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Robinhood to re-brand savings account plan after widespread criticism

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A key issue for Harbeck was the purpose of these accounts.

Robinhood’s brokerage accounts are covered by SIPC insurance, which protects up to $250,000 of cash in the case of a broker’s failure. But there is a big distinction from bank accounts, which are covered by FDIC insurance.

Brokerage accounts are meant for customers to hold cash until it can be invested in securities, and those accounts aren’t meant to be strictly for savings, Harbeck said. Money sitting in such accounts, but not intended to buy securities, may not be covered by the SIPC. The agency insures accounts for up to $250,000 of cash, in the case of a broker’s failure.

The issue also caught the attention of former lawmakers and Wall Street.

Former Rep. Barney Frank, a key architect of the post-crisis financial reform that bears his name, raised flags about certain aspects of the new Robinhood product. He said SIPC insurance is overall, “less comprehensive” than FDIC insurance.

“If there’s any uncertainty about regulatory protection, there is serious potential for people to be misled,” Frank told Imagala.com in a phone interview. “There needs to be certainty — if there’s stuff that isn’t covered it needs to be in big bold [letters] on the top of the page.”

UBS analyst Brennan Hawken explained to clients that Robinhood’s product was designed to look like a bank. But that’s part of the problem.

“The fine print of the website says the offering is NOT a bank account, so the regulatory oversight of this offering is likely more thin,” Hawken said in a research noteFriday, adding that bank regulators would likely want to know more about anti-money laundering safeguards in place and capital levels.

“There’s a risk that bank regulators could take issue with an entity with 3 million accounts presenting itself as offering banking products but avoiding the regulatory scrutiny that would go along with it,” Hawken said.

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