One of the major industry advancements of the last decade has been FinTech companies. FinTech, short for financial technology, seeks to use technological innovations to make financial processes more accessible for users. This can include banking, financial transactions, investing, and trading stocks.
FinTech had its moment in the mainstream spotlight in February 2021. People across the globe heard the story about young investors, spurred on in part by the website Reddit, who bought stock in unprecedented volumes in efforts to throw off the hierarchical balance of hedge funds and traditional traders. The most focused on stock was video game retail store GameStop (GME,) but others included Nokia, AMC Theaters, and Bed Bath & Beyond.
The stocks targeted were those that the young traders had nostalgia for in their youth. The movement was primarily devised by millennials, in their early thirties and younger, who used the stock trading app RobinHood. RobinHood is a FinTech company primarily targeting millennials who want to begin playing in the stock market.
Founded in 2015, one of Robinhood’s primary selling points was that it did not charge its customers trading commissions. However for larger value orders, this price difference at Robinhood exceeded the commission its competitors would have charged, the price they paid to trade stocks was actually higher than with traditional methods.
RobinHood’s majors scandal actually began a couple of years ago. In December 2020, the Securities and Exchange Commission ruled that RobinHood had not been disclosing that they were receiving payments from other trading firms, called “payment for order flow.”
The SEC charged RobinHood with a $65 million dollar settlement and ordered them to retain an independent compliance consultant under specific conditions. In the midst of the GameStop frenzy mere months later, RobinHood made headlines again by restricting users from buying GME stock or that of other popular stocks. RobinHood, founded on the principle of making the stock market more accessible to everyday people, was roundly seen as betraying its users and bending over backwards to protect the elite stock traders hurt by the GME explosion. Congress even called a hearing to discuss RobinHood’s actions specifically.
So what went wrong? Maybe if RobinHood had made more efforts to implement and to be committed with that compliance program, things would have gone differently – or if they had one in place from the beginning. Since FinTech companies are relatively new, their industry is less uniformly regulated than other financial institutions like banks. This means that if FinTech companies want to protect their business, keep their customer’s safe, and follow all applicable regulations not only in theory, they will want to implement a compliance program.
Corporate compliance allows businesses to mitigate potential risks and follow government regulations affecting them. It works with the specific company to develop a compliance program that is tailored to fit their needs. It is a necessity for all companies, regardless of industry or size. For FinTech companies, it helps not only share data with consumers and protect their privacy and money, but protect against illegal proceeds. FinTech companies, especially those who do not do their due diligence in compliance, are extremely vulnerable to money laundering schemes.
We can clearly see in the case of RobinHood that there is a high price to pay for ignoring compliance and misleading consumers. All businesses should implement a robust and consistent corporate compliance program to protect themselves against such bad exposure. If you would like to discuss what a compliance program could look like for you, contact Prae Venire today. We have solutions tailored to each client’s specific needs!