The Risks of Using an Unregulated Tech Platform to Invest in US Stocks

There Investing in US stocks interests you. You have come across a plethora of options. Some of these devised themselves as technology platforms with no regulatory licenses. They may even have a few tie-ups with other larger brands who also send their clients over. Should you consider these?

If you invest in the Indian markets, would you consider investing through an unregulated fintech platform? That charges you brokerage but isn’t a broker? Chances are that you won’t.

So why invest through just a technology platform for your overseas investments?

Technology platforms are unregulated. So if things turn sour, you don’t have recourse to a regulator.

Here is a simple example:

You choose to invest in shares of Facebook and the transaction goes through. But the price doesn’t match what you expected it to. What do you do?

You can make a fuss about it and say that you will complain. But the tech platform can just raise its hands. They don’t have any complaint redressal mechanisms. If you face a problem, you can’t raise it with the regulator. Infuriating, to say the least. There could be many more such examples.

However, if the same issue happened with a regulated entity like Winvesta, we have a clear complaints redressal process mandated by our regulator – the FCA. We have to adhere to this and provide our responses within a specified time. If this doesn’t satisfy you, you can always raise it with the Ombudsman to look into the issue.

The kinds of protection technology platforms offer and why they are not enough

Let’s say you want to start diversifying your investment portfolio by exploring the US stock market. 

Often, all platforms providing you access to US stock markets will tie up with a US stock broker and rely on the regulatory license of this executing broker. Nothing wrong with that, but here’s why it can be tricky: 

There is no obligation on a technology platform to protect the client’s interest by any regulation. They leverage the third-party broker’s regulatory license to give you minimal comfort by stating that the investor’s assets are protected under the SIPC protection of $500,000. 

Why do we call it minimal? Because these are insolvency protections that the US regulator provides if the executing broker goes bust. The Securities Investor Protection Corporation (SIPC) extends this protection only when the executing broker has become insolvent and doesn’t cover the issues you may face as part of business-as-usual. This would also make you question, what if the technology platform becomes insolvent? 

The user needs to know that the self-directed investment execution through a technology platform has no protection available to the investors nor is it under a regulatory obligation to protect the client’s interest by strictly following a complaint redressal mechanism. 

You may even come across disclaimers like: “XYZ has represented to us that it is neither a broker nor an investment adviser but is only a platform provider that enables investments in a diverse set of global assets from a single account from anywhere in the world. Therefore, XYZ makes no warranties or representations, express or implied, on products and services offered through its platform nor does it accept any liability for any damages or losses that may be caused in connection with the use of related services“.

The challenge with such disclaimers is that they protect the technology platform and not the client when a dispute arises. Such disclaimers and actions tend to be a mechanism for deception and misdirection.

As these platforms aren’t legally obligated to offer any complaint redressal mechanism they are not client-centric. This acts against the investor’s interest, as traditionally, local brokers must service customer complaints, while technology platforms don’t.

Conclusion

It is necessary to know that if you wish to invest in US equities from India, you have to do it either through a regulated platform, or those which have proper grievance redressal mechanisms. Complaint redressal mechanisms should be clearly stated on the websites. If it is absent, chances are the platform is unregulated. For those who are still thinking of investing through an unregulated platform, here’s a statutory warning – Do not try this at home!

Also read: What are the investor protections you should look at while choosing to invest overseas

All content provided by Winvesta India Technologies Ltd. is for informational and educational purposes only and is not meant to represent trade or investment recommendations. Remember capital is at risk. Terms & Conditions apply.