Academic journal article ABA Banking Journal

NEW PRIVACY RULES: "A Monumental Effort"

Academic journal article ABA Banking Journal

NEW PRIVACY RULES: "A Monumental Effort"

Article excerpt

Donald Boudreau found himself in a state of disbelief as he listened to a witness testify about privacy abuses during a congressional hearing not long ago. The witness was reciting a case in which a credit card issuer had notified an insurance company that one of the insurer's customers had gone skydiving and paid for it by credit card.

The Chase Manhattan vice-chairman thought, "That outrageous! That's not what any of us would do. That's not how we got to be as large an institution as we are." The Chase executive decided he had to speak up.

"We've got to bang the table once in a while and stop the burlesquing of this issue," the Chase executive said during a panel discussion at the recent New York Bankers Association Annual Conference.

(Boudreau knows first-hand how quickly an alleged privacy complaint can become a front-page firestorm. In January, Chase agreed to a settlement with the New York Attorney General's office regarding the alleged sale of customer information to marketers. Chase denied the allegation but quickly took steps to address the situation, and largely succeeded in defusing it.)

Fellow panelist Sanford Belden, president and CEO of Community Bank, Dewitt, N.Y., stated that banks need to vigorously make the case that they have been handling customer data on a confidential basis for centuries. And also that banks do share information with affiliates and business partners, but that this is critical to being able to offer the products and services that customers want.

ABA President Hjalma Johnson, who attended the NYBA conference, said, "Privacy is not an issue, privacy is a core value of banks." Privacy restrictions greater than what is contained in the Gramm-Leach-Bliley legislation, said Johnson, would be "a threat to our ability to take advantage of financial modernization and technology."

Final regs will be similar

The prospect of tougher privacy requirements may stir bankers' ire, but the new law's provisions alone may prove difficult to implement. In a luncheon address, Elizabeth McCaul, Acting Superintendent of Banks for New York, observed that implementing the Gramm-LeachBliley privacy provisions will be a monumental effort for banks.

The law's main requirements are deceptively simple:

* At the time of establishing a customer relationship, and every year from then on, each customer must be given a clear statement of the financial institution's policies and practices for protecting "nonpublic personal information."

* A financial institution is prohibited from disclosing nonpublic personal nformation about a customer to a nonaffiliated third party unless the consumer has been clearly notified of this possibility and given an opportunity to opt out. There are several exceptions to this requirement, including sharing information in order to effect a transaction, for purposes of fraud control, or to resolve a customer dispute.

* The act prohibits a financial institution from disclosing account numbers to nonaffiliated third parties for marketing purposes.

A NYBA conference session on privacy brought to light some of the complications inherent in the proposed regulations. Richard Fischer, an attorney with Morrison & Foerster, LLP, flatly stated that it will be impossible for any financial institution to achieve total compliance by November of this year. The sheer magnitude of the disclosure requirement alone will preclude that. Fischer cited estimates that put the disclosure mailing load nationwide at two to four billion notices. That includes not just banks, but all companies engaged in financial services.

Co-presenter Carl Howard, Citigroup's general counsel for regulatory issues, agreed that a November 2000 implementation date was impossible. He pointed out that a financial institution with multiple lines of business would likely have to create multiple notices.

Sending a notice to checking account customers will be relatively simple, the attorneys said. …

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