How can financial agreements be truly enforceable?

As we know from the PPI scandal, financial agreements can be far from air tight when it comes to being legally enforceable. Even when PPI was correctly contracted, many banks were unable to prove that the customer had seen the relevant terms or even understood them. Once one customer had successfully challenged PPI, a precedent was set for the banks to prove that they had sold it correctly elsewhere.  Yet, without a comprehensive and fully compliant process, adequate proof was difficult to come by.

As a result, the cost of PPI to the UK banking industry reached £34bn last year. The reality is that the financial sector can’t afford another PPI scandal, or the pay-outs associated with it.

For most of us, the most important agreements we sign are those of a financial nature (think mortgage, insurance, personal loans). The more that is at stake, the more important it becomes to create robust, enforceable agreements. However, the financial services sector still all too often relies on archaic agreement processes exposing businesses to huge risk. 

Manual, paper-based agreements are inefficient, prone to human error and virtually impossible to track whether a sales process was compliant. Even businesses that have digitised parts of the agreement process – such as using electronic signature or ID-verification – carry risk. A legal process does not mean it is enforceable in the event of a dispute, creating a dangerous – and expensive – precedent which can run into billions of pounds.

Digitising the entire process

Some companies have taken steps to fully digitise their agreement processes, but unfortunately few have gone far enough. There are many components that companies need to consider such as ID verification, bank checks, document checks, anti-impersonation, anti-fraud, electronic signature, and vaulting.  Integrating them as an end-to-end process is complicated. However, not doing so makes each step a potential point of non-compliance and legal risk.

The most common step in digitising the agreement process is the introduction of electronic signatures. While this offers the potential for greater efficiency, it is the other steps of the process leading up to, connecting with and following the electronic signature that ensures the enforceability of the resultant contract.

Lorna Brazell, a Partner at Osbourne Clarke, is one of the UK’s leading lawyers specialising in electronic signatures. In her March 2016 white paper ‘E-Signature, Best Practice for UK Financial Service Companies’, she highlights a number of things institutions may wish to consider when offering electronic signature to their customers, including:

Ability to prove the identity of the signer

There should be sufficient evidence not just to prove the existence of the signer, but to prove that it was the signer who actually signed. This is especially important in a ‘click-to-sign’ process.

Ability to prove what the signer saw

Whilst this sounds obvious, many electronic signature solutions are unable to reliably demonstrate what the signer actually saw during the signing process. The signature needs to be linked to the exact terms and conditions seen and read by the customer and not a representation or copy of them.

Ability to prove what happened during the signing process

One of the common sources of contractual contention is around what happened during the signing process. For example, a company needs to be able to show that all documents were presented, that pre-contractual information was available, that enough time was given and that customers had read and understood the terms. The ability to capture and replay a visual record of the signing process can help establish these things clearly and unambiguously.

Completeness and integrity of the evidential data

The electronic signature process creates, by its nature, digital evidence in the form of data. This data must be demonstrably reliable and, where multiple data sources exist (e.g. identity, contract, process), they must be demonstrably and uniquely linked. At a technical level, this means creating a single, complete ‘package’ of evidential data and applying a tamper seal to that package.

As the financial services sector is continually evolving, so must the agreement processes that businesses rely on. The need to balance increasing regulatory and compliance requirements with customer expectations is becoming more of a challenge. The demands can often seem conflicting. But with the right end-to-end agreement processes in place, there is no need to compromise between customer experience and the robust, easily enforceable contracts that the sector needs.