Back in 2016, the Law Commission launched the 13th Programme of Law Reform and sought the opinion of the general public on key issues they believe require urgent reform.
The consultation received over 1,300 submissions, covering 220 different areas of focus. Those 220 topics have been narrowed down to just 14 with the Government announcing an intention to reform the chosen areas.
Although each of the 14 topics is significant in its own right, the ones we focus on in this blog are the most important in the financial sector. They are:
- electronic signatures;
- smart contracts; and
- intermediated securities.
Reform in these areas is intended to boost ‘Global Britain’ and help to maintain, and even enhance, the UK’s competitiveness as the country leaves the European Union.
There are only a few cases which consider electronic signatures and we are yet to see a case which explicitly confirms that documents executed by an electronic signature satisfy the statutory requirements for signing. As a result, there is still nervousness that the validity of electronic signatures remains open to challenge.
Respondents to the consultation expressed particular concerns around how an electronic signature should be witnessed – look out for our upcoming Talking Finance blog ‘Witnessing well’, for more on the importance of witnessing a signature.
Seemingly, the Law Commission appreciates that we are living in an increasingly digital age and that the large extent of business is conducted online. By reforming this area of law, it will allow UK businesses to move towards a fully electronic system which will allow transactions to be completed faster and more efficiently, a change which is, arguably, long overdue. The Law Commission would look to address the uncertainty surrounding the validity of electronic signatures in all types of contracts.
Start date: December 2017
Timescale for reform: 9-18 months
These are self-executing contracts written in computer code which are able to verify the performance of contracts and can also benefit the negotiation process. Smart contracts are expected to increase trust and certainty in business. Blockchain (an example of distributed ledger technology) is probably the most widely known example of this technology as it supports Bitcoin.
Historical data written in blockchain code cannot be erased or amended, meaning that if there is a dispute over a term or a clause within a contract, there will be a time-stamped and secure record as evidence.
However, this very benefit of the technology also poses problems. For example, courts will not be able to correct any mistakes or unfairness in the contract as the complex blockchain code makes it very difficult to alter the content of a document. There are also questions about how implied terms will be dealt with, as well as those contracts which are considered void from the outset.
The Law Commission will need to carefully balance the advantages of smart contracts with the potential problems they can create.
Start date: to run alongside the reform of electronic signatures
Timescale for reform: 9-18 months
Gone are the days of only being able to hold paper certificates for shares and bonds. Increasingly now, these certificates have been replaced by systems through which investors hold securities in computerised form. These create complex relationships between brokers, banks and other intermediaries.
These digital relationships make the trading of securities more efficient and more convenient, but investors may be deprived of a remedy should they suffer a loss due to the negligence, or fraud, of the issuer where there is no direct relationship between the issuer and the trader.
The Law Commission intends to undertake a scoping exercise which will provide clarity on the current law, as well as what the Government can do to give greater legal certainty for banks, intermediaries and investors.
Start date: as and when resources allow
Timescale for reform: 12 months