US lawmakers are pressing Robinhood to improve safeguards on the trading app a month after the apparent suicide of a 20-year-old student who saw a negative account balance of $730,000.
“This should have never happened,” Rep. Lauren Underwood told CNN Business on Tuesday.
The family of Alex Kearns, the 20-year-old Robinhood user, said he died by suicide June 12 after confusion over an apparent negative balance on the millennial-focused trading app. It isn’t clear what factors contributed to his death.
Underwood, a Democrat who represents the Illinois district where Kearns’s parents live, wrote a letter to Robinhood that expressed “serious concerns” about a “lack of safeguards” at the $8.6 billion trading platform. The letter was also signed by Illinois Senators Dick Durbin and Tammy Duckworth.
In response to the letter, Robinhood said it would work with the lawmakers. “We take our responsibility to our customers seriously and will work with the Representatives and Senators to address their questions and concerns,” a spokesperson said in a statement.
Last month, Robinhood announced plans to improve its user interface in response to Kearns’s death. “We are personally devastated by this tragedy,” Vlad Tenev and Baiju Bhatt, Robinhood’s co-CEOs, wrote in a blog post. The company also announced plans at the time to make a $250,000 donation to the American Foundation for Suicide Prevention and urged people who are in crisis to reach out for help.
‘A recipe for disaster’
The tragedy drew widespread attention to the potential risks of the free-trading boom ushered in by Robinhood, which caters to young, first-time investors.
Kearns, a college student with no income, was using Robinhood to trade complex options instruments. The Kearns family believes Alexander was misled by the app’s interface suggesting he owed $730,000, when that was not really the case.
Underwood accused Robinhood of incentivizing risky trading to new investors while providing limited customer support.
“I see that as a recipe for disaster,” Underwood told CNN Business. “Robinhood has designed a platform that feels very much like a video game…It’s not a game. It’s real life.”
A Robinhood spokesperson said the company has doubled the number of customer support agents it has and plans to add hundreds of registered financial services professionals by the end of the year. That customer service typically takes place via email.
Gaps in oversight?
The tragedy could prompt increased scrutiny from regulators.
Lawmakers are “exploring avenues to compel” regulators to increase oversight on Robinhood and similar platforms, Underwood said in an interview.
“This spotlights some real gaps in our systems and oversight,” she said.
The Securities and Exchange Commission, which Underwood mentioned in the letter as a a regulator that should be urged to take action here, declined to comment.
Jay Clayton, chairman of the SEC, told lawmakers last month the incident was “just terrible.” Clayton said the agency is working with FINRA, the finance industry’s self-regulator, to improve disclosure requirements in this area.
The letter from lawmakers requested a written response from Robinhood to a series of questions, including whether the startup evaluates a user’s age and experience before granting approval to advanced options instruments. The lawmakers asked if Robinhood plans to add a phone support number — something the startup confirmed it does not currently have.
The zero-commission business model of Robinhood has transformed the brokerage industry by capturing market share from existing players. Robinhood’s rivals eventually capitulated and slashed fees to zero.
The pricing shifts sparked massive consolidation in the industry. Morgan Stanley (MS)agreed to buy E*Trade (ETFC), while Charles Schwa (SCHW)b made a deal to buy TD Ameritrade (AMTD).
Robinhood continues to attract investors captivated by its rapid growth. The startup revealed Monday it raised an additional $320 million in previously-announced round of funding that values it at $8.6 billion.