How to keep your shares safe from hacks and collapses

A rapid proliferation in the number of share trading platforms in the market has prompted warnings for investors to check in on the safety of their shareholdings to safeguard against a potential hack or company collapse.

The fall of major crypto exchange FTX and the high-profile hacks of Optus and Medibank have thrust data security and safety into focus at a time when Australians are increasingly trading equities on apps and other digital platforms.

The fall of major crypto exchange FTX and the high-profile hacks of Optus and Medibank has thrust data security and safety into focus.Credit:The Age

Matt Leibowitz, the co-founder and chief executive of Stake, one such online share investing platform based in Australia, says the robustness and security of the services on offer is absolutely critical.

He says investors can get overly focused on deciding on what investments to hold and not give much attention to security, but they should make sure the broker is “robust and stable” and using the best technology and infrastructure.

What’s in a name?

Chris Brycki, the founder of online investment adviser Stockspot, says the single best thing share investors can do is to invest in Australian securities in their own name.

Brokers provide either CHESS ownership of Australian securities – where you are the legal owner – or they will have a “custodial” model, where you are the beneficial owner, but not the legal owner.

That may seem like not much of a distinction but, under the custodial model, the investor relies on the broker’s ability to accurately account for your investments, Brycki says. Investors’ money under the custodian model can also be held in a single account with the money of other investors.

He says the risks with the custodial model are more than a potential delay in getting your shares back if the broker was to go under. “Your shares may be sold or transferred without your knowledge,” Brycki says.

Legal ownership

Investors with a broker using CHESS are given a Holder Identification Number (HIN), which is like a bank account number in the sense it is unique to the holder of the securities.

If something were to happen to their broker, the investors can simply move their securities to another broker that offers CHESS. Having a HIN also makes it easier to switch brokers to take advantage of lower brokerage costs, for example.

There have been failures of Australian brokers that were using a custodian model which left shareholders waiting years to recover funds.

For example, Halifax Investment Services was an Australian broker which operated using a custodian model with 12,000 customers and over $200 million on its books.

Stockspot founder Chris Brycki says two-factor authentication is also key for share investors.Credit:Dominic Lorrimer

Following its collapse and liquidation in 2018, customers were locked out of their investments and the funds only started being returned three years later, in 2021.

Under a CHESS-sponsored model, those investors would have been able to access and transfer their Australian shares to new brokers as soon as the collapse occurred.

US securities

There are dozens of online brokers offering their services to Australian retail investors. Most of them – in addition to Australian-listed securities – will also likely facilitate the trading in US-listed securities and, sometimes, trading in other foreign markets.

US-listed tech stocks are particularly popular with the mostly younger investors who opened share trading accounts during the pandemic.

The US market runs on a custodial model. The best practice is where the broker or a US-regulated entity it uses, such as a custodian, is a member of the Securities Investor Protection Corporation (SIPC) in the US.

It is an insurance scheme where each investor, including those in Australia, can claim up to $US500,000 worth of securities, including up to $US250,000 of claims for cash, if the broker was to collapse.

Even though legitimate foreign brokers with local operations will be licensed and regulated by the Australian Securities and Investments Commission (ASIC), a locally headquartered broker may be better.

This is because if the foreign-based owner of the platform fails and investors’ money disappears, there are limits to what Australian financial authorities can do to help recover your money in overseas jurisdictions.

Keep secure

Last, but not least, anyone offering a financial service that is customer-facing, not just brokers, should have two-factor authentication, Brycki says.

This is where the investors have to go through at least two authentication steps – usually their password and an additional, unique six-digit code – to access their account or make a withdrawal.

“The great thing about two-factor authentication is that even though someone might know your password, they’ll still need to access your SMS or email to tamper with your account”, Brycki says.

“Two-factor authentication gives peace of mind as it provides an extra layer of bank-level security and encryption to your account.”

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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