JULY - AUGUST THE COMPUTER LAW AND SECURITY REPORT

A case of what the Lord gives, the Lord also takes away. Yet surely the Government, with all the resources it has at its disposal, should have realised that one of the most important developments the Information Technology Age has brought about, is the potential for people to work at home. For instance the fortunes of companies like software house F. International have been founded on having teams of part- time programmers working from home. Other companies - such as Thorn-EMI - now have senior managers who are never at their desks - at the office. Instead, they work from home, with computer terminals, telecommunications, electronic mail, fax and access to on-line databases keeping them just as in-touch with the commercial world as if they commuted into the office every day of the week. Planning law unfortunately remains the Cinderella of the computer law spectrum and, not just over the issue of property use and working from home. For example various local authorities are now finding themselves faced with controversial plans for the erection of cellular radio relay masts within their areas. Whilst this seldom causes problems in urban districts, as the cellular network spreads nationwide, so more and more areas of formerly unspoilt countryside come under threat. And, looming not far in the distance is yet another potential headache - satellite television. Yes, what are planning departments going to do when faced with the

prospect of satellite TV reception dish antenna being erected in every back garden? and f inal ly ... Is the computer industry at long last raising its sights above base commercial considerations by becoming increasingly conscious of the legal controversies surrounding its activities? Last year we had a press conference (see (1985-86) CLSR in passim) at which a firm of insurance brokers claimed that some computer maintenance agreements were in fact illegal insurance contracts. Then earlier this year we had another press conference at which a third-party computer maintenance company accused computer manufacturers like IBM of hampering competition through their restrictive practices. (Shades of the ICL -v- DPCE case). Both conferences attracted a considerable number of column inches - not only to the issues they raised but also to the companies who raised them - Wigglesworth Insurance and Mills Associates to be precise. So, was this chance or coincidence? Well - and I'm sorry to disappoint any idealists - but both press conferences were the handiwork of veteran public relations man Joe Wildman, who client list includes - you've guessed it - Wigglesworth Insurance and Mills Associates.

Charles Christian, Barrister. Report Correspondent

NEW TECHNOLOGY

TECHNOLOGY AND REVOLUTION IN A CHANGING CITY To remain competitive in international financial markets London financial institutions, including the Stock Exchange, are having to adjust to a fundamental revolution. This revolution has been dubbed The Big Bang. In essence the change is twofold; firstly major alternations in membership regulations, procedures and commission charges by the City itself. Secondly, fulfillment of the Government's desire to introduce a comprehensive reform of investor protection legislation under the Financial Services Bill expected to become law by October 1986. In this article I shall concentrate on how the City is introducing new technology to cope with The Big Bang and the implications of this new technology for the new regulatory framework in the Financial Services Bill.

Financial Services On 1st March this year a change in ownership regulations in the Stock Exchange heralded the formation of financial services conglomerates. Mergers between merchants banks, jobbers, brokers and overseas banks have enabled greater capitalisation to finance technological innovations. For example the recently formed Mercury International Group comprising merchant bank S.G. Warburg, jobbers Ackroyd & Smithers and stockbrokers Rowe & Pitman are now completing the installation of 500 new integrated dealer work stations at their Finsbury Avenue offices in London. Throughout the City, firms are facing a race against time to get new systems installed and operating. If they have not developed their own in house systems they are resorting to agencies. The principal agents are FICS (Financial Clearing and Services) run by Hoare Govett and the Security Pacific Bank; and NMW-Citicorp.

The race is to be prepared for dual capacity which, from October, will allow the new financial conglomerates to deal direct with investors (buying and selling securities from their own book), or to act as agent, (putting a deal together for negotiated commission on a client's behalf). The conglomerates as market makers will be obliged to maintain firm two-way quotes (selling price and buying price of shares) at all times on an electronic quotation system - the Stock Exchange Automated Quotation System (SEAQ). Only registered market makers will be able to display prices on the SEAQ system but the screens will be limited to information dissemination; they will not be used to conduct share dealings. Deals between market participants will be arranged by telephone or on the floor of the Exchange. The SEAQ system concentrates on information on market movements in equities. Information on stock dealings or gilts will be through an inter-dealer broker system (IDM).

Investor protection The technological changes faced by individual financial conglomerates and the City at large are also the concern of the Government. The Financial Services Bill will provide a new framework for investor protection, establishing a series of regulatory bodies to inspire confidence in issuers and investors by ensuring that the financial services sector is a 'clean' place to do business. Computer malpractice is a real danger as the City becomes an attractive target for various types of fraudulent dealing within the new computer systems. Unfortunately, the Government prefers self regulatory organisations (SROs) to safeguard the investor which might lack the necessary degree of objectivity and expertise. In terms of computer systems the Government has already stated that gilt market makers must make a continuous market with two-way prices. Without appropriate technology that is

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THE COMPUTER LAW SECURITY REPORT 2 CLSR

impossible and without a proper system their licence (required from October) would be revoked. The basic requirement in the Financial Services Bill is that anyone doing investment business must be authorised either by the Securities and Investment Board (SlB) or by a self- regulatory organisation (SRO) recognised by the SIB. To do investment business without authorisation will be a criminal offence. Once authorised, a firm must comply with rules and regulations made by the relevant regulatory body, eg the Stock Exchange. Sir Kenneth Berrill, Chairman of the Securities and Investment Board, has recruited lawyers, accountants, administrators and market men to staff his regulatory organisation. Similarly the Stock Exchange has concentrated on recruiting experienced merchant bankers and dealers for its SRO. The problem is that there is a clear shortage in the City of good regulatory staff with computer expertise and as banks and brokerage houses build up their compliance teams, the self regulatory organisations face recruitment problems with their more limited funding. The rapid rise of young, less experienced operators in the conglomerates and the inevitable fiercer competition arising with The Big Bang is already causing concern that the City's self-regulation may break down and that the Financial Services Bill will be inadequate to cope with an expanded technological market. The new breed of compliance enforcers in the regulatory bodies and compliance executives in the authorised firms will need a rare combination of computer expertise and city knowledge if they are to prevent computer frauds within the City and in future international share transactions. To obtain further information on changes affecting the City see: Conduct of Business Rules for Investment Businesses - Securities and Investment Board.

Financial Services in the United Kingdom Cmnd 9432 HMSO 1984 Tel: 01-622-3316

Report of the Committee set up to consider the System of Banking Supervision - Cmnd 9550 HMSO 1985

Review of lnvestor Protection - Cmnd 9125 HMSO 1984 £9.90

Auditors Role in the Financial Services Sector - Consultative Document - Department of Trade & Industry Tel: 01-215-4249

David Yates

- - o 0 o -

CHEQUE TRUNCATION So far, the articles in this series have been concerned with existing methods of moving value around, and the trend away from paper and towards electronic techniques. This article deals with a proposed change in the way the most popular payment vehicle is processed; much as the banking industry would like to move away from the use of papel, the cheque is far too convenient and flexible in the ways it can be used for the banks seriously to be able to contemplate withdrawing it from use by customers. The industry's expectation is that new electronic techniques which are undergoing development, and some of which are very near to implementation, will result in the voluntary use by customers of less cheques (albeit aided in their voluntary decisions by incentives!), so that the vast mountain of cheques which is moved around the country daily will be eroded. In the meantime, however, any method which will ease the burden the banks have to carry in handling cheques would be

welcomed by them. Truncation (which simply means 'cutting short') of cheques is one such method.

The life cycle of a cheque The normal life of a cheque within the banking system is roughly as follows. The paper voucher is 'paid in' at the payee's account-holding bank branch on Day 1; all such cheques are sorted, batched and listed, and sent overnight to the bank's clearing department. On Day 2, cheques drawn on other banks are exchanged through the Clearing House in Lombard Street, so that at the end of the exchange each bank's clearing department is in possession of cheques drawn on its own branches; all these cheques are sorted by machine (which reads the magnetic code line along the bottom edge of the cheque), and the information is loaded into the bank's main computer for updating the customers' accounts. The sorted cheques are then sent overnight to the branches on which they are drawn. On Day 3, the drawee bank branch receives the cheques themselves, and information from the bank's computer (usually in the form of print-out or microfiche) which tells the manager what effect each of the cheques, if paid, would have on the account. Information will usually be held in the computer about chequebooks reported stolen and particular cheques the payment of which has been countermanded ("stopped") by the customer. The Manager is then in a position to examine the cheques and make decisions on their payment.

Impact of electronic methods The business of sorting and moving paper is very time- consuming and expensive; the information which is required for accounting purposes is all there in the code-line; why not just move the information in electronic form - much cheaper and easier than moving tons of paper? This is where cheque truncation comes in, by 'cutting short' the life of the paper voucher as soon as it has crossed the counter of the collecting bank (where it is paid in). In practical terms, this would mean that the modified life of a cheque would be as follows. The paper voucher would be paid-in on Day 1 for the credit of the payee's account; the amount would be 'keyed-in' and the pre-printed code line either keyed-in or read electronically at the counter; all such vouchers would then be microfilmed and/or boxed for storage. On Day 2, the electronic data on all truncated items would be exchanged between banks, probably on magnetic tape, but possibly by direct data-links. That data would be used to up-date the drawers' accounts, as now, the drawee bank manager would still receive computer-produced information on Day 3 telling them the effect of the cheque on their customers' accounts. So far, so good. But implementing such a scheme is not as easy as it sounds. The most obvious difficulty is that some customers, especially those in business, want to have their paid cheques returned to them with their statements. So perhaps those cheques cannot be truncated. If they are truncated, in which case they will be stored by the collecting banks, then either some means must be found to get them back, or the customers' requirements must be met in another way. Photographic copies might meet their needs. In many cases their need is for information rather than for the actual pieces of paper, so the provision of the necessary details from the cheques may be sufficient for their purposes. But there are more serious objections still. The bank manager's job of deciding whether to pay a cheque is nothing like as simple as merely ensuring that the money is available on the account. There is a list of about fourteen checks which need to be made - for example, is the signature correct?

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