From the Freetrade blog:
In the coming days, we will be updating our terms and conditions to include a new section on securities lending.
At Freetrade, our mission is to get everyone investing, by offering a low-cost and simple product.
This product is now being used by over one million people in the UK.
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, and to continue to improve our product and services as we scale.
ETFs, for example, often lend securities to enhance investor returns. Likewise, we’re going to harness this additional revenue to help support our business and to deliver a low-cost product for everyone.
As part of our standard terms of service all Freetrade customers must provide their consent to lend their securities.
We can only lend securities held in a general investment account (GIA) or a personal pension account (SIPP); any holdings in an ISA are not included in the lending programme.
In the first place, we will only be lending UK-listed securities, although we will ask for your consent to lend all securities you hold in your GIA and SIPP, as we plan to expand our programme to lend European and US-listed shares in the future.
Below we provide some more information about what securities lending is, and how it will work at Freetrade.
What is it?
Securities lending is a common feature of the global capital markets and it’s been that way for decades.
Some of the biggest lenders of shares include pension funds and ETFs.
Financial institutions borrow stocks, ETFs and other assets for a range of reasons:
They may be a market maker enabling investors to buy and sell shares throughout the trading day. They will not necessarily hold the share at the point they sell it to a buyer and so they borrow shares until they do hold them
They might be speculating that there will be a decline in the price of the asset and want to benefit by borrowing it, selling it and buying it back at a lower price, making a profit, after repaying the initial loan
This process is closely monitored and those who borrow shares are required to post collateral – typically government bonds or cash – worth more than the value of shares borrowed as protection for the lender in the unlikely event that they’re unable to return the shares to the owner.
Will I notice anything different?
Quite simply, no.
The securities lending programme will operate behind the scenes and it should have a very minimal impact on how you use our app.
You will be able to buy and sell shares as normal. If you’re due a dividend and your shares are on loan, you will still receive this dividend.
If your shares are on loan and there’s a corporate action that we support, we will recall your shares before the record date so that you’re able to participate.
We will also provide you with a monthly statement that includes details of your shares that have been on loan and the collateral that we hold for you.
What are the risks?
As with any financial transaction, there are risks, but we also take steps to manage these.
If for any reason the borrower can’t return the shares, Freetrade will be holding the collateral on your behalf. In this case, we would sell the collateral and take all reasonable measures to return the shares to you.
We also monitor the value of your shares and the collateral on a daily basis and require the borrower to provide additional collateral where necessary.
You can find out more, including answers to some frequently asked questions, on our securities lending page.
What’s next?
In the coming days, you’ll get a push notification with more details and a form to provide your consent. This will include our updated terms and risk disclosures.
There is a grace period ending on 1 June 2022 during which we must get your consent, and throughout this period you will see a banner on your portfolio screen as a reminder.