Academic journal article Economic Commentary (Cleveland)

Consumer Financial Privacy and the Gramm-Leach-Bliley Act

Academic journal article Economic Commentary (Cleveland)

Consumer Financial Privacy and the Gramm-Leach-Bliley Act

Article excerpt


Federal Reserve Bank of Cleveland

By requiring financial institutions to put adequate controls in place to secure consumers' confidential data and by clearly spelling out what rights consumers and financial institutions have, the 1999 Gramm-- Leach-Bliley Act is a positive step toward ensuring consumer financial privacy. If there are no market imperfections, then competition may be relied on to efficiently sort out the competing interests of consumers and financial institutions. Alternatively, if there are market imperfections in the form of externalities, the Coase theorem suggests that the act, by clearly assigning property rights to the information, should facilitate an economically efficient outcome.

Over the last 50 years, computers and telecommunications have radically changed many aspects of life. Most of these changes have been beneficial. Cell phones allow us to remain in touch with our offices and families-of course, some would argue they also allow our offices and families to stay in touch with us. The Internet enables us to obtain, quickly and inexpensively, information that previously was time consuming, expensive, or unavailable. Increasingly, we have greater access to our financial accounts. We can check our bank balances, 401 (k) balances, and brokerage accounts 24/7.

All this activity is generating a vast amount of information, some of it personal. Except for consumers' names and ages, most information about them is created in transactions that involve at least one other party. For example, when consumers purchase new homes, they transact with the current owner, the county recorder, and usually a financial institution to obtain a mortgage. To conclude the transaction, consumers willingly release personal financial information to the other parties-but who owns the rights to that information once the transaction has occurred? Prior to disclosure, consumers have complete control over it. The problem arises when data is subsequently transferred to third parties, which, although it may benefit the party releasing it, may not benefit the consumer.

Merchants and credit providers see many potential benefits from this rising flood of personal data. Merchants, given a better understanding of household preferences as revealed by their previous purchases, could more effectively target their marketing dollars. Credit providers, given a more complete view of household finances and spending habits, could more accurately price their loans.

Not all consumers are convinced these benefits are worth the loss of privacy. When you buy a new house, for example, you may or may not be pleased to find yourself bombarded by telemarketers hawking everything from new roofs to basement waterproofing. A more serious consumer privacy problem is identity theft, a rare crime before the information age that is made easier by freer access to personal information.

The general legal principle that has evolved over the last hundred years is that data collected for one purpose should not be put to any secondary use without the provider's consent. Early applications of the secondary-use principle go back to the U.S. Post Office and the Census Bureau, and, since the 1970s, privacy advocates have vigorously promoted this principle. When privacy is viewed as a fundamental right, economics has little to offer to the debate. However, we will see that when privacy is viewed as a characteristic of a financial institution's quality of service, economics offers a number of important insights. This Economic Commentary examines the economics of consumer financial privacy and considers the implications of the 1999 Gramm-- Leach-Bliley Act.

* Privacy Provisions of the Gramm-Leach-Bliley Act

Passed in 1999, the Gramm-LeachBliley Act is remaking the financial services landscape by allowing financial holding companies to engage in both commercial and merchant banking as well as securities and insurance underwriting, removing barriers that had been in place since the Glass-Steagall Act of 1933. …

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