The electronic signature law, passed in October, is opening new avenues of business for financial institutions but also uncorking worries about the types of liabilities they would face if security were compromised.
The Electronic Signatures in Global and National Commerce Act, which gives digital signatures the same legal standing as paper signatures, creates financial and reputational risks for financial institutions, said speakers at the E-Signatures 2000 conference sponsored by Thomson Financial Media this week in Washington.
"If something goes wrong, it's not just the monetary liability," said John L. Burke, a senior partner in the Washington office of Foley, Hoag & Eliot LLP, a Boston-based business law firm. "It's the reputational risk you're going to have to deal with as well."
Threats to their reputations are a crucial matter for financial institutions, which count on trust in their brand names to give them an edge over newcomers to the financial services arena.
"Frankly, we're excited and nervous at the same time," said Parker Foley, vice president of certification authority for First Union Corp. in Charlotte, N.C.. "It opens up a world of opportunity, and a lot of opportunities as well for crooks. One little slip has enormous rippling effects, so it makes us very nervous."
There is reason to be nervous, said Benjamin Wright, a lawyer and co-author of "The Law of Electronic Commerce," a book on the legality of electronic contracts. Mr. Wright told what he called a cautionary tale about a lawsuit filed last year against E-Trade Group Inc. by Kate Nyquist.
Her husband, John, a day trader whose penchant for the stock market had spun out of control, tried to kill her in April 1999 by pushing her off a second-story balcony of their Mount Pleasant, N.C., home.
His wife, the former president of Scott Foresman, now the educational publishing division of Pearson Education, accused E-Trade of negligence and recklessness that she said had helped lead to the crime.
Ms. Nyquist contended that E-Trade should have intervened when her husband forged her signature and made unauthorized withdrawals from her E-Trade individual retirement account. As for the attempted killing, she and authorities said Mr. Nyquist had hoped to collect on her $500,000 life insurance policy to pay off a trading debt.
Mr. Nyquist pleaded guilty to assault and battery with intent to kill is now serving a five-year prison sentence.
"The case brings up an important issue - the conflict between spouses," Mr. Wright said. "When you as an institution are doing business long-distance with someone you don't see, how do you really know who you are doing business with? We need to have mechanisms that counteract this type of problem."
Liability and the e-signature law is a primary focus of Identrus, a New York-based banking consortium launched last year to address trust and risk barriers affecting e-commerce. Joseph Steele, a senior information technology lawyer for ABN Amro, one of Identrus' eight founding banks, said it is "exceptionally difficult" for banks to agree on how to deal with liability around the e-signature law. "All of us hope someone else is taking liability for most of this stuff," he said.
Mr. Burke, the Washington lawyer, said consumers also need protection. Regulation E, a 21-year-old federal rule, protects them by capping their liability at $50 in the event of theft, misdirected payments, and other problems occurring when funds are transferred electronically. The rule has greatly assisted the growth of the credit card industry, he said, and the same type of safeguard is needed to facilitate electronic signatures.
Mr. Foley of First Union, cautioned financial institutions against jumping into new technology.
The absence of legal precedents involving E-Sign law makes a slow and steady approach the best strategy, he said. "I'd appreciate it if some of you would get sued," Mr. Foley said jokingly to the audience at the convention, "so I could watch the cases."