Formulation of Appropriate Laws: A New Integrated Multidisciplinary Approach and an Application to Electronic Funds Transfer Regulation

189 Pages·2008·6.39 MB·English

by  Dr. Paul F. White

Paul F. White
Sardar M.N. Islam
Formulation of
Appropriate Laws:

A New Integrated
Multidisciplinary Approach
and an Application to Electronic
Funds Transfer Regulation
1 23
Formulation of Appropriate Laws:
A New Integrated Multidisciplinary Approach
and an Application to Electronic Funds
Transfer Regulation
Paul F. White Sardar M. N. Islam
●
Formulation of Appropriate
Laws: A New Integrated
Multidisciplinary Approach
and an Application
to Electronic Funds
Transfer Regulation
Dr. Paul F. White Prof. Sardar M. N. Islam
Barrister-at-Law Professor, CSES, and Director
Victorian Bar – Australia Law & Economics Program
Associate Director Victoria University
Law & Economics Program Australia
Victoria University [email protected]
Australia
[email protected]
ISBN 978-3-540-72046-1 e-ISBN 978-3-540-72047-8
Library of Congress Control Number: 2008927202
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Foreword
Formulation of Appropriate Laws: A New Multidisciplinary Modelling
Approach and an Application to Electronic Funds Transfer Regulation.

Efficient laws have profound positive social, economic, political and welfare
effects. As a consequence, the formulation of efficient laws is a central issue in the
study, practice and implementation of laws. Fragmented approaches to the
formulation of laws such as ‘comparative law analysis’ and ‘welfare economic
analysis of laws’ exist in the current literature; they even occasionally rear their
heads in the practice and implementation of laws. However, what these authors
offer and what is needed, is an integrated approach to help formulate efficient and
socially desirable laws – an approach that not only incorporates ‘comparative law
analysis’ and ‘welfare economic analysis of laws,’ but also takes into consider-
ation other various dimensions of human welfare that are affected by new laws
and legal reform. This book presents such an approach using the Electronic Funds
Transfer (EFT) regulation in Australia as its vehicle of analysis. The two-pronged
approach offered in this book can be applied to formulate efficient laws that
maximise the social welfare of the country, irrespective of social, political and
economic organisations of the country under study.
As such, this book makes several distinct contributions to the literature in law
as it:
1. develops a new integrated multi-disciplinary approach using quantitative
methods to formulate appropriate laws;
2. applies recent developments in welfare economics;
3. provides a quantitative empirical analysis of legal rule formulation;
4. undertakes a very comprehensive study of the regulatory issue of EFT; and
5. prescribes a set of appropriate, efficient, and socially desirable regulations in
an optimal regulatory framework.
VI Foreword
Given the limited number of research books dealing with this topic, this book
makes a significant contribution to enrich the literature in this area. I believe that
students, researchers, academics, practitioners, and policy makers in the areas of
law, finance, banking, economics and development management will benefit form
its scope and content. I commend the authors for this valuable contribution to the
literature in law, economics and finance.

April 2008 Professor Nicholas Mercuro
Professor of Law in Residence
Michigan State University College of Law
East Lansing, Michigan USA
Preface
The formulation of efficient laws (that is, appropriate legal rule formulation) is a
central issue in the study, practice and implementation of laws since efficient laws
have profound positive social, economic political and welfare effects. Fragmented
approaches to the formulation of laws, such as ‘comparative law analysis’ and
‘welfare economic analysis of laws’ exist in the existing literature and sometimes
in the practice and implementation of laws. An integrated approach, which
embeds these 2 approaches as well as other considerations of other dimensions of
human welfare that are affected by laws, is necessary in formulating efficient
(socially desirable) laws. In this book, such an approach is developed with an
illustrative application to electronic fund transfer regulation in Australia. This
approach can be applied to formulate efficient laws, which maximise social
welfare of the country, irrespective of the legal, social, political and economic
organisations of the country under study.
Electronic Funds Transfer (‘EFT’) as a modern, global consumer payment
method continues to expand rapidly by comparison with credit cards and
traditional paper-based forms of payment.
The core issue in EFT addressed in this book is a controversial one: the fair
allocation of liability between the consumer and financial institution in the event
of a disputed or unauthorised EFT transaction. The purpose of this study is
considered especially apposite in view of the Australian Securities and Invest-
ments Commission’s (‘ASIC’) imminent review of the self-regulating Australian
EFT Code of Conduct (‘EFT Code’) and both the increasing incidence of reported
unauthorised EFT transactions and in non-compliance by EFT financial
institutions with the EFT Code. It is also an important study because of the rapid
recent growth in EFT transaction volume and the continued expansion of EFT
products and services compared to other payment instruments, which are in a
corresponding decline. Moreover, there has been no previous study or review of
the current Australian EFT Code, which was revised in 2002.
In the EFT payments system, consumers are exposed to risks quite different
from those in traditional payments instruments. These include flaws in the various
methods employed by financial institutions for the distribution of EFT cards and
PINs, problems adducing unequivocal evidence in the event of unauthorised use of
the instrument and systemic errors and technical malfunctions in processing EFT
transactions. Furthermore, the distinct nature of electronic authentication using an
electronic device and secret code makes the general common law principles
dealing with handwritten signature authentication in the case of paper instruments
(eg, by analogy with a forged cheque) particularly unhelpful.
VIII Preface
In order to address these controversies, this book presents a new integrated
multi-disciplinary analysis of EFT regulation in Australia in an attempt to identify
the efficacy of current EFT regulatory arrangements as well as to appraise the
merits of different EFT regulatory options to attain a more optimal and efficient
regulatory regime for the future. The adapted multi-disciplines include compara-
tive law method, economic criteria and regulation theory methods, as well as
ethical, social and administrative considerations.
The two (2) EFT regulations which are the subject of this comparative study are
the Australian EFT Code and the US EFT Act. The latter was chosen for com-
parative purposes as it is a rare example of a formal legislative response to the
above core issues and risks, which the EFT system in the USA has in common
with Australia.
Unlike the US EFT Act, for example, which has a relatively simple and
administratively convenient approach to apportioning fault, the self-regulating
Australian EFT Code essentially shares the burden of proof between the financial
institution and the consumer in most instances. The consequence of the EFT
Code’s ambiguous, undefined and multi-layered legal tests and guidelines for
determining the allocation of liability to either consumer or financial institution is
that it leaves the Australian Banking and Financial Services Ombudsman, as the
independent and preferred adjudicator of Australian EFT disputes, with the
difficult and arbitrary task of hearing contrasting arguments and weighing the
inconclusive evidence led by both sides before then seeking to reach a fair and
equitable finding on the ‘balance of probabilities’. Indeed, the practical application
of the EFT Code is extremely difficult and confusing, as the Ombudsman
regularly observes in its annual reports and is almost always evident in its actual
case examples.
The task undertaken in this book to research and analyse these difficult and
complex regulatory issues is both helped and hindered by another important issue:
the lack of literature on consumer EFT regulation. Helped, because it represents a
unique opportunity to embark upon such a study afresh, and, hindered, because
little benefit can be derived from previous studies and hence there are no
foundations upon which to build or progress the debate, the research and the
analysis.
Accordingly, the significant gaps in this area provide a rare occasion to explore
these contemporary and contentious issues using the multi-disciplinary techniques
and approach proposed in this book.
As is argued in this book, the current regulatory arrangements in Australia are
ineffective on several grounds. In particular, in: (i) efficiently settling disputed or
unauthorised EFT transactions; (ii) ensuring compliance by financial institutions;
and (iii) legal enforcement of its provisions
Ultimately, in consequence of this study, it is concluded that (a) in order to design
and formulate an efficient or optimal regulatory regime, a more rigorous analysis
beyond a straight legal studies approach needs to be undertaken, and (b) to
improve consumer confidence and institutional compliance, as well as to arrest
rising fraud and illegality, there is an urgent need for a comprehensive review and
reform of EFT regulation in Australia. In this sense, the multi-disciplinary
Preface IX
research and analytic approach adapted in this study is an integrated approach with
the intention that it will not only drive the debate on an appropriate EFT
regulatory framework forward, but ultimately with its 48 findings and 25 specific
recommendations, also serve as a workable framework with some actual prag-
matic criteria on which to assess different EFT regulatory and policy options. The
proposed and applied approach is a general one; it can be applied to all legal
issues in all countries irrespective of their socio-political-economic and legal
conditions and systems.
This book will be useful to barristers, solicitors, judges, researchers, academics,
policy makers and other practitioners of law.
The authors are especially grateful for the materials and generous time and
assistance of the Federal Reserve (USA) and Australian Securities and Invest-
ments Commission (Aust.), as well as Prof Benjamin Geva.
Our special and particular thanks also go to Prof Colin Clark and Prof Neil An-
drews for their extensive comments and help with editing, together with Dr Dan-
ielle White and Alex Manzoni for their assistance with editing and proofreading of
this, our exciting and groundbreaking book.

April 2008 Dr. Paul F. White
Prof. Sardar M. N. Islam
Table of Contents

Chapter 1. Introduction........................................................................................1
1.1 Context and overview......................................................................................1
1.2 Aims of the research in this book....................................................................8
1.3 Definitions.......................................................................................................8
1.4 Research problem and conceptual framework...............................................11
1.5 Contributions of this book.............................................................................12
1.6 Research method and the new multidisciplinary approach............................13
1.7 Scope.............................................................................................................16
1.8 Outline of the book........................................................................................17
1.9 Conclusion.....................................................................................................17
Chapter 2. The EFT System and Regulatory Framework...............................19
2.1 Prior literature and its limitations..................................................................19
2.2 Emergence of EFT.........................................................................................23
2.3 Risks in the consumer payments system.......................................................25
2.4 Regulating liability for unauthorised EFT transactions.................................27
2.4.1 Historical perspective: a comparison with cheques.............................28
2.4.2 Written terms and conditions of use....................................................29
2.5 Evolution of the EFT code of conduct...........................................................31
2.6 Australian Securities and Investments Commission (‘ASIC’)......................33
2.7 Australian Banking Industry Ombudsman (‘ABIO’)....................................37
2.8 Code of Banking Practice..............................................................................38
2.9 Relevant legislation: the ASIC Act and the Trade Practices Act...................39
2.10 Background and scope of the US EFT Act....................................................44
2.10.1 Unauthorised use...............................................................................45
2.10.2 EFT errors and malfunctions.............................................................46
2.10.3 Dishonours.........................................................................................47
2.10.4 Disclosure of terms and conditions....................................................47
2.10.5 Other provisions of the US EFT Act.................................................48
2.11 Conclusion....................................................................................................48