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September 2, 2013

Cyber Crime: Who Pays?

By Gregory Bresiger

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Brokerages must prepare for increasing amounts of cyber crime attacks.

Cyber-fraud experts and clearing industry officials say that when cyber-crime happens, the problem is primarily the responsibility of the financial institution involved. The broker-dealer is usually socked with most of the costs. It also has to face the potential destruction of a business by malicious hackers, according to fraud experts.


So the financial services industry has become a preferred target of cyber-criminals, say executives of clearing brokerages that are studying the issue.

First Clearing and others in the financial services industry are issuing these warnings. They are saying that cyber-crime is becoming a massive threat to brokerages, as well as to exchanges and, indeed, the entire financial services industry. In a white paper, First Clearing says there were around $388 billion in cyber-fraud losses in 2011. And that makes cyber-crime "larger than the global markets in marijuana, cocaine and heroin combined," according to the paper, titled "Getting Serious About Cyber Risk." 

The report calls for firms to adopt the "four pillars" of risk management. These services, which First Clearing and others are offering, include educational support, consulting, educational events and technology tools to stop cyber fraud.

The report also calls for brokerages to candidly evaluate their vulnerabilities and how they will respond to hackers' attacks.

See Chart: PWC U.K Crime Findings

"The best, most effective way to measure or implement an appropriate security posture," the report says, "is to undertake a guided third-party risk assessment. If an attacker were probing your defenses today, are you comfortable you would even know?"



Cyber-crime constitutes about half of all the fraud reported in the financial services sector, according to a 2012 worldwide survey by PricewaterhouseCoopers UK. About 44 percent of financial fraud is cyber-fraud, according to the survey, which had around 4,400 respondents.

"It is scary. It's hard to look at those facts and not have some level of concern," said Chris Valenti, who coordinates the Information Service Initiative for First Clearing.

"The risk is urgent for all businesses," added First Clearing chief risk and quality officer Al Caiazzo.

Valenti said that part of the problem is that it is much easier to attack a system than to defend. "However, it is not impossible. Defending is a layered thing. It is not just throwing up one big wall," he said.

One critical element of defense is convincing the industry of the seriousness of the problem, especially smaller and midsize brokerages, industry experts say. Indeed, one surprising result of the PwC UK poll is that about half of the senior executives surveyed don't know if cyber-fraud is a problem at their firm. 

Acknowledging the potential risk is critical, industry experts say.