Internet banking is a potential legal nightmare. “There can be as many as 200 legal systems with which any one internet banking transaction may have to comply, most jurisdictions don’t recognize on-line contract formation and internet retail banking could cost your bank billions in customer claims,” says Mark Lewis, partner at Arnheim Tite & Lewis, PricewaterhouseCoopers’ UK correspondent law firm.
Lewis adds: “Your UK internet banking transactions will need to comply with the Banking Act 1987 and regulations made under it such as the Banking Act (Advertisement) Regulations 1988, as well as the Financial Services Act 1986 and the regulations made under it, the Consumer Credit Act 1974 and the regulations made under it, the Code of Conduct for the Advertising of Interest-Bearing Accounts, the Banking Code of Practice, the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contracts Regulations 1994, the UK law implementing the proposed Directive on Distance Marketing of Financial Services and the proposed Directive on Certain Legal Aspects of Electronic Commerce in the Internal Market – and that’s just in the UK.”
Despite the difficulties, Lewis remains bullish. “Banks operate in a highly regulated market, but e-business is happening anyway. Can you afford to hold back while you worry about all of those 200 jurisdictions whose legal systems could stand in the way? It’s true that there are lots of legal barriers but you can find your way round some and minimize others.”
There are four principal areas of concern for anyone seeking to enter the e-banking market. The first stems from the recognition that a bank cannot go it alone. “Apart from banks, the parties involved include network and communication providers, technology platform providers, retailers, consultants, internet service providers and so on,” says Lewis. “The key is to decide how such interests should be represented and the optimum number to make a joint venture vehicle workable, bearing in mind the go-to-market time for e-business projects.”
Next is the need to overcome systemic legal barriers. “This is the risk that legal systems do not recognize, or else create uncertainty in, banks’ legal rights and responsibilities or the effectiveness of e-banking transactions,” says Lewis. Examples include the fact that most legal systems fail to recognize on-line contracts, digital signatures, electronic messaging and email, electronic invoicing or dematerialized financial instruments, e-cash or internet-specific payment systems, and most require there to be tangible evidence of a legally binding transaction for it to be admissible in court (for instance, to enforce it).
In the UK, for example, legislation running back to the Statute of Frauds 1677 and the Bills of Exchange Act 1882 lays down that actual signatures and hard-copy contracts are required for guarantees and bills of exchange to be enforceable. “Most legal systems effectively require higher levels of proof, such as near-conclusive audit trails, for electronic transactions,” says Lewis. “Other barriers include the lack of internationally agreed procedures for resolving on-line banking disputes and the unclear direct and indirect tax treatment of internet banking.”
There are new laws or initiatives on the stocks that will tackle some of these barriers. They include the proposed EU electronic commerce directive mentioned above, the UK electronic commerce bill (awaited as this is written) and a proposed EU digital signatures directive. “But where you can’t overcome the barriers, use risk-assessment tools to gauge the risk, then structure your e-banking business to overcome the barriers where you can and to minimize the risk where you can’t,” says Lewis, who points to “club” rules such as the EDI interchange agreement that can serve as a model for the e-banking trading community.
Then there is the service dependency/ liability risk – the risk that you and your e-banking joint-venture partners could face greater responsibility or liability than you should, either because you have accepted it or because it is imposed upon you. “This can arise because parties fail to recognize that there can be risks inherent in e-banking that are not always inherent in physical or partly dematerialized banking. In other words, it is impossible to guarantee the end-to-end transmission and receipt of electronic messages in that cloud that represents the internet in diagrams used to illustrate e-banking,” says Lewis. “You need to establish clear terms of engagement, allocating risk between parties, setting out the service dependencies and limiting parties’ liability for direct and consequential losses.” But the challenge is to make e-banking a worthwhile proposition for the customer.
The final component is the regulatory environment. “The regulatory environment presents two types of risk: that laws either in place or to be enacted will severely hamper your ability to undertake e-banking; and the risk that you will underestimate the impact of those laws or the time it can take to manage them.”
By way of example, Lewis points to the litany of UK regulations quoted above. “Again, some regulations can be overcome, some can’t. Assess the regulatory requirements at the outset, allow more time than you can possibly have imagined and structure your e-banking business to gain regulatory approval. If you can’t, then seek official opinions or other comfort or else work well within the limits of your proposed project or trade and be prepared to restructure it to fall within the legal limits.”
He points to a number of major e-banking projects that have failed because the institutions involved did not approach the European Commission early enough to get competition clearance. “There are others in which no-one had thought to consult the revenue authorities in various countries about their acceptance of electronic invoices – so putting the project back several months,” says Lewis, who emphasizes, in addition, the need to interact with the bank’s compliance, regulatory and other off-line procedures and the need to establish an e-banking rule book.
In short, as with all massive advances in the way we live and do business, the law may be slow to catch up, but that isn’t a reason for not participating.
