Alan L Tyree

Regulating the payment system - Part 2 - consumer protection

Alan L Tyree*

1  Introduction

Consumer protection in the payment system context takes two distinct forms. The most direct form is the usual direct control over the content of contracts made between large powerful organisations and consumers. The problem here is the usual one of unequal barganing powers and the modern tendency for lawyers to attempt to exempt the stronger party from all liability and responsibility.1

The other form of consumer protection is less direct. Depositors are seldom in a position to make an informed analysis of the financial stability of the financial institutions with which they deal. Further, it is recognised that depositors may be “small” and particularly vulnerable to the collapse of the financial institution. Australia, in common with most countries, gives some priority to the claims of “depositors” when the financial institution collapses.

This article will discuss both forms of consumer protection in the current Australian context.

2  Terms and conditions

The need for consumer protection in payment system contracts is a relatively new phenomenon. When cheques were the only widely used third party payment mechanism, consumer protection was provided by the nature of the banker-customer contract.

The reason for that was that the banker-customer contract was not imposed by either of the parties. As is well known, the terms of the contract were unwritten, meaning that they were defined by a series of common law cases. In other words, it was the common law judges who wrote the banker-customer contract governing the terms and conditions of use of the cheque system.

In Australia, that all changed with the introduction of electronic funds transfer. To their discredit, the early operators of the EFT system imposed contractual terms that were grossly one sided and unfair. Conclusive evidence clauses were widely used and, when coupled with a tenatious belief that their systems were infallible, led to the customer bearing all the losses for unauthorised transactions.

The unfair terms led to consumer interest groups calling for legislation to remedy the imbalance. Legislation was not forthcoming, but finally the government brokered a “voluntary” Electronic Funds Transfer Code of Conduct. It was voluntary only in the “Godfather” sense of being a offer the institutions could not refuse, for the government made it abundantly clear that legislation would follow if the Code was not volutarily accepted.

The Code was, and is, far from perfect in operation. It has gone through several revisions, and the latest review noted that there is a need for a new or revised Code to cover new payment systems.2

Monitoring the effectiveness of the Code was the responsibility of the Australian Payments System Council until its abolition in 1998. Following the reorganisation recommended by the Wallis Committee, monitoring the Code is now the responsibility of the Australian Securities and Investment Commission (ASIC). It is understood that ASIC is currently working on a new version of the Code.

2.1  Application of the EFT Code

Until such time as the Code is reviewd and extended, its application is limited to those transactions “intended to be initiated by an individual through an electronic terminal by the combined use of an EFT card and a personal identification number (PIN)”.3 Thus, a transaction initiated through a home computer is probably not covered by the Code since it does not use a card. A transaction initiated by a “smart card” will probably not be covered since it does not require a PIN.

There are other anolomalies. A smart card could require a PIN for certain transactions. For example, it might be a sensible security measure to require a PIN for transactions exceeding some reasonable floor limit. When such a card is used for a “large” transaction, the Code applies, but when it is used for a “small” transaction, the Code does not apply. Similarly, some transactions initiated through a home computer could require the insertion of a card. These transactions would then be covered by the Code.

It is not possible to simply extend the application to all electronic transactions since the requirements of the Code are not “technology neutral”. For example, cl 4.1 of the Code provides detailed instructions on the issue of receipts. Surprisingly, the Code does not specifically require “paper”, but it is clear that this is the intent. The requirements are inappropriate for a transaction initiated from a home computer or from a prepaid smart card.

2.2  Consumer protection administration

Until the passage of the “Wallis legislation”, payment transactions were subject to the consumer protection provisions of the Trade Practices Act 1974. Following those changes, “financial services” are now governed not by the TPA, but rather by the Australian Securities and Investment Commission Act 1989 (ASICA).

Since ASICA seems to mirror the TPA’s consumer protection provisions, it might seem that this change is minor. Consumer complaints governed by ASICA are dealt with by the Australian Securities and Investment Commission (ASIC) rather than by the Australian Competition and Consumer Commission (ACCC), but presumably the principles applied will be the same. Indeed, it is believed that most of the personell with experience in the EFT/financial transaction area have transferred from the ACCC to the ASIC.

Section 12A(3) provides that ASIC has the function of monitoring and promoting market integrity and consumer protection in relation to the payments system. Included in these powers are the powers conferred by Part 2, Division 2 “Unconscionable conduct and consumer protection in relation to financial services”, the sections of ASICA that mirror the familiar provisions of the TPA.

This tidy little scheme is ruined by the definition of a “financial service”. Such a service (a) consists of providing a financial product; or (b) is otherwise supplied in relation to a financial product.4 A “financial product”, so far as relevant to a payment system, is (a) a facility for taking money on deposit (otherwise than as part-payment for identified services) made available in the course of conducting a banking business within the meaning of the Banking Act 1959.5

“Banking business” is, for the purposes of the Banking Act 1959, “(b) a business that is carried on by a corporation to which paragraph 51(xx) of the Constitution applies and that consists, to any extent, of: (i) both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money; or (ii) other financial activities prescribed by the regulations for the purposes of this definition”.

Note that a business is not “banking business” unless it includes both taking money on deposit and making loans.

A cheque facility is obviously a “financial service” so that consumer complaints should be directed to ASIC. On the other hand, a prepaid smart card facility run by a company other than a financial institution is clearly not a “financial service” so that consumer complaints should be directed to the ACCC. Other payment systems may or may not fall within the definition of a “financial service”. Is a bill paying service operated by X, not a financial institution, a “financial service” if it results in the debit of a consumer’s account with a bank and a credit to the bank account of the payee?

This splitting of responsibilities was clearly not intended. It is an unfortunate consequence of the decision to “mirror” the consumer protection provisions rather than to address directly the issue of administrative responsibility.

2.3  Fitness for purpose

A payment system must conform to the requirements of s74 of the TPA or s12ED of ASICA, depending upon whether it is a “financial service”. In particular, the payment system must be “reasonably fit for [the] purpose” and might be reasonably expected to achieve the result expected.

I have recently argued at greater length that this requires the terms and conditions of a payment system to be at least as generous to the consumer as those required by the EFT Code of Conduct.6 If this is correct, then many clauses in recently developed payment services are in breach of the relevant Act. This applies, in particular, to those clauses that make conclusive presumptions about the origins and authoriity of a message.7

3  Indirect consumer protection

Many countries provide consumer protection in the form of deposit insurance. Deposit insurance is, on the one hand, a recognition of the obvious fact that consumers are ill-equipped to evaluate the risk of institutional insolvency. On the other hand, deposit insurance gives an unfair competitive advantage to those institutions covered by the insurance and, it is argued, actually promotes institutional irresponsibility.8

In any case, Australia has chosen not to provide deposit insurance for Authorised Deposit Taking Institutions (ADIs). However, Division 2 of the Banking Act 1959 provides for “Protection of Depositors”. Section 12 imposes a general duty on APRA to exercise its powers and functions under the Division for the protection of depositors. The powers and functions given to APRA are threefold:

Neither “deposit” nor “depositor” is defined in the Act. However, “deposits” held in an account are a loan from the customer to the ADI: Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002. The “account” need not be a current account, and, indeed, there seems no logical basis for denying the status of “deposit” to any loan made to an ADI. The result, of course, gives ADIs a competitive advantage in fund raising.

4  Dispute resolution

Consumer disputes are characterised by the relatively low value of the amounts disputed. Consumers simply cannot afford to resort to court action as a remedy.

The various financial industry Codes of Conduct establish dispute resolution schemes. If the consumer has a dispute with a bank, he or she may take the compaint to the Banking Industry Ombudsman, the most elaborate of the dispute resolution mechanisms. The Australian Association of Permanent Building Societies has developed a model based on mediation and expert determination. There are four separate Credit Union Schemes14

The Australian Payments System Council has examined the schemes, evaluating and comparing them along the following dimensions:15

The Council found differences between the schemes in almost every dimension. It is obviously undesirable that there should be serious differences in dispute resolution schemes when the services offered are the same.

5  Conclusion

The consumer protection regime for payment systems in Australia is fragmented. Similar transactions attract different levels of protection. Similar payment instruments are regulated by different bodies. Similar disputes are subject to resolution by different schemes.

The highest level of consumer protection is probably given to those transactions covered by the EFT Code of Conduct. However, as is well known, the operation of that Code is far from perfect.

Consumer protection in the payment system probably requires a complete rethink and overhaul. ASIC is said to be reviewing the EFT Code of Conduct with a view to making it “technology neutral”, but even the most optimistic observer would not expect a result within the year. Most consumer organisations consider that the existing Code has been too heavily influenced by the desires of the institutions, and there is fear that any revised Code will incorporate this influence.

This is not an argument for the development of a “perfect” consumer protection scheme. Such a goal is not only impossible, it is also counter-productive since the search for perfect often results in overlooking the good. There should, however, be an effort to rationalise the existing structure, and we have every right to expect that the magnitude of this effort should be as great as that which went into reforming the financial system.

Consultant, Mallesons Stephen Jaques, Sydney; formerly Landerer Professor of Information Technology and Law, University of Sydney.
This may be too harsh on modern lawyers. After all, exemption clauses in bills of lading at the end of the 19th century provide the extreme example.
Electronic Funds Transfer, Report by the Treasury and Australian Competition and Consumer Commission on the operation of the EFT code of conduct, March 1998
Clause 1.1, EFT Code of Conduct.
ASICA, s12B(1).
ASICA, s12B(1).
Tyree, “Section 74 TPA and payment services” (1998) 9 JBFLP 304.
In this context, note also the Electronic Transactions Bill 1999, cl 15, adopting a recommendation of the Electronic Commerce Expert Group that the usual rules of attribution apply.
Admittedly, this is usually argued by people who carry substantial insurance themselves.
For a full discussion, see Australian Payments System Council Annual Report 1996/97, pp41-48.
Australian Payments System Council Annual Report 1996/97, pp 41ff