Freetrade asks users for securities lending consent 'to keep fees low'

Leading share trading app Freetrade is asking all users to agree to new terms and conditions including agreeing to let the fintech lend out customers’ securities.

Securities lending is a fairly commonplace practise in financial markets. Holders of securities such as pension funds, ETFs or brokers enter into an agreement with a borrower. These tend to be banks or hedge funds that agree to repay the security by a given date and pay a small fee. This could be to ‘short’ a security or for a number of other risk management or investment strategy reasons.

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

Users have to agree to their securities be lent or have the ability to buy new stocks taken away by 1 June 2022, a Freetrade spokesperson told AltFi.  

Users that do not agree will still be able to hold or sell their securities but not able to buy new securites after 1 June.

"In line with our goal to build a sustainable business, securities lending will provide Freetrade with a new and stable revenue stream, allowing us to keep our fees low, continue to improve our product and services as we scale and help get everyone investing," Freetrade's spokesperson said.

The new terms do not apply to shares held in ISAs owing to HMRC rules, and will only apply to UK shares at first.

“We’re asking all Freetrade customers to provide their consent to allow us to lend the securities they hold. It’s an important evolution in our business and one that means we can continue to offer our customers a low-cost, simple way to invest,” Freetrade said in a blog post. 

“Our mission has always been to get everyone investing, by offering a low-cost and simple product. Securities lending plays an important role in building a sustainable business model around a low-cost service, and ensuring we keep developing our product,” it said. 

“Securities lending isn’t the wild west, it’s an established process, with risk controls taken throughout. Securities lending and its participants are part of the regulated UK financial market which means any lending in the UK must be reported to regulators,” it added.

What are the risks of securities lending?

While the practice is relatively common, the likes of Revolut and Trading 212 also earn cash by lending securities, it does not come without risk, Freetrade makes clear.

“Securities lending introduces another party into the investment process and this means there is an additional risk of loss should the borrower fail to return any securities.” 

This could occur because a borrower defaults or there is a shortfall between the value of the shares lent and the collateral. This happens in times of market stress when movements in prices of either the lent securities or the collateral between revaluations of collateral is mismatched. Operational errors are also possible.

‍“If there is a shortfall, Freetrade will take all reasonable efforts to return the equivalent securities to you,” the company said.