Electronic agreements: Why legal does not always mean enforceable

Abstract

Many banks, driven by growing competition, are looking to improve efficiency and customer experience by making onboarding and other services frictionless. At the same time, banking customers now expect a seamless, omni-channel experience, similar to the experience offered by retailers such as Amazon. The trend towards digitising the customer agreement process as part of digital banking brings benefits by reducing costs and speeding up customer onboarding processes. Ineffective technology and procedures that lack due diligence could however, provoke a new wave of customer or regulatory initiated legal action from alleged mis-selling. Whether any mis-selling is intentional or accidental, financial institutions could be vulnerable. Simple solutions favoured by banks such as eSignature are not enough — these systems need to be fully integrated and capable of handling the entire end-to-end agreement process. They must also be fully enforceable as well as being legal. As events such as the Payment Protection Insurance mis-selling scandal in the UK demonstrate, banks have recently been fined huge amounts, and suffered reputational damage owing to insufficiently robust disclosure and evidence-gathering procedures when dealing with customers. More recently, in the USA, Wells Fargo admitted that around two million phantom accounts had been created between 2011 to mid-2015, aimed at increasing the sales figures posted by the bank. As a result, it was fined US$185m, and billions of dollars were wiped off its market value. These and other cases have arisen because as they have sought to increase revenues and reduce costs, banks and financial institutions have been insufficiently focused on risk inherent in their back-end processes. Although they have mitigated risk at the ‘front door’, prompted by the action of the authorities and adverse publicity, all too often they have neglected it at the ‘back door’. As a result of these fines, increased regulation and the bad publicity that they have suffered, many banks are now reviewing and seeking to improve both their technical and administrative processes. As cases such as these emerge, there is a growing awareness among banks that they are increasing their risk by not having in place processes that are fit for purpose.