This disciplinary action illustrates the emphasis that regulators place on adequate systems and processes and on the perennial struggle by firms to ensure that technology actually produces the expected compliance outcomes. It also underscores the importance of robust recordkeeping and that an adequate review of the records gathered is very much part of that essential compliance process.

And, as with anything connected to compliance, systems and processes also require good people to build, maintain and, most crucially, to supervise them. This looks like a case of a firm that scaled rapidly and then ran into trouble because its compliance systems and resourcing were not prepared for the operational reality of that growth.

Compliance checks

FINRA’s investigation found that the automated system the firm had implemented to handle the approval of customers for options trading was not designed or programmed well. The system “considered only information that a customer provided in his or her most recent options suitability questionnaire” and didn’t compare this information to other information submitted by the customer to the firm.

This fundamental flaw undermined the suitability of the system to screen customers. A customer could, for example, claim three years of trading experience, for example, despite not being old enough to actually possess that experience (customers must be at least 18 to open a brokerage account). A customer, previously rejected by the firm as unsuitable, could file a new application and be approved without the system reviewing or incorporating any previous applications into its approval rationale. Customers who indicated no investment experience were still approved by the system, despite not being eligible to trade options.

Effectively anyone with enough chutzpah and persistence could eventually be approved to trade using Webull’s investment platform because the system did not limit the number of applications any customer could submit, always only reviewing the latest one in isolation.

The firm compounded the system issues by not supervising or auditing it adequately. Of the thousands of accounts opened each month, fewer than 100 were manually reviewed.

Complaints system flaws

In addition to the troubles with customer vetting and on-boarding, FINRA found serious flaws in connection with complaints handling by the firm.

The firm captured written communications from customers and utilised a lexicon to help identify those that constituted complaints. This lexicon was overly restrictive and did not flag or escalate all complaints. When it comes to supervision the usual problem is an excessive number of red-flagged entries, but in this instance the obverse was true. In December 2020, for example, the firm received over 88,000 messages from customers and only 15 of these were flagged as customer complaints by the lexicon.

These are statistics that most compliance and management teams might have considered too good to be true. As a result of the problems with the lexicons as well as inadequate policies in place, the firm also continuously underreported complaints to FINRA between May 2018 and December 2021.

Also, during the time in question the firm grew rapidly, but it’s customer service teams did not keep up. The example cited by FINRA will be familiar to anyone who has in the past interacted with customer service teams at many companies struggling with communication volume: “… on August 17, 2020, a customer wrote to the firm that he could not withdraw money from his account. Over the course of 25 days, the firm informed the customer that the issue had been fixed six times, only for the customer to respond each time that he still could not withdraw funds. Then, the firm closed the customer’s service ticket while his complaint remained unresolved.”

The reaction of customers to these service levels was predictable. According to the FINRA complaint, 46% of calls by customers were abandoned with another 12% dropped. For context, a 2% abandonment rate is seen as good with 5% being deemed acceptable in the industry. Unsurprisingly FINRA deemed this a failure to reasonably supervise the customer complaints system.

And finally, the firm failed to maintain a central place where all options-related complaints could be stored, identified and retrieved.

As a result of these failings, in addition to a sizeable, $3m fine, the firm has been censured and will be required to fix all of the compliance and supervisory problems identified during FINRA’s investigation within 180 days. The firm has accepted and consented to FINRA’s finding without admitting or denying them.