FOOL SCHOOL
Is Your Broker Safe?

October 3, 2003

While there are plenty of benefits to trading online, there are also some concerns, particularly in the light of some of the horror stories that have surfaced in the past. So, let's get up close and personal and confront these issues.

There are two main aspects to security on the Internet. One of them involves what your broker does at his end, and the other involves what you do at your end.

The broker end

At the broker end, there is encryption software, which ensures that any information that is passed between you and him is scrambled. Only someone with special decryption software and a unique key code would be able to unscramble the information and look at your account.

It's true that in the banking industry, there has been the odd cock-up, but these technical glitches are not only rare, they're invariably the bank's fault. It means they would be liable for any losses you might sustain as a result of their negligence. And hackers are far more likely to try and sabotage the broker's website than your own personal account.

Brokers have reputations to maintain, not to mention money to make! And since online broking is cost-effective for them, they are very keen to make sure it works.

They are also subjected to pretty stringent rules. Responsibility for all financial services lies with the Financial Services Authority (FSA). You can check if a firm is registered with them on their web site. There is also the Financial Services Compensation Scheme. This covers you when an authorised investment firm goes out of business or from losses that arise from bad investment advice or poor investment management. The maximum amount you can receive is £48,000, being the first £30,000 of losses and 90% of the next £20,000 of losses. In addition, many brokers also take our insurance policies which will provide you with additional protection against losses above these levels.

Your end

At your end, your responsibility is simple. Never, ever reveal your ID or password to anyone. And don't walk away from your computer while you're in the secure area of your broker's website. As long as you are careful and keep to your side of the bargain, your broker has to take responsibility for anything that goes wrong at their end.

The fact is your Internet brokerage account is much less vulnerable to fraud than your credit card is when you buy something over the phone. And have you ever thrown away a petrol receipt that happens to detail all the important bits of your debit card? Or bought a book or a CD over the Internet? Well then!

The other concern, of course, is that computer systems can crash. Either yours or theirs. You may worry that you won't be able to get online at the crucial moment. This may well happen occasionally, but don't forget there's still the old-fangled telephone for the odd emergency should one crop up.

Finally, some sensible precautions:

• Never reveal your ID or password to anyone
• Make sure your broker has a telephone back-up service in case your -- or their -- computer system crashes
• Never reveal your ID or password to anyone
• Always print off evidence of your instructions when you trade
• Never reveal your ID or password to anyone
• Ensure that your broker carries insurance protection
• You know what I'm going to say, don't you?

The very existence of the computer, in the home and at work, makes the growth of online trading inevitable. So you might as well join the rest of us and get stuck in!