Banks must compensate consumers for fraud losses. On Tuesday, E-Trade Financial Corp. said it is doing the same for its brokerage customers - even if they could have prevented the losses.
The New York company already reimbursed customers in about 90% of fraud cases, an analyst estimated. But E-Trade said that in the past it sometimes would not do so if the victims had not protected their account information adequately.
R. Jarrett Lilien, the company's president and chief operating officer, said Tuesday that criminals try to steal "tens of millions" of dollars from E-Trade accounts annually. He hopes security software he plans to announce by the end of March will foil 40% to 50% of those attempts, he said.
Covering losses from those that succeed will entail "a definite cost, but I think it's pretty much a no-brainer on our part," Mr. Lilien said. Customers who know of the policy will trade more, and the extra trading revenue will offset the fraud losses, he said.
Until now E-Trade challenged some fraud claims if it thought the customer had been negligent in home computer security. But this was not a strict rule, Mr. Lilien said; reimbursements were authorized on a case-by-case basis.
The new policy covers investing and lending transactions.
The estimate that E-Trade already reimbursed customers in about 90% of cases came from Avivah Litan, a vice president and research director at the Stamford, Conn., market research company Gartner Inc. She said the estimate was based on consumer surveys.
The Federal Reserve Board's Regulation E requires banks to reimburse all but $50 of money transferred out of consumer bank accounts if the victims give timely notice of the crime - even if they have not protected their account information. Most banks cover the $50 as well.
But Ms. Litan said money in a brokerage account is "not held in a Reg E-protected account." Most brokerage consumers are not "aware that they're not protected," she said.
Mr. Lilien said that if a criminal gains access to a customer's account and initiates a transaction, "then from an online brokerage's perspective you've traded or you've transferred money, and today the laws do not require that you're made whole."
Ms. Litan said E-Trade's promise to reimburse customers is "a really good policy" and will "set a standard in the brokerage industry." Other online investment companies will follow suit, she said.
An Ameritrade Holding Corp. spokeswoman, Katrina Becker, said that her company has "no specific policy" for covering fraud loss, and that such cases "can include reimbursement." Efforts to interview a Scottrade Inc. executive were not successful. A call to Charles Schwab Corp. was not returned by deadline.
E-Trade is one of the few financial companies offering their customers security tokens that create a new passcode every minute. Critics say that the tokens are cumbersome and costly, but most concede that they are effective.
Mr. Lilien said the new reimbursement policy applies to all customers, whether they are using tokens or not. He also said E-Trade's security strategy will soon move beyond tokens. The company plans to announce in March that it is using additional security tools, including some from Cyota Inc. of New York, Mr. Lilien said. (RSA Security Inc. of Bedford, Mass., which provides E-Trade's security tokens, said in December that it would buy Cyota for $145 million.)
Cathy Graeber, a principal analyst at Forrester Research Inc. of Cambridge, Mass., said she does not know if other brokerages will follow E-Trade's example, but she does think it is likely to spur debate among them.
No other prominent online brokerages allow consumers to use tokens, but E-Trade's decision last year "nudged them along" in thinking about stronger authentication technology, she said.
Ms. Graeber said that though consumers may not switch brokers because of fraud guarantees, such policies are "what consumers are looking for."
"They want to know that their financial firm stands behind them," she said.
