The COVID-19 pandemic is disrupting the e-commerce landscape and will have a lasting effect on how businesses conduct online transactions in a post-pandemic world. While e-commerce has been around for a long time, COVID-19 has forced regulators, market participants and businesses alike to pivot and adapt to the current environment. This, in turn, has set off a wave of changes as businesses or sectors that were slower to adopt e-commerce – perhaps because of a more traditional sales force, customer comfort levels, or heightened fraud risk – have had to quickly adopt digital and remote processes, or else be forced to completely shut down.
However, as we discussed in detail in our on-demand webinar, “Financial Services Regulatory Webinar Series – Episode 1 – COVID-19: Looking Ahead”, we expect that once the immediate threat of COVID-19 has passed, these organizations may see the benefit of keeping some or all of these emergency processes in place. E-commerce initiatives may be more efficient, lead to greater opportunities, and having diverse sales channels may mitigate the impact of future business interruptions.
Limitations of the existing e-commerce framework
Each province in Canada has enacted e-commerce legislation, which, except in Québec, is relatively standardized because it is based on the United Nations Model Law on Electronic Commerce. These laws facilitate electronic transactions by stating that a document should not be denied legal effect or enforceability simply because it is in electronic form. They also set out functional equivalency rules, which allow certain legal requirements – like a requirement that a document be signed – be fulfilled using electronic methods.
There are some limitations to the e-commerce framework, including the following:
- There are some important exclusions from the application of e-commerce laws, including documents that create or transfer an interest in land and that require registration in order to be effective against third parties. This means that not all mortgage documentation may be in electronic form.
- There are additional statutory requirements or practical considerations that mean e-commerce is not a viable alternative to paper-based processes, particularly for asset-based financing.
- Fraud risks are heightened in a non-face-to-face environment. Further, entities that are subject to Canada’s anti-money-laundering laws are required to verify identity, as specified under these laws and in accordance with regulatory guidance. Traditionally, regulated entities have required in-person ID verification in order to mitigate these risks and comply with these laws.
COVID-19 as a catalyst for change
COVID-19 has highlighted these limitations and in that respect, has acted as a catalyst for change, particularly in those sectors where e-commerce has not been prevalent.
The e-commerce regimes typically exclude documents that create an interest in land from the application of the law, putting in doubt the enforceability of documentation and fulfilment of legal requirements. In addition, land titles registries often only accept wet signatures or have other formalities that make remote, electronic-based processes an impossibility. Although not all documentation relating to a mortgage transaction “creates an interest in land,” or must be registered with land titles, the result is that a seamless electronic experience is typically not possible.
As a result, mortgage lending has lagged behind other types of lending in terms of digitization initiatives. While people still need to buy and sell homes and other real property, physical distancing protocols mean it is often not possible to fulfil the necessary formal requirements. Legislators have attempted to address some of these limitations by enacting temporary measures that are intended to apply for the duration of the state of the emergency in the jurisdiction. For example, the Minister of Service Alberta issued a ministerial order temporarily allowing the Alberta land titles office to register documents that have been witnessed, sworn, or affirmed by lawyers using two-way videoconferencing. It will be interesting to see if there will be industry pressure to implement more permanent remote processes in connection with real properties in Alberta or in other provinces. Beyond COVID-19, these remote processes may streamline the customer experience and facilitate transactions with people in remote communities.
Motor vehicle sales and leasing
Digitization in motor vehicle sales and leasing is possible, but had not been widely adopted by the sector pre-pandemic, in some cases due to legal limitations. Traditionally, dealers have supported the in-person sales model, but faced with COVID-19 restrictions, dealers have been required to look at other alternatives. Regulators such as the Ontario Motor Vehicle Industry Council (OMVIC) and the Alberta Motor Vehicle Industry Council (AMVIC) issued dealer bulletins in response to issues arising from the pandemic. Both bulletins confirmed that online sales were permitted, although noting that the legal requirements under motor vehicle dealer and consumer protection laws must still be adhered to.
OMVIC also clarified that remote test drives are permitted and that the vehicle can be taken to the customer’s home for that purpose, provided the test drives are conducted by a registered salesperson. Delivery of the vehicle can also be made to the customer’s home, provided that the contract was completed beforehand. This proviso relates to the general requirement that all trading must take place at the dealership or be fully online in accordance with the requirements under the Motor Vehicle Dealers Act. In contrast, AMVIC noted that registered salespersons may deliver contracts to a consumer’s home for signature, although the bulletin does not seem to consider whether these would be direct sales, which trigger different legislative requirements than online sales.
Finance companies, banks and others who purchase conditional sales contracts and leases that are originated by dealers should take note, as increased online activity and adoption by dealers may open up new business opportunities in a post-COVID-19 world.
There have been recent developments in ID verification pertaining to the requirements under anti-money laundering (AML) laws that could have important implications moving forward. Entities that are subject to Canada’s AML laws will be aware that in July 2019, the Canadian government finalized amendments to the regulations that included changes to permit reporting authorities to rely on digital copies of photo ID, provided they are authentic, valid and current. Before this change, ID documents had to be original, valid and current, with the result that entities couldn’t rely on photocopies or scanned documents.
Guidance published by FINTRAC in November 2019 sets out fairly specific requirements that must be met in order to be able to authenticate and rely on electronic copies of ID documents. In brief, the entity must use a technology that is capable of assessing the authenticity of the photo ID that is being used. The reporting entity must also confirm that the individual presenting the photo ID is the same person whose name and photo are, in fact, on the ID. This could be achieved through a live video chat, or the person could take a selfie and the entity would apply facial recognition software to compare the features of the selfie to the photo on the authenticated ID.
COVID-19 has sped up the need for this type of ID verification - and for the technology to facilitate it - and we expect to see further adoption of this type of process moving forward. Of course, the issue of fraud will always persist, and reporting entities will want to ensure that privacy and security issues are considered and addressed. This will include conducting due diligence on any third-party service provider providing a technology, as well as requiring such third parties to contractually agree to comply with privacy and security obligations.
So what does all of this mean for e-commerce moving forward? Below are some key takeaways:
- Assess, evaluate: Look at your organization and consider whether any temporary changes will benefit your business in the long term. For example, if you’re a mortgage lender, there may be a strong case to looking at opportunities to lobby for electronic methods for witnessing documents and filing documents.
- Leverage technology: Take advantage of the current legal regime to the fullest – Do you need to do face-to-face ID verification? Can you see a path forward using technology that will satisfy FINTRAC’s expectations?
- Look ahead: Organizations that move past this flurry of change and focus on long-term goals maybe better positioned in the post-pandemic world.