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189 Pages·2008·6.39 MB·English
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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 © 2008 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permissions for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com 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

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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
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