ISSUE IS SHARING FINANCIAL INFORMATION: IT’S 50 STATES VS. ONE CONGRESS

With Congressional approval of landmark financial deregulation virtually in the bag, the industry is poised to share private customer information among affiliates. But 50 states are already gearing up to cut the legs out from under that new power.

The legislation likely to be OK’d allows customers to prevent financial companies from sharing information about them — but only with unaffiliated companies. Consumer groups denounce the bill as not being strong enough in protecting confidential information.

But the bill also specifically allows states to enact stricter standards. As a result, financial services companies may be forced to pay through the nose to comply with a host of different regulations.

In practice, a person whose bank certificate of deposit is maturing might get a cold call from a broker at the bank’s securities affiliate trying to persuade him to roll his money into, say, a variable annuity.

Massachusetts and California already are considering legislation that would force financial companies and others to get express permission from customers before their affiliates could use the customers’ private information, and a bill in Wisconsin would flatly prevent companies from sharing information.

Says Kurt Bauer, director of government relations for the Wisconsin Bankers Association, which opposes the bill: “Somebody has a horror story out there and a legislator says, ‘O my God, we’ve got to do something about that,’ and they don’t understand the consequences. Sometimes politics and good policy do not match.”

In September, 23 state attorneys general sent a letter to House and Senate members working on the financial services bill, which would allow all financial businesses to engage in any financial business.

The letter expressed concern “that the privacy provisions of the act specifically allow practices that will further erode the rights of consumers to exercise some degree of control over their financial and medical records.”

The financial industry, which has been going through a wave of mergers in recent years in large part so it can cross-market to customers, says such efforts would make it extremely difficult for them to conduct their business.

“Given that Congress has decided not to put a strong privacy standard on the books it is very likely that this issue will surface repeatedly at the state level,” says Travis Plunkett, legislative director of the Consumer Federation of America in Washington.

Alluding to the bill’s affiliate info-sharing provision, Mr. Plunkett said, “This is why a wide variety of organizations have said that these protections are virtually meaningless. They look good on paper.”

Supporters of stronger privacy provisions included conservative Sen. Richard Shelby, R-Ala., and more liberal members, such as Sen. Richard Bryan, D-Nev.

Mr. Plunkett criticized Congress for not mandating a consumer opt-out provision, allowing consumers, for example, to check a box on a form to prevent information sharing. “A number of abuses that have occurred recently have been among affiliates.” he says.

He pointed to the 1995 case against the former NationsSecurities.

The subsidiary of NationsBank was found by the Securities and Exchange Commission to have sold risky, unsuitable investments to elderly customers after receiving information about the customers from its parent. NationsBank, now part of Bank of America Corp., was fined $6.75 million, and it paid $30 million to settle a class action filed in Texas in 1995.

tough proposal in mass.

Gov. Paul Cellucci, a Republican, is pushing legislation in Massachusetts that not only would require all companies to get approval from customers to share information with any entity in order to market products, but also would allow consumers to freeze the release of their credit reports — except to existing creditors.

In addition, consumers could delete any information about themselves from databases operated by “individual reference services” such as check-clearing services.

The legislation, if enacted, would be the furthest-reaching in the nation.

“Our concern is the people opting out will of course be the dishonest people,” says Jon Hurst, president of the Retailers Association of Massachusetts in Boston, which is leading a diverse coalition of companies opposing the bill. The bill also would allow people to close their credit bureau files to prevent “identity theft,” in which criminals misappropriate people’s identities to run up credit card charges.

Mr. Hurst says that would prevent retailers from issuing instant credit cards and would slow credit approvals to renters and car buyers, among other problems.

The bill also would force companies doing business in the state to change their procedures for Massachusetts residents.

“You are talking about potentially a crazy quilt here if a lot of states do this, and a totally separate system for the state of Massachusetts,” Mr. Hurst says.

David Veator, acting director of the Massachusetts Office of Consumer Affairs and Business Regulation, dismisses the concern about bad actors shutting off credit reports.

“That decision could be made by each consumer with the full knowledge that if you close your credit file, you’re not going to get any more credit.” He said it was aimed at older people who have few credit needs and who may be targeted by thieves.

Speaking of the bill, Mr. Veator says, “The idea is that consumers who are undertaking a transaction with one entity don’t have an expectation that that entity is going to be sharing that information with some other entity. The consumer should have the right to control what happens to their information.”

The Wisconsin bill would prohibit financial companies from sharing information about customers without even allowing them to permit such sharing.

pie in the sky?

“It’s unrealistic,” says the Bankers Association’s Mr. Bauer. “It shows a complete lack of understanding of how a bank or the financial industry works.” Unlike the other bills, this legislation appears to be stalled in the Republican assembly.

But, Mr. Bauer predicts, “We’re going to have many more than this.”

A bill introduced in California would require businesses to get permission from customers before releasing any information to affiliates or other companies.

James Clark, vice president of state government relations at the California Bankers Association in Sacramento, says that would hit banks particularly hard because they are required by law to separate subsidiaries within financial holding companies.

He also thinks the problem has been overblown. “If I’m doing business with Bank of America, I don’t think most people are offended when they receive a solicitation from Bank of America.”

He also thinks a single federal standard should be enacted because businesses are “operating in an interstate environment now. Do you really want each state adopting a separate standard so you have this compliance nightmare?”

Regardless of the bill’s language, Steve Judge, senior vice president of government affairs at the Securities Industry Association in Washington, argues that the federal legislation “doesn’t make it any worse than it already was… The states have always been able to enact privacy standards that govern transactions within their own state.”

He also says the federal legislation “gives the industry a very good argument to make in state capitals, an argument they didn’t have before, that the federal government has already taken a look at this and the states don’t need to pass legislation.”