Freetrade asks users for securities lending consent ‘to keep fees low’

Savings and investment

The stock trading app also says users must agree so it can continue to offer a low-cost access point to stocks and ETFs.

Image source: Adam Dodds/Freetrade

Leading stock trading app Freetrade asks all users to agree to new terms and conditions, including agreeing to let fintech lend clients’ securities.

Securities lending is a fairly common practice in financial markets. Holders of securities such as pension funds, ETFs or brokers enter into an agreement with a borrower. These are usually banks or hedge funds that agree to redeem the security on a specific date and pay a small fee. It could be a “short position” in a security or a number of other risk management or investment strategy reasons.

Freetrade says the process will mean it can continue to offer a low-cost product and build a sustainable business model through a new revenue channel.

Users must agree to have their securities loaned or given the option to buy new shares taken by June 1, 2022, a Freetrade spokesperson said. AltFi.

Users who disagree will still be able to hold or sell their securities but will not be able to purchase new securities after June 1.

“In line with our goal of building a sustainable business, securities lending will provide Freetrade with a stable new source of revenue, allowing us to keep our fees low, continue to improve our products and services as we evolve, and help everyone to invest,” the Freetrade spokesperson said.

The new conditions do not apply to shares held in ISAs due to HMRC rules and will initially only apply to UK shares.

“We ask all Freetrade clients to give their consent to allow us to lend the securities they hold. This is an important development in our business and means we can continue to offer our clients an easy and inexpensive way to invest,” Freetrade said in a blog post.

“Our mission has always been to get everyone involved, by offering an inexpensive and simple product. Securities lending plays an important role in building a sustainable business model around a low-cost service and ensuring that we continue to grow our product,” he said.

“Securities lending is not the Wild West, it is an established process, with risk checks carried out throughout. Securities lending and its participants are part of the regulated UK financial market, which means that any lending in the UK must be reported to regulators,” he added.

What are the risks of securities lending?

Although the practice is relatively common, companies like Revolut and Trading 212 also make money by lending securities, it is not without risk, specifies Freetrade.

“Securities lending introduces another party to the investment process, which means there is additional risk of loss if the borrower does not return any securities.”

This could happen because a borrower defaults or there is a shortfall between the value of the shares loaned and the collateral. This occurs during times of market stress when the price movements of the loaned securities or collateral between collateral revaluations do not match. Operating errors are also possible.

“In the event of a shortfall, Freetrade will make every reasonable effort to return the equivalent securities to you,” the company said.

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