulators.
Margin trading is not something that is typically offered to UK investors but Robinhood would have been allowed to offer this feature due to some type of “regulatory exemption” but it’s not clear what that exemption is exactly.
My opinion - stay away from margin trading. Investing already comes with risk, so why add more unnecessary risk, especially if you are a new investor? I ended up just unchecking the box and continuing.
Funding
Funding the account was pretty easy. This is handled by Open banking via Truelayer. No issues here and worked as expected.
Identity Verification
I’ve signed up for dozens of fintech apps and they all follow a similar identification verification process. Take a photo of your ID and take a video or photo of yourself.
There was one part of Robinhood’s process that threw me off, however…
Robinhood asked me for a photo of my ‘tax document’.
Most investment platforms will ask for a NIN (National Insurance number) but Robinhood also wanted a colour photo of a paper copy of either a payslip, P45 or P60. This is the first time I’ve ever been asked for this. Thankfully I was able to print out a copy fairly quickly and continue with the application process.
Accessing the app
After submitting that, my account application is still in review, but in the meantime, I have been granted access to other parts of the app. Right now I’m able to view stocks in the app and read the latest news on various stocks as well. All that’s left now is for my account to be approved.
Will I use Robinhood going forward?
While Robinhood shows a lot of promise, I likely wouldn’t be using it in the future for investing. There are two key reasons why.
No ISA offering
There’s no Stocks and Shares ISA offering, meaning there is no way to make gains on investment via Robinhood in a tax-efficient manner. I would rather focus on investing via a Stocks and Shares ISA which allows for tax-free gains. Currently, the amount you can put into ISAs in a single tax year is £20,000 a year (or about £1,666 a month). Most people never fully max out their ISA allowance every tax year and they would likely be better off focusing on doing that before looking into general investment accounts.
Additionally, if Robinhood only plans to offer accounts in USD then they will never be allowed to offer a stocks and shares ISA as HMRC rules do not allow you to hold foreign currency within an ISA (this is the same case for other apps such as Trading212 which offers a stocks and shares ISA).
No ETFs
Since Robinhood focuses on the US stock market, it offers US-listed ETFs (Exchange Traded Funds). Currently, under local and European regulations, it’s not possible to buy US-listed ETFs in the UK, which leaves investors with only being able to buy shares in single stocks (a lot riskier than buying an ETF).
I would hope Robinhood offers a localised ETF equivalent offerings similar to their competitors in the UK but given the large focus being buying and selling US stocks and the account being held in USD I don’t think this will happen any time soon.
Summary
Overall while Robinhood’s offering is unique compared to other brokerages in the UK, I don’t believe it’s a great option in the long run for long-term passive UK investors. There are other platforms that are better suited for passive investing.
Of course, this is just my opinion. Remember, none of this is financial advice. I just wanted to share some initial thoughts on Robinhood’s launch in the UK.