[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107- 990
FINANCIAL PRIVACY AND
CONSUMER PROTECTION
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
THE GROWING CONCERNS OVER THE WAY CONSUMERS' PERSONAL AND FINANCIAL
INFORMATION IS BEING SHARED OR SOLD BY THEIR FINANCIAL INSTITUTIONS
__________
SEPTEMBER 19, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
U.S. GOVERNMENT PRINTING OFFICE
90-808 WASHINGTON : 2003
_____________________________________________________________________________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Linda L. Lord, Republican Staff Director
Dean Shahinian, Counsel
Daris D. Meeks, Republican Counsel
Mark F. Oesterle, Republican Counsel
Sarah E. Dumont, Republican Professional Staff
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
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THURSDAY, SEPTEMBER 19, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 2
Senator Stabenow............................................. 3
Senator Akaka................................................ 26
Senator Corzine.............................................. 27
Senator Carper............................................... 41
WITNESSES
William H. Sorrell, Attorney General, The State of Vermont....... 4
Prepared statement........................................... 46
Fred H. Cate, Professor of Law, Indiana University School of Law. 8
Prepared statement........................................... 53
John C. Dugan, Partner, Covington & Burling; on behalf of the
Financial Services Coordinating Council........................ 11
Prepared statement........................................... 57
Mike Hatch, Attorney General, The State of Minnesota............. 14
Prepared statement........................................... 62
James M. Kasper, Member, House of Representatives, The State of
North Dakota................................................... 17
Prepared statement........................................... 65
Phyllis Schlafly, President, Eagle Forum......................... 21
Prepared statement........................................... 69
Edmund Mierzwinski, Consumer Program Director, U.S. Public
Interest Research Group; on behalf of: Consumer Action,
Consumer Federation of America, Consumer Task Force on
Automotive Issues, Consumers Union, Electronic Privacy
Information Center, Identity Theft Resource Center,
Junkbusters, Inc., Privacy Rights Clearinghouse, Private
Citizen, Inc., and U.S. Public Interest Research Group......... 23
Prepared statement........................................... 72
(iii)
FINANCIAL PRIVACY AND
CONSUMER PROTECTION
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THURSDAY, SEPTEMBER 19, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:07 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
This morning, the Committee meets to hear testimony on the
issue of financial privacy and consumer protection. At the very
outset, I want to acknowledge the interest and the contribution
which Senator Shelby has made regarding this issue and I am
pleased to be working with him on it.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Sarbanes. During the past few years--even longer,
actually--there have been growing concerns over the way
consumers' personal and financial information is shared or sold
by their financial institutions. In 1999, when we did the major
revision of the structure of the financial industry, after
considerable debate, we enacted certain Federal privacy
protections, although many perceived them as not to be fully
adequate to the challenge, and therefore, financial privacy
remains a critical issues.
The amount of sensitive personally identifiable financial
information that, under current Federal law, can be circulated
is vast. It includes savings and checking account balances,
certificates of deposit maturity dates and balances, any check
which an individual writes, any check that is deposited into a
customer's account, stock and mutual fund purchases and sales,
life insurance payouts, and other data. The universe of
consumer data that the financial institutions can collect,
warehouse, and then either share or sell is
increasingly growing, some think at a very rapid pace. Modern
technology makes this sharing cheaper, quicker, and easier than
ever before. I think the real issue is that much of this is
done without the knowledge or the approval of the customer
regarding the specific information being transferred or the
specific affiliated or nonaffiliated company to whom it is
either being sold or shared.
Financial privacy is in many respects a fundamental right
that all consumers should enjoy. And obviously, if that is the
case, if it is not adequately protected, we can have abuses.
Recent reports and surveys indicate the public's ongoing
concerns. Dr. Alan Westin of Columbia University, who heads
Privacy and American Business, wrote this year: ``Both on and
off the Internet, consumers are more concerned about privacy
today than they have been at any point over the past 2 years.''
A survey published this year by that group and sponsored by the
AICPA and Ernst & Young found that 79 percent of respondents
agreed with the statement: ``Consumers have lost all control
over how personal information is collected and used by
companies.'' The same survey found that the number of
respondents who disagreed with the statement: ``Existing laws
and organizational practices provide a reasonable level of
protection for consumers today.'' That was the statement, that
existing laws and practices provided a reasonable level of
protection. The number disagreeing with that statement has gone
from 38 percent in 1999 to 62 percent in 2001.
We obviously need to address the issue of whether consumers
should have the right to choose whether his or her bank or
other financial institution may circulate private financial
information to others for purposes that the consumer may never
have originally intended.
At today's hearing, we will hear testimony with respect to
a number of questions: Do consumers continue to be concerned
about their financial privacy, the privacy of nonpublic
personally identifiable data held by financial institutions?
What types of concerns do consumers have about the possible
uses of their financial information? Are the minimum financial
privacy protections in Federal law adequate to meet the
consumer's concerns? What recommendations would panelists make
to the Committee regarding financial privacy protection?
We have a number of very able witnesses with us this
morning. In a sense, I apologize for the breadth of the panel,
but we had many people that we wanted to hear from. I think
what I will do, in view of that, is I will introduce each
witness as we come to them, rather than introducing them all
here at the outset because, by the time we get to the last
witness, they may have forgotten what was said about them.
[Laughter.]
So before I begin the process of going to the witnesses, we
thank all of you for coming today, we very much appreciate your
participation, I yield to my colleagues for any opening
remarks.
First, I turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. Thank you for
calling this hearing. And I also want to thank you for your
long-time interest and work in this area. We worked together on
a number of initiatives dealing with financial privacy and I
believe we will continue to work those issues because the more
I see and talk to the American people, most of them do not
realize what is going on yet. But they are learning. And
hearings like this certainly help.
Mr. Chairman, the subject of financial privacy is one that
is very important to all of us and requires the Committee's
thorough consideration, as you realize.
I want to thank the witnesses for taking the time to come
here to share their views and experiences with us. And I look
forward to hearing from all of you.
This issue of privacy is not a new one. In one way or
another there has been an ongoing debate about privacy since
the founding of this country. However, the issue has clearly
evolved over time as a range of specific incidents and general
trends have raised public concerns about new or different
threats to our privacy. Where once only the Government
possessed the ability to obtain and the means to exploit vast
amounts of personal data, technology now makes it possible for
just about anyone to collect, to store, to sell, or to do just
about anything that they want to with a lot of our private
items.
I believe that the existence of such capabilities requires
that we carefully, here in the Congress, examine the pros and
cons of its use relative to the disclosure of personal
information. Furthermore, as we move forward, I think it is
extremely important that we continue to pay close attention to
the significant role that technological capability is going to
play in this debate. Consumer and industry demand for faster
and more reliable information exchange is only going to
increase. As technological capabilities are expanded to keep
up, new and unforeseen issues concerning the use of sensitive
personal financial information I believe will continuously
arise.
While it may not be possible to develop rules that deal
with every possible scenario involving the use of confidential
financial information, I believe the American people will
demand that we establish some basic principles that will guide
our future efforts.
In order to do this I believe that it is important for this
Committee, the Banking Committee, to draw from a broad range of
perspectives in considering the basic questions regarding the
various Federal laws touching on financial privacy. For
instance: Are such laws effective? Are they targeted to
consumer concerns? Do consumers even understand them? I am
going to ask that again: Do consumers even understand them? Are
they in sync with today's marketplace? What restrictions do
they place on business activity?
Additionally, in light of the fact that the States play an
important role in this area, I think it is also essential for
us to gain a better understanding of their efforts and to
consider some basic questions about their activities. For
instance: Do State officials have a greater perspective or
awareness regarding the trends or concerns about financial
privacy? What value is provided by preserving a State
legislative role, thanks to Senator Sarbanes? What value is
provided by preserving strictly a State enforcement role? How
does State activity impact the financial services industry?
It is my hope that this is just the first, Mr. Chairman, of
what I hope are a whole series of opportunities to consider
this issue. I look forward to a productive and informative
dialogue here and I thank you for this hearing.
Chairman Sarbanes. Thank you very much, Senator Shelby.
Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. And to you and
to Senator Shelby, thank you for your leadership.
I think this is one of the most important issues that we
face as we move forward at this time, and I appreciate the fact
that we have so many people willing to share their expertise
with us today.
This is a topic that, in our increasingly sophisticated
world, is one that consumers are extremely concerned about, as
has been indicated. We know that our financial decisions can be
recorded, analyzed, shared, and sold, and consumers want to
know that they have a basic level of privacy. We all want to
know that we have that basic level of privacy.
When we passed the privacy provisions of Gramm-Leach-
Bliley, we were breaking new ground. We gave the public a
certain degree of control, but not as much as many would have
liked. And since the Act was passed in 1999, the regulators
have had the opportunity to set standards, as we know, and
financial institutions have been complying with the law.
Now it is appropriate to reflect on that legislation and
how it is being implemented and where we should go from here.
Is it sufficient? Is it being implemented effectively? As
Senator Shelby said, do consumers really understand their
privacy rights? Are the annual financial privacy disclosures
effective or simply thrown away with all of the other things
that come in the mail? What are regulators doing to make sure
that these disclosures meet the spirit of the law?
I also believe it is important to look at States, as
Senator Shelby was mentioning. I know there have been a number
of serious debates going on in States. In particular, there has
been a lot of focus on North Dakota and California. I suspect
the discussions will continue, from Sacramento to my hometown
of Lansing, Michigan, to Annapolis, all across the country,
this will become more and more of a debate and discussion, as
it should.
So, Mr. Chairman, thank you again for what I think is a
very important hearing. I hope this helps us lay a foundation
as we move into the next Congress to focus on this issue, which
I know is of deep, deep concern to the American public.
Chairman Sarbanes. Thank you very much, Senator Stabenow.
We will now turn to our panel. We will first hear from
Attorney General William Sorrell, who has been the Attorney
General of the State of Vermont since 1997. Attorney General
Sorrell is the Vice President of the National Association of
Attorneys General and Co-Chair of its Consumer Protection
Committee. Earlier, he served as Vermont's Secretary of
Administration.
Mr. Attorney General, we are very pleased to have you here.
STATEMENT OF WILLIAM H. SORRELL
ATTORNEY GENERAL, THE STATE OF VERMONT
Mr. Sorrell. Thank you very much.
Chairman Sarbanes. I think if you pull that microphone
close to you, it will be helpful to all of us.
Mr. Sorrell. Good morning.
Chairman Sarbanes. That is better, yes.
Mr. Sorrell. Thank you for inviting me to speak with you
today on the important issue of financial privacy.
The State Attorneys General are grateful for the work of
this Committee on this important consumer issue and we
especially want to commend Chairman Sarbanes and Senator Shelby
for working so hard to address these issues in a bipartisan
fashion.
As this panel of witnesses demonstrates, concerns about the
privacy of consumers' financial information is neither a
Democratic issue, nor a Republican issue. It is not a liberal
issue, nor a conservative issue. Rather, it cuts across
traditional party and philosophical lines to touch all of us
who are concerned about protecting our citizens.
The Chairman did indicate that I am the Vice President of
the National Association of Attorneys General. But I want to
make clear for the record that I am here for myself and
representing my Office of Attorney General for the State of
Vermont.
I am not here purporting to speak for the entire National
Association of Attorneys General.
Chairman Sarbanes. As they say on those ads that they put
in the paper when they get all those academics to sign and give
their institutions, just for the purpose of identification.
[Laughter.]
Mr. Sorrell. Thank you very much, Mr. Chairman.
[Laughter.]
Along with my esteemed colleagues on this panel, I am here
today to tell you that the privacy provisions of Gramm-Leach-
Bliley are not working. Although this Committee worked hard to
enact provisions to eliminate the abusive practices that were
uncovered by the State Attorneys General in 1999, in fact,
these practices are continuing largely unabated.
I strongly recommend that this Committee undertake a
thorough examination of the effects of Gramm-Leach-Bliley and
the related regulations implemented by the Federal regulators
in order to determine whether the law, as interpreted by the
Federal agencies, carries out your intent. I believe you will
find that it does not do so. I also believe you will want to
enact strong provisions to correct problems that have arisen
under Gramm-Leach-Bliley.
What are some of these problems that consumers are facing?
First and foremost, the unfortunate telemarketing practices
that were uncovered in 1999, by Minnesota Attorney General
Hatch are continuing. The U.S. Bancorp case demonstrated that
major financial institutions were facilitating abusive
telemarketing by selling their customers' account numbers and
other nonpublic personal
financial information to vendors, who then turned around and
sold consumers memberships in travel clubs, gardening clubs,
esoteric insurance products, often through improper use of
information provided by the financial institution.
This Committee wanted to put a stop to such practices, and
so prohibited financial institutions from sharing account
numbers. But the Federal agencies responsible for interpreting
the law allow financial institutions to share or sell encrypted
account numbers or other unique identifiers, thereby giving the
telemarketers essentially the same access to consumers'
accounts as before.
So just as was the case prior to Gramm-Leach-Bliley, an
eager telemarketer, paid on commission, is able to convert a
consumer's ambiguous statement of interest into a purchase. The
telemarketer simply informs the financial institution that a
charge should be processed on that consumer's account. The
telemarketer doesn't need the actual account number because the
bank will convert the encrypted number or unique identifier
into the account number for processing the charge. The consumer
doesn't know how the charge appeared on her account since she
never gave out her account number. In many instances, she
doesn't even know she made a purchase.
This Committee should undertake a thorough investigation of
these continuing abusive telemarketing practices and afford
greater protection to consumers in this regard.
Gramm-Leach-Bliley is also not working because the notices
required under the law are fundamentally incomprehensible to
too many consumers. My written testimony fully covers the
surveys and studies that demonstrate the dense writing of these
notices, as well as the correspondingly high reading levels
required to understand them.
I thought, and with the Committee's indulgence, that I
might just take a moment to read just one paragraph from one of
these notices. This should serve to give the Committee a flavor
of what consumers face in trying to decipher these notices and
the excerpt I will read is from the American Bankers
Association model, Gramm-Leach-Bliley privacy policy notice,
that it sent out to its members for use in their notices.
And in that notice, and I believe the average American
household received roughly eight or more of these notices,
under the heading, What Information We Disclose, if you get
down in the body of the notice, here is what you find:
We may disclose nonpublic personal information about you to
the following types of ``affiliates'' (i.e., companies related
to us by common control or ownership) and ``nonaffiliated third
parties'' (i.e., third parties that are not members of our
corporate family). Financial service providers, such as
mortgage bankers, security brokers-dealers, and insurance
agents. Nonfinancial companies, such as retailers, direct
marketers, airlines and publishers. And others, such as
nonprofit organizations.
If you prefer that we not disclose nonpublic personal
information about you to such nonaffiliated third parties [with
respect to this loan or account], you may opt-out of those
disclosures, that is, you may direct us not to make those
disclosures (other than disclosures permitted by law). If you
wish to opt-out of disclosures to nonaffiliated third parties,
you may call the following toll-free number.
I hope I have made my point.
It stretches credulity to think that average consumers can
readily work their way through these obtuse notices and reach a
basic understanding of their rights to control the sharing of
financial information. And then to make informed choices in
this regard.
This is exactly why the Attorneys General of 44 of the
States and territories recently called on the Federal
regulatory agencies to
create standard notices to require much simpler language so
that consumers can more readily understand the notices.
This Committee should give serious consideration to
requiring standard privacy notices similar to the nutritional
notices that are required in the Federal Nutritional Labeling
and Education Act.
This Committee had the wisdom to ensure that States would
have the authority to go further than Gramm-Leach-Bliley to
enact more protective laws governing financial privacy.
We hope the Committee will continue to allow States to
protect their citizens as they see the need to do so. Indeed,
several States had enacted more protective laws governing
financial privacy prior to the adoption of Gramm-Leach-Bliley.
Because consumers continued to be very concerned about the
protection of their personal financial information, States have
continued to adopt laws that are more protective than Federal
law.
Currently, there are six States that have enacted laws that
require some form of opt-in before financial information can be
shared by banks, and 14 States have enacted laws that require
some form of consumer consent before financial information can
be shared by insurance companies.
As my co-panelist, Representative Kasper, will describe,
North Dakota voters recently adopted a referendum reversing the
State legislature's repeal of that State's opt-in law, thereby
putting that State's banking opt-in law back on the books. In
addition, two California localities, San Mateo County and Daley
City, have recently adopted ordinances requiring affirmative
consumer consent before financial information may be shared.
These State and local laws are a reaction to the problems
associated with Gramm-Leach-Bliley and an effort by these
governments to exercise the power given them by this Committee
under Section 507, to provide consumers with protections
greater than those afforded under Federal law.
The sharing of financial information among corporate
affiliates remains another real concern. Should a consumer who
opens an account with Citibank, for example, expect that, for
purposes of ``preacquired account marketing,'' her account
number will be shared with Travelers Insurance or any of the
other 2,761 affiliates within Citigroup? The number and the
breadth of affiliates currently associated with some of the
country's major financial institutions is truly astounding.
In addition to the Citigroup's 2,761 affiliates, the web
site of the Federal Reserve lists 1,476 corporate affiliates
for Bank of America, and 871 affiliates for KeyCorp, which is
considered to be a mid-size bank.
A perusal of these corporate affiliate lists demonstrates
that these holding companies appear to be involved in widely
disparate activities, including insurance, securities,
international banking, real estate holdings and development,
and equipment leasing.
So a consumer holding a credit card with the lead bank or
an insurance policy with a major insurer in any of these
affiliate groups would not expect that his or her account
number would be spread throughout the corporate affiliate
structure for the purpose, not of servicing the consumer
better, but of marketing products to the consumer.
This Committee should require that financial institutions
give consumers an effective choice before nonpublic personal
financial information can be shared among affiliates.
Moreover, the Congress should direct that the standard
financial privacy notices to be created by the Federal
regulatory agencies contain a standard format for information
about affiliate-sharing practices and consumers' choices to
prevent such sharing.
Mr. Chairman, I referred to the following documents* in my
written and oral testimony. I would like to have them submitted
into the record: Affiliate lists for Bank of America,
Citigroup, and KeyCorp; a report from my office and our
Department of Banking and Insurance; an interim report to the
Vermont legislature on financial privacy; the final of such
report; and the American Bankers Association sample privacy
notice. I hope those and my written testimony will be accepted
into the record.
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*Held in Committee files.
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Chairman Sarbanes. They will be held in Committee files.
Mr. Sorrell. Thank you very much for this opportunity.
Chairman Sarbanes. Thank you very much. We very much
appreciate hearing from you.
We will now turn to Fred Cate, Professor of Law at the
Indiana University School of Law in Bloomington, Indiana, and a
Senior Policy Advisor at the Hunton & Williams Center for
Information Policy Leadership.
Professor Cate.
STATEMENT OF FRED H. CATE
PROFESSOR OF LAW
INDIANA UNIVERSITY SCHOOL OF LAW
Dr. Cate. Thank you very much, Mr. Chairman, distinguished
Members of the Committee. I appreciate the opportunity to be
here.
I should offer the same qualification as my distinguished
colleague, which is, of course, that my comments do not reflect
the views of Indiana University.
One would like to think that the University would have the
good sense that they would.
[Laughter.]
But in any event, the University would want me to clarify
that they do not necessarily.
There is much to say, but I will do my best to limit myself
to four points and try to make those as briefly as possible.
First, there is no doubt but what consumers are concerned
about financial privacy. It seems like there is no room to even
debate that question. I think the issue is what do we make of
that concern and what would this Committee and the Congress do
in response to that concern?
I, for one, do not find that concern tremendously
surprising. Consumers should be concerned about financial
privacy. They should be concerned about privacy in many areas
because, frankly, many of the most effective and, in some
cases, the only effective, steps to protect an individual's
privacy are individual actions. They are not protections
afforded by law. They are not protections afforded by policies
or technologies, but, rather, the things that an individual
himself or herself will do.
So given that we have just had a deluge, twice now, of more
than two billion privacy notices, given the attention given
this issue in the press, it would, I think, be surprising if
there weren't consumer concern about this issue, and I think
that concern is largely healthy.
Clearly, it is not healthy to the extent that it represents
lack of knowledge about either banking practices or the law,
and I will
return to this in my conclusion.
Second, in addition, however, to looking at the presence of
consumer concern, we also have to look at consumer action. And
what we know is that in response to tens of thousands of
financial institutions, mailing billions of privacy notices,
the opt-out rates seem to be consistently less than 5 percent.
Many institutions report opt-out rates of 1 percent or less.
This is true, by the way, not only in financial privacy.
This is true with the FCRA opt-out provisions. This is true for
the DMA's opt-out provisions. This is true for many companies
that report what their specific industry opt-out rates are. A
low response rate is very consistent.
So before encouraging the Congress to adopt new laws or
more restrictive privacy laws, it seems important to first
understand why consumers aren't taking advantage of the rights
that they currently have under existing law. Before giving new
rights, why are the current rights not being used?
Third, another reason for concern about going forward with
more restrictive privacy laws on either the State or Federal
level is, of course, that information serves many valuable,
irreplaceable functions in this economy and in the society.
This point seems so obvious that I do not want to belabor
it here. It has been much written about. And probably the most
articulate spokespeople coming from the Federal Reserve Board.
Let me just offer one quote from Governor Gramlich:
``Information about individual's needs and preferences is the
cornerstone of any system that allocates goods and services
within an economy.'' The more such information is available,
``the more accurately and efficiently will the economy meet
those needs and preferences.''
This seems particularly true in the case of affiliate-
sharing. The number of affiliates which have been referred to
certainly could give one pause. But I think it is worth noting
that research shows that companies do not create affiliates
just for the opportunity to create affiliates, that affiliate
relationships are often driven by tax or liability issues, by
regulatory requirements, by any number of State licensing
issues.
The question then of whether affiliate-sharing of
information should be permitted or restricted would
necessarily, if made a legal issue, require that companies
describe in detail their affiliate relationships to their
customers.
It is difficult to imagine how even the best-intentioned
privacy notice, if required to describe those relationships in
detail, could ever be comprehensible to anybody, to anybody
here or to anyone likely to receive those notices.
Interfering with those benefits of information flows, of
course, impose costs on consumers. There are also additional
costs, however, imposed by privacy laws, and I think this
Committee is well aware of and I think that this is very
relevant to the question of whether more restrictive privacy
laws seem appropriate.
We know that the cost of complying with Gramm-Leach-Bliley
has been measured in the range of $2 to $5 billion a year for
financial institutions, cost that are, of course, passed on,
either to the customers directly or to shareholders, and
indirectly to customers.
These costs, however, are much greater. Experience and
research in this area are consistent and, without exception,
show that costs are much greater when a privacy law imposes a
greater restriction on information-sharing, for example, opt-
in. In fact, most of the available research on opt-in statutes
in practice show that if they require contacting a consumer
after the consumer has engaged in the transaction, after the
consumer has opened the account, after the consumer has sought
service, an opt-in statute effectively works as a ban on
information flows that, in practice, the result is no consent
and no opportunity to share information.
I want to be clear, however.
I think that those costs should be measured not only in
dollars, but also would encourage the Committee and would
direct the Committee's attention to the other types of costs
that that can impose. And here research is particularly
informative.
Even a subject like informing consumers about
opportunities, marketing, which seems to meet with very little
support in any public forum today, nevertheless, is of obvious
importance to many consumers and especially those less likely
to have, for example,
financial advisors, less likely to be well-endowed financially.
We know, for example, that greater information restrictions
disproportionately affect poor and also people located away
from urban centers. This, of course, is also especially true
with opt-in.
I have mentioned in my written testimony and I will not
belabor now a case study that economist Michael Staten and I
did of just one financial institution, MBNA Corporation, and
what the cost of opt-in would be on MBNA's customers. Those
costs are significant and I would encourage the Committee to
pay close attention to the consistent evidence of how great
those costs can be, especially since, to use MBNA's numbers for
the period of the case study, 2000 to 2001, fewer than one
quarter of 1 percent of MBNA customers had opted out. So
imposing any additional costs, given that fewer than one
quarter of 1 percent had found the protection necessary, would
seem dubious, at best.
Remember, and I will quote here Alabama Attorney General
Bill Pryor, it is customers and individuals who ultimately
``pay the price of either higher prices for what they buy or in
terms of a restricted set of choices offered them in the
marketplace, for restrictive privacy laws.''
Finally, I think it is important to keep in mind the larger
context in which this debate is taking place.
Gramm-Leach-Bliley passed in 1999 and notices were required
to be mailed, the first set, by July 1, 2001. Only 14 months
has passed during that time and we have seen significant
changes and developments that would strike me as very positive
in that time.
While the issue of consumer confusion has already been
noted, I think it is important here to return to the question
of why notice is needed to be improved, why the developments of
the past 14 months, in fact, warrant approval rather than
disapproval from this Committee.
Remember the law itself is very complex. If you have ever
tried to explain it to anyone, you appreciate how complex the
law is. The terms used, for example, in the ABA model notice
that was previously read, largely came from the law and from
the implementing regulations.
If you want simple requirements to be explained to
consumers, you will have to enact simple requirements. And in
this area, that is very, very difficult. So, for example,
distinctions between consumers and customers, which are so
important to the law, do not make much sense to ordinary
people. It is difficult to understand these.
It should also be noted that clarity seems to be very much
in the eye of the beholder.
I had the experience on June 18, 2001, of appearing before
the California General Assembly Committee on Banking and
Finance, where the Committee Chairman lauded American Express
for the clarity of its notice. In fact, he passed out copies to
everyone in the audience, so, as he said, industry
representatives could live up to the model set by American
Express.
Three weeks later, on July 9, 2001, USA Today cited
American Express' notice as one of the least comprehensible it
had read.
There is much going on. There are market responses. We are
seeing banks and other financial institutions offering privacy-
related cards and other privacy-related services. We are seeing
the quality of notices being improved, the Federal Trade
Commission working to improve that quality. We are seeing new
types of privacy protections, many from the States, such as do-
not-call lists.
In the absence of evidence of harms not being addressed by
the current law, not just Gramm-Leach-Bliley, but the full
range of Federal and State financial privacy laws, it seems
inappropriate, or at least premature, to move forward with more
restrictive privacy requirements.
Thank you.
Chairman Sarbanes. Thank you very much, sir.
Now, we will hear from John Dugan, appearing today, I think
it is fair to say, actually, representing the Financial
Services Coordinating Council. I do not know that we will need
a disclaimer here.
Mr. Dugan. No disclaimer.
Chairman Sarbanes. The Council includes the American
Bankers Association, the American Council of Life Insurers, the
American Insurance Association, and the Securities Industry
Association. Mr. Dugan is a partner at Covington & Burling,
here in town, and I must note, previously worked here on the
Banking Committee staff as Minority General Counsel when
Senator Garn was a Member of the Committee.
We are very pleased to hear from you, Mr. Dugan.
STATEMENT OF JOHN C. DUGAN
PARTNER, COVINGTON & BURLING
ON BEHALF OF THE
FINANCIAL SERVICES COORDINATING COUNCIL
Mr. Dugan. Thank you, Mr. Chairman, and Members of this
Committee. It is a pleasure to be back here today.
As you said, I represent the Financial Services
Coordinating Council, and this organization represents
thousands of large and small banks, insurance companies, and
securities firms that, taken together, provide financial
services to virtually every household in America. I have
represented the FSCC on financial privacy issues since the
organization was formed in late 1999.
Every commercial privacy law strikes a balance between
protecting the privacy interests of consumers and preserving
the clear consumer benefits that arise from the free flow of
information in the economy. While consumers expect limits on
the disclosure of their information, they also expect companies
to provide them with benefits that can only be obtained through
information-sharing. For example, a long-time depositor in a
bank wants and expects to receive a discount on a mortgage loan
offered by a related mortgage company affiliate, and such
``relationship discounts'' can only be provided through
information-sharing. Privacy laws try to balance these
competing consumer expectations.
In terms of financial privacy, we believe that Congress
struck the right balance in the Gramm-Leach-Bliley Act.
Financial institution consumers now must be provided notice of
practices regarding information collection and disclosure, opt-
out choice regarding sharing of information with nonaffiliated
third parties, security in the form of mandatory policies,
procedures, and controls, and enforcement of privacy
protections via the financial regulatory agencies.
By any measure compared to 3 years ago, consumers have much
more meaningful information, choice, and security regarding
their financial information.
At the same time, the GLB Act appropriately allows
financial institutions to share information for a variety of
plainly legitimate purposes without consumer consent, for
example, to carry out transactions requested by the consumer,
to deter and detect fraud, to respond to regulators and
judicial process, et cetera.
The FSCC also continues to support Congress' decision to
treat information-sharing by affiliates in the same manner as
sharing within a single institution. In both cases, the opt-out
requirement does not apply, as has already been stated. We
think this decision reflected the fact that consumers are
unlikely to distinguish between, for example, a community bank
and its affiliated mortgage lending company. Instead, consumers
expect that both affiliates are part of the same community
banking organization where information is shared.
Finally, we also continue to believe that Congress
appropriately chose to provide consumers with the right to opt-
out of information-sharing with third-party commercial
companies.
But Congress also rightly chose to reject an opt-in
approach, which deprives consumers of benefits from
information-sharing, as Professor Cate just described.
Consumers rarely exercise opt-in consent of any kind, even
those consumers who would want to receive the benefits of
information-sharing if they knew about them. In essence, an
opt-in creates a default rule that stops the free flow of
information, and that makes financial services more expensive
and inefficient. In contrast, an opt-out gives privacy-
sensitive consumers just as much choice as opt-in, but without
the default rule that denies consumer benefits.
In terms of implementation, the Gramm-Leach-Bliley privacy
provisions were enacted in 1999 and implementing regulations
became effective just over a year ago. While tremendous
progress has been made, this is still very much a work in
progress.
Nevertheless, the financial institutions and their
regulators have received a minuscule number of customer
complaints about the privacy provisions. For example, in
response to a recent Freedom of Information Act request, the
Federal Reserve reported that it had received only 25 privacy-
related complaints out of the 4,503 complaints in total that it
received in 2001, or .0056 percent of the total, with similarly
low numbers reported by all the other Federal bank regulators.
Having said that, the FSCC recognizes that privacy notices
constitute one area in which improvements can and should be
made. This is by no means as easy as it sounds, however,
because the notice requirements of the Gramm-Leach-Bliley Act
are, in fact, quite detailed, as we just heard. The financial
institution regulators tried very hard when they issued their
regulations to simplify, including through the use of sample
clauses, and they told institutions that a notice complying
with the GLB Act could fit on a six-page, tri-fold brochure. In
their first notices, financial institutions generally took this
approach. But a six-page notice is not short, and terms from
the sample clauses such as ``nonaffiliated third-party'' and
the other terms that were quoted earlier this morning are the
types of legalese that have been sharply criticized.
To address these concerns, many institutions have tried to
simplify the language used in their next round of notices. In
addition, both financial institutions and their regulators are
exploring a simplified, short-form version of the notice that
would supplement, but not replace, the longer legal notice
required by the Gramm-Leach-Bliley Act. The basic idea is to
use simplified terms, be much less legalistic than the longer
notice, keep the length to one page, and use common language to
make it easier for consumers to compare policies.
The FSCC is leading one of the short-form notice projects
in which we have hired a well-known language expert, and we
have nearly completed the initial drafting phase.
Let me now turn to the misunderstanding about the amount of
State legislative action that has occurred since passage of
Gramm-Leach-Bliley.
During this period, no State legislature has adopted a
comprehensive financial privacy statute that has exceeded the
obligations of the Gramm-Leach-Bliley Act. Nearly 40 States did
consider such privacy legislation in 2000, the year after the
law passed, but no such statute was enacted. About half that
number revisited the issue in 2001, again without final action.
And this year, only California has come close to enacting a new
law. But for the third time in 3 years, the legislature has
chosen not to do so.
We recognize the initiative in North Dakota which we will
hear about and the action by regulators, but not legislatures,
in New Mexico and Vermont. But taken together, these few
actions simply do not constitute a groundswell of State action.
The FSCC believes the States' diminished focus is due
largely to an increased understanding that the Gramm-Leach-
Bliley protections are real and need some time to work, and
that it is more complicated than it first seems to impose new
restrictions without causing major unintended consequences.
In terms of new Federal privacy legislation, we believe
that any action that Congress considers should be targeted to
specific harms rather than take the form of sweeping data
protection restrictions. For example, if the harm to consumers
that people care about most is identify theft or excessive
telemarketing, then legislation should remedy these problems
specifically and not impose broad restrictions on information-
sharing. The FSCC stands ready to work with public policymakers
to address specific consumer harms.
Let me emphasize, however, that the FSCC could not support
any new financial privacy legislation that did not include
Federal preemption to ensure a uniform national privacy
standard. The FSCC also supports extending the FCRA provision
that preempts State restrictions on affiliate-sharing, which
would otherwise sunset by the end of 2003.
Thank you. I would be happy to answer any questions.
Chairman Sarbanes. Thank you, Mr. Dugan, for your
testimony. We are pleased to have you back again with the
Committee.
Mr. Dugan. Thank you again, Senator.
Chairman Sarbanes. We are now going to hear from Attorney
General Mike Hatch, who has been the Attorney General of the
State of Minnesota since 1998. He previously served in the
1980's as Minnesota's Commissioner of Commerce, the primary
regulator, as I understand it, of banks, insurance companies,
securities, and real estate firms doing business in Minnesota.
Attorney General Hatch, we are pleased to have you with us.
STATEMENT OF MIKE HATCH
ATTORNEY GENERAL, THE STATE OF MINNESOTA
Mr. Hatch. Thank you, Mr. Chairman. And I want to thank all
of you for your leadership on this issue.
I had the opportunity a couple of years ago to watch a
hearing in the Minnesota legislature on the issue of privacy.
The Wall Street Journal had covered it and pointed out that
there were 58 lobbyists retained by a variety of different
members of the financial industry, the telephone industry,
HMO's, insurers, you name it. And they all piled in, and the
pressure was immense. Both parties collapsed. They just caved
in.
I know that the pressure on you people is immense. I
applaud you for your leadership and for your efforts here. It
takes guts and courage and it is very refreshing to see that
type of leadership in this country.
So, I thank you very much.
The question was raised about, gee, we have gotten all
these notices. Why don't people understand them?
I just want to point out, the first letter I received----
Chairman Sarbanes. I think if he could bring it right up
here next to the table.
Senator Shelby. Bring it up inside.
Chairman Sarbanes. Yes.
Senator Shelby. That would help.
Chairman Sarbanes. Come right on around.
Senator Shelby. Up near the Senator.
Chairman Sarbanes. Don't block--we want Senator Stabenow to
see this easel, too.
Yes, that is it.
Senator Shelby. Okay.
Chairman Sarbanes. Now if we put the things on. Good.
Senator Shelby. That is better.
Chairman Sarbanes. Are you okay, Debbie, with that?
Senator Stabenow. I can see it better than you.
[Laughter.]
Chairman Sarbanes. All right. The panel's okay. So go
ahead.
Mr. Hatch. Mr. Chairman, Members of the Committee, the
point was raised by the financial industry here that, we have
all these notices out there. People do need to understand what
is going on.
So what is the beef ?
All of these notices were sent to me from a former
Congressman, Alec Olson, from the 1970's. He is now, I am
guessing, 75 to 80 years of age. He says, ``What is all this
garbage? I don't understand it.'' Now if a retired Congressman
doesn't understand it, how do we expect that two-thirds of our
senior citizens who are the subjects of the rip-off that occurs
because of this financial fraud, which is targeted to seniors,
how do we expect them to be able to discern these issues?
We heard the Attorney General from Vermont read that
disclosure statement, and in the end, what they did not say is,
listen, regardless of what you do, we are going to share this
with our affiliated institutions and we are going to use it in
other ways as well. Even if you did read it and understand it,
you would have to be a Wall Street lawyer to figure that out.
Here is a letter that I got a kick out of it because it was
after Gramm-Leach-Bliley. This lady had gotten a notice from
General Motors Corporation and she says: ``What is this
business about an opt-out? Why do I have to notify them? And I
have been in the financial industries for almost 20 years. I
find this unacceptable and a bit unbelievable.''
Now what is significant, if you notice her name, she is
from a leading investment bank in this country and she is in
charge of their education. Look at her business card at the
bottom. She did not know. And she thought it was unbelievable.
Now if she doesn't know, and she is in charge of educating the
members of that investment bank, how does that senior citizen
know?
Now if we go to the next exhibit, we will try to figure
out, how do they know?
This is actually before GLB. But let me assure you, the
complaints in our office, we run a consumer division, the
complaint load is higher than it was in the past. I do not
attribute it to being higher because of GLB. I attribute it
just that there is more increased abuse that goes on in a
tighter--when employment gets a little rough, the economy gets
cool, fraud tends to go up. It's the same thing. It hasn't
changed.
Two-thirds, again, still being targeted on seniors.
This one is a Mr. Clinton--I do not know how to pronounce
the last name--Sjosten, I guess. It is a Legal Aid lawyer
writing this letter. He says that Mr. Clinton is 87 years old.
He had a career as a janitor of a church. And he retired. He
has been in a nursing home for 10 years. Telemarketers got that
information from Montgomery Wards. They charged up $2,400 on
him, an auto club membership. But he doesn't own a car. He
hasn't had one for 10 years. A homeowner's warranty plan. But
he doesn't own a home. He is in a nursing home. A dental plan.
But he has no teeth.
[Laughter.]
Charged $2,400. And you ask, how can this be? How can we be
so inhumane to our senior citizens that we allow this type of
manipulation to go on? That is all he asks. I represented banks
in private practice. I was a banking commissioner. Rural banks
do not trade this information. They want it kept private. In
our State, we have laws. I have represented companies. We have
very strong common law, and I think it exists throughout the
country, that says, listen, when you come into a bank with your
business plan, if I am a business and I come in there with a
business plan to get a loan, that bank cannot share it.
Before Glass-Steagall in the 1920's, they would go out and
distribute it. They would give it to their investment arm and
then they would go steal the business, the idea, the trade
secret, if you will, from the client. Well, that was shut down.
The law is pretty clear. And banks know, you keep that
confidential.
But you know what? Under this GLB, you hear those notices
that were read by the Attorney General? It said, your loan data
is not public. With whom? What about the checks I write out as
a business? What about the checks I receive? That is my
customer list. That is a property right, for crying out loud.
It is not only a liberty right, but also a property right.
Somebody says, well, jeez, they won't respond in an opt-in.
Yes, they will. Pay them.
The financial banks--the people who are selling this stuff,
our data, we are on about 300 lists each. This data is being
traded around all over the place. And they sell it. They make
money on it. Over 300 bucks a year, on average.
Why don't they pay us a little royalty. You know how to get
me to go sell my name? Give me some frequent flier miles, maybe
I will do it. I do not know. Maybe some people will. But pay
them. Don't hog it all for yourself.
If it is a property right, why do we allow them to get away
with it on an opt-out? Pay, and people will intelligently make
a decision as to whether this property right will be given up.
Do you know what will happen? Information will still flow.
There will be companies that will sprout up that will engage in
this. That is fine. That is called free enterprise. Why are we
against that?
Property rights. What about the personal liberty right? I
go out and I give speeches and I ask them, please raise your
hand if you have ever had a yeast infection, a hemorrhoid
problem, filed for bankruptcy, bounced a check, had a mental
illness, gone in for chemical dependency. I go through the
whole routine. Please raise your hand. And there is a gasp.
If you look at HIPPA, HIPPA is no better than GLB in terms
of the opt-outs. Oh, we are going to have medical privacy. But
then there is a little exemption that says, for telemarketing
purposes, you are allowed to use it. Well, the exemption
swallows the rule.
All of this information is being traded. What about our
right to define who we are? Thank God we did not have that type
of information going when I was in my 20's. I wouldn't be
sitting here at this table.
[Laughter.]
When you are in your 20's, you experiment with ideas,
right? And thoughts. Your telephone company can sell the
telephone numbers you have.
What about search warrants?
I, as a public official, cannot go pull your bank data
without a search warrant without some probable cause because
you have a reasonable expectation of privacy, right?
Now, with these laws basically saying, you do not have a
reasonable expectation of privacy, guaranteed there will be a
day where a judge will say, because everybody else in the world
can get this data, why can't the Government, too, without the
search warrant?
There is a very strong, compelling issue that is afoot here
and it is not the bank's data. It is my data. That is the way
it is in Europe. That is the way it is in other cultures. Most
people think it is that way here. It is a reasonable
expectation of why not--in most contracts we have in America,
there is an offer and an acceptance. Where is the acceptance on
an opt-out, to give up my private information? Why not just pay
me for it? You would be amazed how many people will respond to
a little money. That is okay.
Now these are very important rights. It is a personal
right. It is a property right. I applaud you for your courage
in standing up on this issue and I wish you the best in getting
a bill through.
Thank you.
Chairman Sarbanes. Thank you, Attorney General Hatch.
We will now hear from Representative Jim Kasper, a Member
of the North Dakota House of Representatives, who is very
deeply involved in the referendum held earlier this year in
North Dakota.
As I understand it, I am sure that Representative Kasper
will develop this, a statute had been passed that reduced the
existing privacy rights under North Dakota law. It was taken to
referendum by the citizens of North Dakota and overwhelmingly,
the referendum was overwhelmingly passed, thereby negating the
statute.
Representative Kasper, we would be happy to hear from you.
STATEMENT OF JAMES M. KASPER
MEMBER, HOUSE OF REPRESENTATIVES
THE STATE OF NORTH DAKOTA
Mr. Kasper. Thank you, Chairman Sarbanes, and Members of
the Committee.
I want to comment before I start my testimony how much I
agree with the three distinguished Senators and your opening
remarks. You are right on. And the people of the United States
are right on with you, as we found in North Dakota.
I am a first-term representative in North Dakota. We have a
part-time legislature in our State. We meet for 3 months every
other year and then we go back to the real world of business.
My background has been the insurance and financial
securities business for my whole career. I even started that
career in college as a senior to help support my newly gotten
wife, who has been with me the 30-some years that we have been
out of college.
Little did I know when I came to the legislature of North
Dakota that the bulk of my time in that freshman term would be
spent battling the banks on the issue of privacy. But that is
exactly what happened.
North Dakota had a privacy law that was developed and
enacted in 1985 at the bequest of the banks, and it allowed no
affiliate and no nonaffiliate sharing of information. So
private information was totally private. In 1997, our law was
amended quietly at the request of the banks to allow affiliate-
sharing, probably in anticipation of Gramm-Leach-Bliley. So, we
had that item in North Dakota law. We also had the bank
loopholes, so to speak, in North Dakota law where banks
marketed and continue to market insurance in small towns.
I have competed with the financial services of the banking
industry my whole career in North Dakota. So, I have an idea of
what they do, how they compete, and what their strategies are.
It is my understanding that the banking industry is being
led in their battle to defeat privacy laws like North Dakota by
the organization that is represented here today and by, I
think, a financial roundtable organization, are the groups
that--there is a focused
effort, in my opinion, to stop the privacy laws from changing.
And that is what happened in North Dakota.
The banking industry had their bank law introduced into our
State Senate, Senate bill 2191. That, in essence, repealed
North Dakota banking law and adopted the Gramm-Leach-Bliley
definitions of privacy.
I want to share with the Committee and read what their
arguments were, why the North Dakota legislature should pass
their law and throw out our very protective privacy law. Here
is what they said: ``North Dakota needs to pass Senate bill
2191 to adopt Gramm-Leach-Bliley in North Dakota law so that we
will be in compliance with Gramm-Leach-Bliley.''
This Committee knows that that is a joke. They knew that
that was a joke, but that was one of their strategies--
confusion.
``North Dakota will experience job loss if we do not pass
Senate bill 2191.'' Now, you tell me how we are going to lose
jobs, but their idea was the bank calling centers will pull out
of North Dakota if you do not pass 2191. ``North Dakota will
experience negative economic development if we do not pass
Senate bill 2191.'' Businesses will not come to North Dakota
because it will be too onerous to comply with old North Dakota
privacy law.
There is no cost at all to comply with North Dakota privacy
law. The businesses go on doing what they do and their
information is protected because one thing in North Dakota law,
not only do we protect consumer privacy, but we also protect
all privacy.
So business transactions, ag transactions, nonprofit
transactions are all private.
``We do not want North Dakota to be the only State in the
Nation, an island, which has different privacy laws from other
States.'' Obviously, as the Attorney General from Vermont
stated, there are other States that have privacy laws like
North Dakota. And as the legislators of the various States
begin to realize what GLB privacy is all about, we are going to
see more State legislators introduce laws. I know of two States
right now that are contemplating, legislators who are
contemplating initiating privacy protection laws like North
Dakota's in their legislature in their next session.
The most funny of all, ``If we do not pass Senate bill
2191, the people of North Dakota may not be able to use their
ATM's, credit cards, and their checking accounts.''
In a recent trip to California, at the invitation of
Senator Jackie Speier to work with the California assembly,
most of the goal was to try to convince some Republicans to
support Senator Speier's bill because that has become a
partisan issue, which it should not be. These were their same
arguments.
So this is a national strategy that I submit is being
utilized and orchestrated by the banking industry to stop
privacy laws from being passed and to try to repeal a North
Dakota law.
Anyway, these arguments convinced my colleagues in both the
House and the Senate to overwhelmingly, with between a 70 and
80 percent vote, pass their bill. There were just a handful of
us who attempted to stop that bill. Two of us were freshmen
legislators, and you know how much credibility freshmen have
any place. So the bill was passed. The law was signed by our
governor, who was a former banker, and it was enacted into
North Dakota law.
Fortunately, that is not the end of the story because a
group of citizens called Protect Our Privacy formed.
Volunteers. No money. No budget. Just a goal to repeal Senate
bill 2191 in North Dakota. And in the course of a few short
weeks, gathered the number of signatures necessary, a little
over 17,000, to repeal the law, or to refer it and put it to a
vote to the people.
When you consider that we only have 640,000 people, 17,000
is a big number. It is equivalent to almost 900,000 signatures
in the State of California.
Their initiative is going forward, as this Committee heard.
And by the way, I predict that when and if their initiative is
on the ballot, it will be on the ballot, unless the California
legislature acts responsibly next year, that initiative is
going to overwhelmingly succeed.
The more money the big banks spend, the more the people get
angry, and that is exactly what happened in North Dakota. The
banks were well financed. Their first campaign statement showed
they had $129,000 raised. We had $2,800. By the time the whole
battle was done, their media blitz throughout the State of
North Dakota was enormous. They attempted to persuade the
people of our State that all the arguments which I shared with
you earlier were needed to keep the bill.
Our statement and position was very simple. Whose
information is it, anyway? Do you own it? Should you have the
right to control it? Or should the banks own it once they get
it and be able to share it and sell it without your consent and
knowledge? That was the focus. That is all we could talk about
because that is the truth and the bottom line of this privacy
battle--whose information should it be, as Attorney General
Hatch has indicated?
When the people understood, the vote was 73 percent to
throw out the Senate bill 2191 and go back to North Dakota law.
I submit that as more and more people in the United States
become aware of what this is all about, you are going to see
more and more State legislators move forward to do the same
thing in their State.
Unfortunately, that is time-consuming and costly and you
have the might of the big banks, who will be there to try to
thwart the issue every time it comes up in every State
legislature. We had full-time lobbyists up there from the
banking industry, three or four of them. The credit union
lobbyists were involved. The big banks came in. The local
bankers came in to talk to their legislators and the
legislators were, frankly, somewhat misled and confused on this
issue because they talk real good. But the people know better
and the people of our country want their private information
protected.
If we do not do this, if we do not move forward with
protection, because the lifeblood of this battle for financial
services is the free-flowing of consumer confidential financial
information, Gramm-Leach-Bliley does not foster competition. It
eliminates competition.
As a small business person in the financial services
industry, I have a very difficult time competing with the Wells
Fargos of the area. When a person comes in to get a loan and
provides their tax return, their financial statement, their
history, and the loan officer just goes to the insurance agent
or the securities agent and says, here, here's some stuff. Look
it over. Go call this guy.
That happened on one occasion with my best client in Fargo,
who I have served with life insurance for 20-some years. An
insurance agent from Wells Fargo called on them and had all of
their financial information and, in fact, showed them a
sophisticated insurance proposal where they had to have
gathered their incomes, their date of birth, et cetera. My
client knew nothing of it, had never met the agent before, and
this guy comes in and shows him the information. He called me.
We looked at it. We threw it in the garbage. But the point is,
why should that insurance agent have gotten that information in
the first place? He shouldn't have.
My mother in Beulah, my hometown, western North Dakota,
just had a CD come due. The bank teller recommended that she
put it into an annuity. The bank teller knows nothing about my
mother's financial information and her background and her
financial needs.
My mother, thank goodness, said, I call my son on these
things.
[Laughter.]
She did. And we are looking at what she should do with her
CD.
The point is, people are handling confidential information
all over the place. It has run amuk. And I hope that this
Committee will have the courage to stand up to the tremendous
lobbying
effort you are going to see and reverse the things in Gramm-
Leach-Bliley that need to be reversed, such as no sharing of
information to nonaffiliates, period. A no-opt.
An opt-in sharing of information for affiliates. And the
joint marketing agreement loophole, that needs to be fixed. I
understand why it was introduced, to allow the small banks and
credit unions to compete with the Wells Fargos of the world.
That definitely needs to be fixed.
Mr. Chairman, and Members of the Committee, I see my time
is up. I have a lot more I could say about this issue. But I
thank you very much for the opportunity to be here.
Chairman Sarbanes. We thank you very much, Representative
Kasper. It is a very instructive story that you tell and we
really appreciate it.
Before she leaves, I do want to add just one dissent to
what you said. You said that the freshmen members of the
legislature do not have much influence.
[Laughter.]
I agree with that statement generally. But I do want to
underscore what a tremendous exception to that statement our
freshman Member, Senator Stabenow, has been here, both in the
Committee and in the Senate.
Senator Stabenow. Thank you.
Chairman Sarbanes. We will now turn to Phyllis Schlafly. We
are very pleased that you are here with us today. As we all
know, Phyllis Schlafly is the President of the Eagle Forum. She
has been an outspoken advocate on a number of very important
issues and has testified frequently here in Congress. She is
the author/editor of numerous books and publications. Ms.
Schlafly, we are delighted to have you with us today.
STATEMENT OF PHYLLIS SCHLAFLY
PRESIDENT, EAGLE FORUM
Ms. Schlafly. Thank you, Mr. Chairman, and Senator Shelby.
Totalitarian governments keep their subjects under constant
surveillance by requiring that everyone carry ``papers'' that
must be
presented to any Government functionary on demand. This is an
internal passport that everyone had to show to authorities for
permission to travel within the country, to move to another
city, or to apply for a new job.
Having to show papers to Government functionaries was bad
enough when papers meant merely what was on a piece of paper.
In the computer era, personal information stored in databases
can be used to determine your right to board a plane, drive a
car, get a job, enter a hospital emergency room, start school,
open a bank account, buy a gun, or access Government benefits
such as Social Security, Medicare, or Medicaid.
While each classification currently has its own set of
rules, connecting all these dots would amount to the personal
surveillance and monitoring that are the indicia of a police
state. The Washington buzz words, ``information-sharing,'' are
often put forth as the solution to 21st Century problems, but
this has significant privacy implications that I am very happy
you are addressing.
The global economy is obsessed with gathering information.
The lifestyle or profile of each consumer is a valuable
commercial commodity. The checks you write and receive, the
invoices you pay, and the investments you make reveal as much
about you as a personal diary. Where I shop, how often I
travel, when I visit my doctor, how I save for retirement are
all actions known to financial institutions, which connect the
dots of my life and create a valuable personal profile. This
compilation of personal information is bad enough, but the
sharing of it without my consent is even worse.
True privacy protections encompass the principles of
notice, access, correction, consent, preemption, and limiting
data collection to the minimum necessary.
The bill commonly known as Gramm-Leach-Bliley had the
financial goal of streamlining financial services, thereby
increasing affiliation and cross-company marketing. But it was
conflicted with the goal of true financial privacy. Greater
affiliation meant greater information-sharing. Interjecting the
right of individuals to control their personal information into
that streamlining equation was perceived as a threat to this
big business scheme.
Gramm-Leach-Bliley does not provide consumers with any
opportunity to decide for themselves about the transfer of
their private information among affiliates. Particularly
troubling is the large number of companies marked as
affiliates. For example, the Bank of America has nearly 1,500
corporate affiliates, and Citigroup has over 2,700. There is no
opportunity to stop this free flow of personal information.
Gramm-Leach-Bliley did include a privacy notice provision.
Privacy notices should be simple documents outlining what kinds
of information are collected and how the business plans to use
that information. However, the notices sent to consumers as a
result of Gramm-Leach-Bliley turned out to be too complicated
for the public to cope with and they were always written in
very fine print.
Gramm-Leach-Bliley provided the right to opt-out of
information-sharing but only to third parties. Figuring out how
to prevent the sale of your personal financial diary, and to
whom you were actually denying it, was made very difficult.
Real opt-out consent depends on being able to understand what
you are saying no to.
In 1998, the Clinton Administration proposed a Federal
regulation called Know Your Customer, which would have turned
your friendly local banker into a snoop reporting to the
Federal database called FinCEN any deviation from what the bank
decided is your deposits/withdrawal profile. The American
people and the Eagle Forum was a part of this effort, responded
with 300,000 angry e-mail criticisms and the regulation was
withdrawn. The department subsequently said they would no
longer receive e-mail criticisms. However, the Bank Secrecy Act
still requires banks to share some personal information with
the Government through suspicious activity reports.
The Bush Administration's proposed regulations to implement
the USA PATRIOT Act's Anti-Money Laundering provisions are even
more intrusion than Know Your Customer. The Wall Street Journal
reported that the Treasury Department entered into an agreement
with the Social Security Administration to access a database to
verify the authenticity of Social Security numbers provided by
customers at account opening.
Congress promised us that the Social Security number would
never be used for anything else when it was created, and
certainly not for identification purposes. Giving financial
institutions access to Social Security Administration's
database contemplates using the number as a national ID number,
which is a step in the wrong direction.
I remember after President Nixon opened up China, The New
York Times printed a large picture of a warehouse of what were
called dangens. This was a manila folder containing all the
personal information on every person in China. It started in
school. It followed them all through life, with all of their
job information.
It is the computer that makes it possible to create a
dangen on every American citizen, and that is not America.
In conclusion, neither Government nor private business
should act as if they can own, share, display, or traffic our
personal information. It is a property right issue. Our
personal financial data should be protected by a firewall and
accessible only to those to whom the individual gives the
authority.
Thank you very much, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Ms. Schlafly. We
are very pleased to have you here today.
Our concluding panelist is Ed Mierzwinski, who is the
Consumer Program Director of the U.S. Public Interest Research
Group. He comes today testifying on behalf of a number of
consumer groups, both the broader groups--Consumer Action,
Consumer Federation, Consumer Union, and then a number of
groups that are more specifically focused on the privacy
issue--the Electronic Privacy Information Center, Identity
Theft Resource Center, Privacy Rights Clearinghouse, and
Private Citizen.
We are very pleased to have you here, sir.
STATEMENT OF EDMUND MIERZWINSKI
CONSUMER PROGRAM DIRECTOR
U.S. PUBLIC INTEREST RESEARCH GROUP
ON BEHALF OF:
CONSUMER ACTION, CONSUMER FEDERATION OF AMERICA
CONSUMER TASK FORCE ON AUTOMOTIVE ISSUES
CONSUMERS UNION, ELECTRONIC PRIVACY INFORMATION CENTER
IDENTITY THEFT RESOURCE CENTER, JUNKBUSTERS, INC.
PRIVACY RIGHTS CLEARINGHOUSE, PRIVATE CITIZEN, INC., AND
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Mierzwinski. Thank you, Mr. Chairman and Members of the
Committee, and in particular, I will recognize Senator Shelby,
the founding Co-Chair of the bipartisan Congressional Privacy
Caucus, for his leadership, as well as yours.
The organizations that I am representing today believe
strongly that people have a strong right to privacy and that
privacy should be based on Fair Information Practices.
Recognizing when it enacted the Gramm-Leach-Bliley Act,
that it was increasing the potential for privacy invasions,
Congress acted by establishing Title V to try to protect
privacy. The basis of Title V we believe is flawed and a lot of
that has already been articulated by some of the other
witnesses on the pro-privacy side today.
The primary basis of the Act is that it is based on notice.
Notice is not enough. As we have seen from the first 2 years of
examples, the notices are unclear, the notices are
indecipherable, the notices are unreadable.
The Privacy Rights Clearinghouse commissioned a consultant,
Mark Hochhauser, on readability in 2001. He surveyed 60 of
these notices and found that they were written essentially for
a graduate school education.
The average consumer has not been to graduate school. And I
concur with General Sorrell that there should be something like
a nutrition notice at the front of every privacy notice and the
check-off box for voting out or voting in, whether it is an
opt-out or an opt-in, and of course, we would prefer an opt-in,
as I will discuss briefly. That check-out box should be on the
front page, not on the 8th page of a 6-point type document with
27 to 35 word compound sentences.
This year, as part of California PIRG's efforts to enact
the Jackie Speier legislation, SB-773, broad consensus
legislation supported by a number of privacy and consumer
organizations in the State of California, California PIRG
updated the Hochhauser study with a study of 10 privacy notices
in August. We found that the best of the 10 got a C minus. So
notice is not enough.
In my testimony, I also refer to a very disturbing decision
by a U.S. District Court Judge in California in an unrelated
financial privacy case, but a related case to notice
provisions. In that decision, Judge Zimmerman suggests that a
large telephone company may have hired consultants that taught
it to purposely make its privacy notices deceptive. And I cite
some of those notices. How to convince people not to opt-out.
How to convince people that the notice is a nonevent.
There were a series of consultants actually hired by the
company to teach the company how to make its notices
unreadable, essentially. So, I am very concerned about that.
And that is, of course, one of the reasons that we think notice
is not enough.
The second problem we have with the bill, of course, is
that the consent provision in the bill only applies to some
transactions. It applies, not to all third parties. It applies
to some third parties.
Let's be very clear. It is an opt-out, meaning that you
have to affirmatively say no, and it does not apply to all
transactions. It only applies to some third parties,
essentially limited to telemarketers.
Transactions between and among affiliates and joint
marketing partners--and there is no exception in the law that
prevents large institutions, some of them have as many as 2,761
affiliates, as we heard earlier, that prevents large
institutions from also using outside joint marketing partners
as well.
So the fact is the bill is based on only part of the Fair
Information Practices, which we believe the data-collectors
should subscribe to.
In recognition of the fact that there had been a major
privacy scandal that had been discovered by the State of
Minnesota Attorney General, Attorney General Hatch, and his
office, the U.S. Bank case, the Congress included an encryption
provision in Title V to try to tighten it up a little bit more.
The encryption provision was included and it stated that
telemarketers could not obtain the credit card numbers of
consumers.
The reason for that was that in the U.S. Bank case, as
Attorney General Hatch has described, the consumer never gave
out their credit card number to telemarketers. Their bank gave
their credit card number to telemarketers.
As the Attorney General has testified, and as General
Sorrell has testified as well, the encryption provision has not
worked.
Essentially, Gramm-Leach-Bliley codified the preacquired
account telemarketing programs that are in place at many of the
largest banks in the country. These banks are no longer
providing the credit card number directly to the telemarketer,
but the telemarketer has a button that he or she pushes that
allows the bank to bill the consumer.
Now one of the witnesses testified that opt-out doesn't
work and that opt-in would work even worse.
In Attorney General Hatch's recent settlement with Fleet
Bank, he sent a letter to the consumers who had been
victimized--excuse me--Fleet Mortgage Company, an affiliate of
Fleet Bank. You would think that this kind of tawdry
telemarketing would be limited only to credit card companies,
but mortgage companies are doing it, too.
Attorney General Hatch sent a letter to a number of
Minnesota consumers asking them whether they wanted to opt-in
to his settlement and get their money back. Well, 50 percent of
them responded within 2 weeks.
If you write your opt-in letter well, and if you offer
people something, opt-in does work. And if you are trying to
get people's money back from a rip-off telemarketer who is in
league with your bank, opt-in does work.
So, we were very pleased to see that.
The last point I want to make, of course, is that the best
part of the Gramm-Leach-Bliley bill is, in fact, its States
rights fail-safe, the so-called Sarbanes Amendment, that has
allowed the States to experiment. As the great Justice Louis
Brandeis said, ``The States are the laboratories of
democracy.'' And although the industry has sent hundreds of
lobbyists out to Fargo, out to Sacramento, out to
Bradelborough, I have been to all these places, I have seen all
the industry lobbyists, Montpelier, excuse me, in Vermont, and
all the other State capitals where the State PIRG lobbyists
work, the industry is trying to stop these laws, but these laws
are being considered and you need to protect the right of the
States to continue to try to pass stronger privacy laws.
The costs of privacy have been articulated by industry as
tremendous--billions and billions of notices, the loss of the
free flow of
information.
I want to point out that there are costs to the lack of
privacy as well. I would like to enter into the record a study*
by independent consultant Robert Gellman which refutes a number
of the industry-funded studies that the industry relies on to
make its points.
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*Held in Committee files.
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The fact is the lack of adherence to Fair Information
Practices leads to identity theft, which costs hundreds of
thousands of consumers, hundreds of dollars a year in out-of-
pocket costs, hundreds of hours in trying to clear their good
names, extra costs because their credit reports are in error
and they must pay extra for sub-prime credit, the costs of
profiling, the cost of being targeted and the cost of being put
into a box that you are a Tobacco Road consumer and not a Gucci
Gulch consumer on one of these 300 lists, and you pay too much
for credit and you only get offered mediocre offers. These
costs are very substantial and these costs affect consumers in
a very negative way.
In terms of the free flow of information, industry wants to
have that one both ways. Many banks are limiting their flow of
information about a consumer's good credit in order to prevent
that consumer from having a good credit report and a good
credit score.
They are gaming the credit-scoring system and Comptroller
Hawke did a speech on this several years ago, and he was very
concerned about it. If a consumer's credit score is affected by
a limit on how much information banks share with credit
bureaus, that consumer doesn't get any offers. That consumer
doesn't get any
opportunities.
So there are some very serious costs to a lack of privacy
and identify theft is one. Profiling is another. The cost of
paying too much for credit because banks are gaming the system
is another.
Stalking is even a problem of the costs of lack of privacy,
as the case of Amy Boyer several years ago.
I want to conclude briefly by saying that the State PIRG's
and the other consumer and privacy groups that are signed on to
our testimony today very much appreciate that you held this
hearing. We will continue to work in the States on privacy,
financial privacy issues, identity theft issues, credit-scoring
reform, and other aspects of financial privacy.
We are disappointed that some industry groups have tried to
suggest that financial privacy prevents them from helping
Director Ridge from fighting the terrorists as one of the
excuses they make to try to roll back the State privacy laws.
We are disappointed also that they say you won't be able to
use your ATM card if we pass strong financial privacy laws. But
that is life in the big city and we will continue to fight and
we appreciate you fighting with us.
Thank you very much.
Chairman Sarbanes. Thank you all very much. This has been a
very, very helpful panel.
We have been joined since the panel began by two of our
colleagues and I am going to turn to them now to see if they
want to make an opening statement before we start directing
questions to the panel.
Senator Akaka.
COMMENTS OF SENATOR DANIEL K. AKAKA
Senator Akaka. Thank you very much, Mr. Chairman.
It is good to hear witnesses from around the country on the
issue of financial privacy.
The sharing of consumers' financial information needs to be
regulated to reduce frustrations and the likelihood of the
misuse of that information. Financial institutions are required
to provide their customers with information regarding their
privacy policies on an annual basis. Financial institutions are
prohibited from sharing nonpublic personally identifiable
customer information with nonaffiliated third parties, unless
customers are provided with an opportunity to opt-out.
My constituents in Hawaii have contacted me to express
their frustrations with the opt-out process. The opt-out
process is time-consuming for many individuals and in some
cases, privacy notices are too difficult to understand. I agree
that the notices are not enough and are difficult to
understand.
Financial privacy is one of many areas in which consumers'
financial literacy needs to be increased. Consumers need to be
fully aware of their opportunities to exercise financial
privacy restrictions and how to do so.
In addition to education, a complete examination of the
current laws intended to protect personal financial information
is needed to ensure that consumers are protected.
Again, Mr. Chairman, I thank you for conducting this
hearing.
Chairman Sarbanes. Thank you, Senator Akaka.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman.
I can only tell you that there is almost nothing that
Senator Akaka said that I would disagree with or preparing
myself for this, knowing the concerns of both the Chairman and
Ranking Member with regard to this privacy issue, that I want
to very much identify with, needs to be cleaned up.
I hear about this all of the time as I visit with
constituents around the State, a growing, growing concern about
invasion of one's personal information, the integration of the
marketing aspects of information collected by those that have
access to financial transactions and so on.
I am anxious to be a consistent and full participant in
this process, and I will emphasize this financial literacy
issue.
I can tell you that I have read a lot of these statements
myself. I usually go to sleep before I get to the end of them,
and know where you are supposed to sign off.
[Laughter.]
I think it is a ruse on the public with regard to this
opting-out process.
So, I look forward to working with you and the other
Members of the Committee in this area.
Chairman Sarbanes. Thank you very much, Senator Corzine.
Both Senator Corzine and Senator Akaka have been very, very
active on the financial literacy issue and we certainly
appreciate their concern.
Professor Cate, I want to ask you a question right off the
bat.
The Financial Services Coordinating Council, who Mr. Dugan
is representing here, issued a booklet, not too long ago on
what they call the drawbacks of an opt-in regime. And you were
the author of that booklet. You recall that, I presume.
Dr. Cate. I do. I think it was 2 years ago. But, yes, sir.
Chairman Sarbanes. All right. Now in that, you are arguing
against the use of opt-in. And I do not want to address the
opt-in issue for the moment.
In the argument you make against opt-in, you say:
``Lawmakers should resist the mounting pressure to expand the
use of opt-in, for eight compelling reasons.'' And the first
reason you give is, ``Opt-in and opt-out both give consumers
the exact same level of control over how information about them
is used. Under either system, it is the customer alone who
makes the final and binding determination about data use.''
Now, of course, we have heard some criticisms about how the
opt-out system works. But let me ask you this question. Am I to
take from this statement that you support requiring opt-out for
the sharing of any financial information?
Dr. Cate. I think that would not be accurate to say that I
support opt-out for the sharing of any financial information.
Chairman Sarbanes. I see. Well, you make the point here
that opt-out gives--under both, the consumer has exactly the
same level of control and therefore, you should use it. The
alternative to opt-out is opt-in. And then you are very
critical of opt-in. But you say, with opt-out, they can control
their information. Is that correct?
Dr. Cate. Yes, sir, Mr. Chairman.
Chairman Sarbanes. Should we have opt-out at least as a
starting point or as a minimum for the sharing of financial
information?
Dr. Cate. I would not support that across the board.
Chairman Sarbanes. Would not?
Dr. Cate. I would not, sir.
Chairman Sarbanes. How does that square with your statement
here?
Dr. Cate. It squares in this way. If there are areas or
uses of information that the Congress believes that consumers
should have control over, I think the opt-out is a better and
certainly less expensive system for allowing consumers to
exercise that control.
I personally do not believe that under the First Amendment
that the Congress has the Constitutional authority to extend to
consumers the right to exercise control over all uses of their
financial information.
Chairman Sarbanes. You do not think the information belongs
to the consumer?
Dr. Cate. I think the question of who it belongs to is more
or less irrelevant. Under the Constitution, I do not believe
Congress has the authority to use the power of the courts or to
use regulators to enforce that restraint on the flow of
information.
Chairman Sarbanes. To opt-out as well as to opt-in?
Dr. Cate. Yes, sir, although I believe the opt-in restraint
is more severe, and so the First Amendment impediment would be
greater.
Chairman Sarbanes. So if I am a consumer and I give this
information to a financial institution, it is then gone. They
can do what they wish with it?
Dr. Cate. There are many uses of information, which, if
they do not present a risk of harm or--many uses of
information, most uses of information, which I think in this
country we presume----
Chairman Sarbanes. Should I make that judgment as the one
who provided the information? Or do you get the information
from me for a limited specific purpose, and then once you have
it, can you then--you being the financial institution--turn
around and do with it what you will?
Dr. Cate. Well, Mr. Chairman, I believe it is a matter of
law.
If, in fact, information is obtained under an express
condition that it will not be used elsewhere I think that
restraint should be enforced, as the Federal Trade Commission
has repeatedly done online and elsewhere.
But the Constitution I think limits the power of the
Government to create an impediment at the start to all uses of
financial information or other forms of information, absent
some form of substantial or compelling governmental interest.
Chairman Sarbanes. That is interesting. What do you think
of that, Ms. Schlafly? Do you think that we are precluded from
placing some restraint on the use of that information?
Ms. Schlafly. I am amazed.
Chairman Sarbanes. I am stunned.
Ms. Schlafly. I think the information about what I do and
what I buy is my property. I do not think it belongs to
somebody else. If there is anything the United States stands
for, it is individual property rights.
Chairman Sarbanes. Attorney General Hatch, what is your
reaction to that?
Mr. Hatch. Mr. Chairman, there is $15 to $20 billion of
telemarketing fraud in this country each year. As I said, two-
thirds of it is targeted to senior citizens, who I do think we
have some responsibility to guard.
We know that most of this is done through what is called
preacquired accounts, meaning that they have the information
from a bank or a credit card company. They never have to ask
for that information from the consumer because they already
have it. It has already been obtained from the bank.
That is a compelling State interest right there.
I just don't understand. If opt-out and opt-in are the
same, why would it make any difference as to which information
is being protected? The point you were making, I do not know if
we received an answer.
Chairman Sarbanes. My concern with this statement is, the
argument that is made against opt-in, which would be an up-
front permission from the provider of the information, or how
it is used, the argument that is made is that the consumer can
protect himself because he has opt-out.
Now there is a big difference between the two, but opt-out
at least means that if the consumer initiates it, he can then
say that I do not want that information provided. The other
way, with opt-in, they have to get the permission to begin
with.
Professor Cate uses the argument in this pamphlet that you
should not have opt-in because you have opt-out. So, I just
asked him, well, does he then apply opt-out to all aspects of
providing information? I am told, no, he doesn't.
I am now told that, amongst other things, he thinks there
is a Constitutional impediment to doing this, which I do not
agree with. But, in any event, even as a policy matter--that is
our problem.
Here we have--it is a disingenuous argument to say, we do
not need opt-in, because they have opt-out.
Then you ask, well, would you apply opt-out to all aspects
of the sharing of financial information? Then it is, no, no, we
wouldn't do that. So there is our problem.
Yes, ma'am.
Ms. Schlafly. Senator, it seems to me that the difference
between opt-in and opt-out is the default. Those of us who use
computers know how valuable it is what the computer defaults to
when you do not make an affirmative choice.
With opt-in and opt-out, one way the default goes to the
bank and the other way it comes to you. I think that that is an
extraordinary difference.
Chairman Sarbanes. I think that is a very important point
and I said at the outset, I wanted to be careful. Because there
is a very strong argument that opt-out is not adequate, the one
you just made. Therefore, you should have to get an affirmative
decision.
But I cannot even get Professor Cate to give me opt-out on
the sharing of the financial information. That would be a
beginning here. At least we would begin to parse this thing out
and see if we could not make some advance.
I am told, no, no.
Well, I have used my time. If my colleagues will indulge
me, I want to ask Mr. Dugan one more question.
Mr. Dugan, you cited that these States were trying to pass
these statutes now under the fact that under Gramm-Leach-
Bliley, it is specifically stated that the States' action in
this field, that it is not preempted, that they can move ahead.
And so, people go out and they fight these battles out in the
State legislatures. As I understand it, you yourself have been
in a number of State legislatures on this fight.
Mr. Dugan. That is correct.
Chairman Sarbanes. And you make the point that it has not
yet passed, I think you said, in any State legislature. Is that
right?
Mr. Dugan. That is right. Any comprehensive statute.
Chairman Sarbanes. I thought you said you drew from that
the conclusion that this issue was a fading or a passing issue
across the country, and that this was demonstrated that the
public doesn't really care about this issue and that it is
going to go away. Is that your view?
Mr. Dugan. I do not think I quite said that. What I was
trying to get at----
Chairman Sarbanes. You came close to it. But, anyhow.
Mr. Dugan. What I was trying to get at was this.
Senator Shelby. You did not say it. You were hoping it.
[Laughter.]
Mr. Dugan. I think there is a perception, every State or
many States in the country, that the trend has been for State
legislatures to take this up and pass financial privacy
legislation that goes beyond Gramm-Leach-Bliley. And all I was
trying to say was, in our experience, the trend has been in the
other direction, with the notable exception of California.
Chairman Sarbanes. And North Dakota, by direct action of
the people rather than the legislature.
Mr. Dugan. That is right, but that was a restoring of a law
that was previously on the books. My point is that the year
after Gramm-Leach-Bliley passed, there was a huge set of bills
introduced that went way beyond Gramm-Leach-Bliley in many
States and debated in many States. None of them passed. Then
the second year, it was about half that number. And in the
third year, it had dwindled to a relatively few number of
States that were doing it.
I am not trying to say that there is no interest in it.
There obviously is. There was intense interest in California.
I am just saying that if you take and look at the country
as a whole, and what legislatures have done, I think that there
has been a repeated set of circumstances in which legislators
have decided that it has not been as easy to pass something
like this in a way that works that doesn't create unintended
consequences.
There is also a notion that this new Federal scheme has
gone into effect, and we should give it a chance to work before
we decide to layer on inconsistent privacy statutes across the
country, which the FSCC thinks would be a disaster.
Chairman Sarbanes. So, you think it is going to go away?
Mr. Dugan. No, I did not say that. I think we have work to
do. I think there has been a problem with the notices. They do
have to get better.
Chairman Sarbanes. Where are you going to be if California
passes an initiative on this issue? The California legislature
came close this year, as I understand it, very close. But where
are you going to be if they pass an initiative in California?
Mr. Dugan. Senator, that is a hypothetical situation.
Chairman Sarbanes. Do you think an initiative would pass in
California on the basis of the North Dakota experience?
Mr. Dugan. I certainly would hope not.
Chairman Sarbanes. Mr. Kasper, you wanted to add to that?
Mr. Kasper. Yes, thank you, Mr. Chairman.
Just an observation. If the other States in the last 2 to 3
years were bombarded by the banking lobbyists as North Dakota
legislators were, when they were confused and misled by the
bank arguments, which I laid out earlier, I can understand why
no legislation passed in those other States.
We were different in the fact that we had a law to protect
and the people decided to refer it. And when the people made
connection with the truth, the people spoke loudly and clearly.
That is what I believe is the sentiment all across the United
States, as you have heard from your colleagues here on the
panel and from the panel members themselves.
This is a national strategy, I believe, by the financial
services
industry, led by the banking industry, to confuse the issue and
kill any type of legislation that is attempted in North Dakota.
I wish they could come to North Dakota now and talk to some
of my legislative colleagues who went through this media battle
and now understand the issue, who are very angry at the way
that our legislators were misled by the lobbying efforts of the
banking institutions.
So you confuse. You mislead. Sometimes you out and out lie.
And the legislators, with that type of pressure, are going to
go along with no change because they may think that is what is
in the best interest of their State, which it is not.
Chairman Sarbanes. Yes, Attorney General Hatch.
Mr. Hatch. Mr. Chairman, I would like to point out for
Minnesota, that at least the lobbying effort that occurred did
not diminish the issue. It is coming back and it will continue
to come back until something passes.
But I do want to point out, it wasn't just the banks. There
is a lot of different interests involved in this. You have the
telemarketing companies. You have, as I mentioned, insurers,
HMO's.
And frankly, if I took a poll of the banks in Minnesota,
you would find probably a majority in favor of privacy, but
they would be the smaller ones. They do not want this
information out there. They do not want this information being
taken by a Citibank or whoever, and then stealing their
clients. It is not the small ones who are doing it.
So do not give too bad a rap here to the banks of America.
A lot of the small ones are not interested in this issue at
all. They have operated very well with an opt-in system because
they do not want to do it.
As I mentioned before, a First Amendment right to
disseminate, does this mean that an employee of mine--I have
companies that represent companies, an employee can take the
customer list? They have a First Amendment right to disseminate
it? Does the bank have a right to take the bank deposits of my
clients and go disseminate it to their competitors, their
customer list? I do not think so.
There has been very strong privacy rights by common law in
this country with regard to property assets. I would hope that
GLB did not touch that. But you know what? I suppose one could
interpret it to have done so. What a tragedy?
Chairman Sarbanes. I am going to yield now to Senator
Shelby. Did you want to say something?
Mr. Dugan. Mr. Chairman, I want to respond on the point
about smaller banks.
I think the fact is that smaller banks have to share
information with other financial institutions to offer the
range of competitive products that diversified financial
institutions can provide. And we are very strong supporters of
that kind of sharing, which is precisely what was recognized in
Gramm-Leach-Bliley, and which was precisely what was recognized
even in the California bill that almost passed.
Chairman Sarbanes. Well, but should the consumer have a say
in that? Shouldn't he have a say?
That's all. That's all. I do not think there is any
approach that would rule it out absolutely. It would just put
the decisionmaking authority in the person who provides the
information. It is personal information about them, and they
should have, it seems to me, should be able to control where it
goes and what is done with it.
But I have strayed over my time. I yield to Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman. Again, I want to
thank you for calling this hearing. I also want to commend
Senator Sarbanes, that in the conference, we were all on it
with the House, dealing with Gramm-Leach-Bliley, Senator
Sarbanes had the foresight to offer the amendment to protect
the States' ability to deal in this area over and above.
I think that is so important to Senator Sarbanes. I have
been involved with you and I have worked with you and I have
worked with a lot of people on this. I believe myself that the
people ultimately are going to prevail here. The people are
going to win this battle, no matter how much money is spent
against it because this is an important right of the people, as
Ms. Schlafly talks about.
Mr. Kasper, I have a few observations and some questions.
One, I want to commend you for getting involved and what
the people of South Dakota did. That was not isolated--of North
Dakota, excuse me. Made a mistake.
Mr. Kasper. That is all right.
Senator Shelby. But what they did, they understood the
issue. And if the people understand the issue, they are not
going to give their privacy away. I believe that. Not many of
them, and so forth.
I do want to also take a few seconds and commend both the
Attorneys General here. They have been outspoken. Somebody has
to speak up for the people, and they do this.
Ms. Schlafly, we have worked together on a number of
issues, and this privacy issue cuts across all political
philosophy, and all parties, Democrats, Republicans, and so
forth.
I have worked with Mr. Mierzwinski on a number of
occasions.
I wish my State of Alabama had a referendum proposition, a
proposition where you could bypass the legislature, if you had
so many people. A lot of the States do. And that goes back to
the
Sarbanes Amendment. That is going to be the linchpin to this, I
believe.
Now, I want to direct this to Mr. Dugan and Professor Cate.
I would like to know from you, if you can, to the extent
that you can provide the details here, what happens to, and I
will just use myself here, my personal information when I open
a checking account, get a credit card, and that kind of thing.
Just say I were to go down the street here and open up a
checking and savings account. What happens to that information?
Let me just run down a list of questions.
What information are they required to obtained from me? How
does the bank use it? Do they share it? And yes, what do they
actually share, and who with? Why do they share it? Well, I
think we know that. Who do they share it with? Affiliates?
Third parties? Partners in joint marketing agreements? You can
create those. That is so easy.
Do they sell it? What effort does the bank or financial
institution make to ensure its security? Or how can it be
secure once it is gone? What about affiliates and third parties
who may gain access to the information? Do they undertake
efforts to protect it? Who do they protect it from if they are
using it?
All these questions I think need to be answers because
people in America, across all party lines, are going to be
asking. They are beginning to. And hearings like this help. Can
you help me there?
Mr. Dugan. Well, let me start and there is quite a long
list.
Senator Shelby. Sure.
Mr. Dugan. If there are other things, we would be happy to
furnish it for the record as well. Professor Cate can jump in
as well.
Senator Shelby. Sure.
Mr. Dugan. I think in the first instance, when information
is collected from consumers, there are two kinds of
information. The first is information that is used to make a
judgment about making a loan to you or underwriting insurance
for you. That kind of information is covered by the Fair Credit
Reporting Act.
And because that information can be used to make an
important decision, it can have a very important effect on the
consumer, the restrictions on that information under Federal
law are stricter than they otherwise would be. In fact, that
kind of information cannot be shared with third parties except
under very specific circumstances such as sharing with the
credit-reporting agencies. It can only be shared with
affiliates subject to an opt-out.
If the information doesn't relate to that kind of
information, then the Gramm-Leach-Bliley system kicks in and
the information can be shared to carry out things that I think
everybody would say it should be shared for it. It obviously
has to be shared with third parties when you write a check and
the check goes through the clearing system to other banks to
carry out your transaction. It has to be shared with third
parties in order to do the very thing you have asked for. And
nobody quibbles with that, and I am sure you do not, either,
Senator. But I think you then get to the question of, is it
shared for marketing purposes?
I think institutions use it to--they would want to know,
for example, if you were a good customer of the bank and you
had a large deposit, that would be a customer that they would
want to make sure was treated well with respect to other kinds
of products. If you were a long-time customer of the bank, that
kind of information, they would want to know that.
And so, the information would be shared inside the bank in
order to make decisions to cross-market products, and it would
be shared with affiliates as necessary if they thought that
would be useful to provide products and services to you.
Now, if it gets to third parties, that is where Congress
drew the line and said, if it goes to a nonaffiliated third-
party, then they have to give you the right to opt-out of that
type of sharing.
Senator Shelby. But you can create an affiliate fast, can't
you? You can create a joint marketing agreement so fast.
Mr. Dugan. We think affiliates----
Senator Shelby. There are a thousand ways to get around.
Mr. Dugan. We do not think it is getting around. We think
an affiliate is all part of the same organization. If you have
Citibank and Citibank Mortgage Lender, that is really the same
thing to the consumer. It is all part of one organization.
The line comes when the information is shared outside the
commonly controlled organization, particularly to commercial
companies or nonfinancial companies. And there, Congress drew
the line and said, that is a place where the consumer should
have some control and that is where they established the opt-
out.
We think that is appropriate.
Senator Shelby. You used the word scheme earlier. A lot of
people believe this was a scheme. That is, the opt-out was a
scheme to hijack people's personal information, knowing that
with all the trouble and all the notices and not understanding
what was going on, that most people wouldn't know the real
issue. The notices were meant not to let them know, but to let
them throw it away.
Mr. Dugan. Well----
Senator Shelby. Whereas--wait a minute--whereas, if you go
with the premise that this is your information that you send
that belongs to your checking account, your savings account,
and all this, and it is your property right, as Ms. Schlafly
talks about, which I believe, it belongs to you, and you have a
confidential relationship, or should have--most people think
they do--with their financial institution.
Gosh, how can you justifying selling that, using that
without the permission of the customer, the expressed
permission? How can you do it?
I think Attorney General Hatch made a good point.
Mr. Dugan. From our point of view, I do not believe----
Senator Shelby. And your point of view is the point of view
of the people you represent, right?
Mr. Dugan. It is the people who have to serve their
customers every day, and it is an industry that is built on
maintaining the trust of their customers.
Senator Shelby. This is a way to break it down, isn't it?
Mr. Dugan. Well, that is where we disagree.
Senator Shelby. I think that is under attack all over
America.
Mr. Dugan. With all due respect, Senator, we think the
information-sharing that goes on helps consumers, helps
provide----
Senator Shelby. How does it help them? I want to hear that.
Mr. Dugan. I will give you an example.
Let's say you had an opt-in scheme and at the beginning of
a customer relationship--from our point of view, many consumers
do not either opt-in or opt-out. They are less sensitive to
this concern.
If you have an opt-in scheme and they do not opt-in to some
information-sharing, they just do not pay attention to it and
they do not opt-in, then they do not get to hear about some of
the benefits that would otherwise apply. For example, if
someone has a deposit with a bank, it is a common practice for
the bank to give a discount on a mortgage provided by an
affiliated company. Or it may be the case that someone has a
high-rate credit card loan and the institution knows that he or
she has a high-rate credit card loan and also knows that that
customer could qualify for a much lower interest rate home
equity loan from an affiliated company.
If an opt-in restriction were in place, as in one of the
California bills, you have a situation where someone would be
punished for calling up and trying to tell the customer that he
qualified for something that was of real benefit to him,
because he did not opt-in at the beginning of this
relationship.
Senator Shelby. Mr. Kasper.
Mr. Kasper. Thank you, Senator Shelby.
That begs the question. We are here talking about banking
products. What about insurance and securities products. An
inducement to purchase an insurance product is called a rebate
and it is illegal under almost all State insurance laws.
What about the small independent business people across the
United States who are in the insurance and securities business
as independent entrepreneurs trying to make a living competing
with this inside information that is being passed around by the
banks to their insurance organization to their securities
organization?
It wipes out competition. It wipes out small business.
Our Nation is built on competition. This is anticompetition
and the basis, the lifeblood of it is the free-flowing of this
confidential information inside the financial conglomerates.
Where we are heading with this is thousands and thousands
of businesses being out of business because we cannot compete.
Senator Shelby. And fewer choices for the consumer.
Mr. Kasper. Absolutely fewer choices, Senator. Absolutely.
The ones that benefit are the big institutions, not the
consumer.
Senator Shelby. Attorney General Hatch.
Mr. Hatch. Mr. Chairman, Senator Shelby, I believe the
question was about the industry, are they reflecting the needs
of their customers?
Exhibit A, what I filed, is a customer sheet. This is from
Fleet Mortgage. These are their customer service reps and what
they told the officers of Fleet Mortgage.
I just briefly have a couple of comments.
``Ninety-five percent of my calls pertain to people wanting
to cancel their policies. I think we should have to get a
signature.''
Another one says, ``They feel it is a fraud, it is a scam,
they never wanted the insurance.''
Another one is, ``I think it is more hassle than it is
worth.''
Another one is, ``I apologize for the inconvenience.''
Another one is, ``Customers should have to sign up for the
products. Don't just add them to accounts.''
And by the way, this is the company. This is an affiliate
of the company.
The best one from an employee of Fleet Mortgage to its
officers.
Chairman Sarbanes. So these are some internal comments of
the company.
Mr. Hatch. Oh, yes, internal.
Chairman Sarbanes. Internal.
Mr. Hatch. I am hopefully not breaking too many laws here.
[Laughter.]
Chairman Sarbanes. No, no, no. But I mean this is what they
are saying to one another. It is like these stock analysts who
tell people to buy the stock. And meanwhile, they are sending
e-mails to one another saying what a turkey the company is.
Mr. Hatch. Correct. The best one is--this is from an
analyst to the supervisor--I hope that Fleet Mortgage makes
enough revenue from optional insurance to justify all the calls
on our 800 line from customers trying to cancel.
Now is that an industry that is really representing its
customers? I do not think so. In fact, I cannot find one
comment--and this is their whole list--there is not one of them
that is positive about what they are doing. They are all
complaining.
Senator Shelby. Mr. Chairman, I hope that as we go along
with hearings, that we will get deeper into this and I hope
that we can get some inside information like that.
I also want to mention, Mr. Chairman, that I saw--and I
haven't talked with him--where Congressman John Dingell had
initiated a probe into the tying of loans. In other words, I
will loan you the money if you buy insurance or if you do so
and so. I think that is something--because that is illegal. And
that is something that I hope under your Chairmanship, that we
will look into, also, because that does destroy competition in
a big way.
Ms. Schlafly, do you have any comments on this?
Ms. Schlafly. I do think that we should consider this a
property rights issue.
Senator Shelby. Absolutely.
Ms. Schlafly. I mean, I believe I own the information about
how I am spending my money and what I am planning to do.
Senator Shelby. In other words, who does the information
belong to?
Ms. Schlafly. Right.
Senator Shelby. Do you give it away? Is it gone? Gosh, if
it does, the American people are going to be in for a shock,
aren't they, a big, big shock.
One last question, Mr. Chairman. You have been very
indulgent. How many signatures does it take to get a
proposition on the ballot in California?
Mr. Mierzwinski. Senator, I actually do not know the exact
number, but I can tell you that our organization has been
involved in a number of them. It is a significant number, 1
percent or something of the people who voted in the last
gubernatorial election across all of the counties.
We have been involved in a number of these and we are part
of a group that is, along with I believe the California Office
of Consumers Union, Consumer Action, a California-based group,
Privacy Rights Clearinghouse, we are seriously considering
going directly to the ballot. And by the way, the industry is
split on this. There is one Internet bank that is a pro-privacy
bank that is supporting the initiative, e-Loan Bank.
So, we are looking forward to working with an industry that
actually believes that privacy is something that they can
market.
Senator Shelby. Mr. Kasper.
Mr. Kasper. Thank you, Senator Shelby.
When I was in California, I had the pleasure to meet Mr.
Chris Larson, who is the Chairman of e-Loan.com, the bank that
Ed Mierzwinski referred to.
The amount of signatures that they will need in California
is between 700,000 and 900,000. He is so serious about this
issue, that he has personally put up a million dollars of his
own money to help get those signatures on the ballot. I
understand the way the California initiatives work, you can
actually hire people to get your signatures. So it is between
700,000 and 900,000.
Senator Shelby. Mr. Chairman, thank you for your
indulgence.
Chairman Sarbanes. Thank you, Senator Shelby.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman.
Mr. Chairman, we seem to be listening to a choir that is
singing the same song about a huge problem out there in
America.
Chairman Sarbanes. Well, there is some dissonant notes in
this choir, I add.
[Laughter.]
Dr. Cate. Thank you, Mr. Chairman.
[Laughter.]
Senator Akaka. There is a huge problem out there in America
having to do with the privacy notices. I just happened to have
a few here that I have been looking at. I have been reading and
rereading the notices. The notices are very complex and
difficult to understand. What kinds of changes can be made to
privacy notices to make them easier to understand? Also, what
do the privacy notices fail to include that consumers should
know?
If we can get feedback on these questions, that may help us
in our quest to craft language that can help.
Mr. Dugan. I would be happy to respond, Senator.
We agree with you that the privacy notices are more
complicated than they should be. And as I said in my testimony,
I think a real fundamental part of the problem is that there is
always a tension with privacy notices about trying to give
enough information to consumers to make an informed judgment,
but not giving too much information so that people are confused
and end up not reading the notices.
I think the regulators tried very hard to come out with
things that simplified the requirements of the statute. But in
the end, it turned out that what they proposed, and some of the
sample clauses that they proposed and some of the legal
terminology that they used was very, very complicated. Indeed,
some of the language that the Attorney General from Vermont
quoted earlier was taken right out of these sample clauses.
Regulators recognize this, as does the industry. But the
industry is in a bit of a Catch-22 because when they see what
the regulators have put out and what they put in these sample
clauses, they have to hew pretty closely to it because, if they
do not, they fear exposure to legal liability.
And so, there is a question and there is, to be honest,
some conservatism the first time out to go and do the letter of
what was being prescribed, and in some cases, that came out
sounding very legalistic and confusing.
I think since then, there has been very much an effort to
try to deviate somewhat and keep within the spirit of the law.
But more importantly, there have been projects that the
regulators have encouraged and the industry is now engaging in
to try to come up with something that is simple, one page, that
has common language terms, that language experts look at, that
makes things easy to understand, to make the opt-out easy to
understand and easy to exercise, and that people could use to
compare among institutions.
That is not an easy process. It is going to take some time
to try to develop and there are several different efforts
underway. But we believe that is an important direction to try
to explore, and that is what we would see as the way to go
about trying to improve the notices because we do believe that
that is a legitimate issue.
Senator Akaka. Mr. Kasper.
Mr. Kasper. Thank you, Senator. I just jotted something
down for your consideration.
If the question and the notice said something like this:
Federal law allows us to share and sell your personal financial
information for marketing purposes and marketing products. If
you do not tell us not to, question, yes or no? Do you want us
to be able to share or to sell your information without your
written permission in advance? Yes or no. That would be simple.
Senator Akaka. Yes.
Mr. Kasper. Bold letters, easy to understand. The consumer
understands.
Ms. Schlafly. How about a box to check?
Mr. Kasper. That is right. Yes or no. Check the box. That
is exactly what I meant. Check the box, yes or no.
Senator Akaka. Mr. Hatch.
Mr. Hatch. Mr. Chairman, Senator Akaka, I think that you
get a very simple notice. People aren't going to respond to an
opt-out. People do not read these things. There is no
inducement for it.
In this country, we are used to an offer and an acceptance
being an agreement. You have to have an affirmative act on both
sides.
What we have done here is deviated from hundreds of years
of commerce by saying that we are going to go to an opt-out. If
the law was simply changed to saying, you cannot trade the
information without permission, other than to serve the actual
transactions involved, I guarantee you the bank, the credit
card company, everybody, it would be very simple. It would be
very clear, and they would offer something. And the consumer
would respond to that offer. It might be frequent flier miles.
It might be--if, indeed, about $300 is made off the sale of
information on myself and on everybody else here in a year, and
if 20 percent of it, if they offered that, some consumers are
going to respond.
Yes, I do want my magazine subscriptions to be disclosed.
No, I do not want my checks to be disclosed to other people.
But give me the choice. It is my property. It is a personal
liberty right.
If you have an opt-in, people will respond. There will be
disclosure of information. It is just simply that people will
pay for it. We are going to find out that it is a free
enterprise system. It is a capitalist system, it should be.
Let's let it work. They will make real clear disclosures. It
will be clear. And they will even offer something for it.
Mr. Sorrell. I agree with General Hatch, that if opt-in was
the standard, the industry that is struggling now to come up
with simpler and more comprehensible privacy notices would find
a way quickly to say clearly what the right is and make the
case that it should be granted, that it wouldn't be eight pages
into the notice and it wouldn't be using this language that
somebody mentioned, you have to be a lawyer to understand it.
This lawyer does not understand it.
So if opt-in was the standard, the industry would find a
way, using its expertise, to make the most compelling case, to
convince the consumer why it is in the consumer's best interest
to give this permission.
We have, as I think was said before, only minuscule
privacy-
related complaints post-Gramm-Leach-Bliley. The reason for that
is because the average consumer doesn't understand the notices,
doesn't understand what the industry is doing in terms of the
sharing of information right now.
These battles are not over in the State capitals. It is
literally just beginning. Efforts by this Committee and
comparable committees in State capitals around the country,
this thing is just starting.
Mr. Mierzwinski. Senator, I agree with the two Attorneys
General that opt-in is the right way to go. Without opt-in, you
need to improve the notices by going to something like an
express statutory language that appears in a box, as General
Sorrell suggested earlier, similar to the nutrition box on the
front of the notice. Because the only right you have is the
limited right to say no to some of the sharing. But most of the
notices put that at the end of the eight pages. The right has
to be moved forward and then needs to be marketed by the
agencies. And the legal gobbledygook and doublespeak needs to
be eliminated.
Senator Akaka. Yes, Dr. Cate.
Dr. Cate. Senator, two responses, if I may.
First, I think we have to distinguish the setting in which
you are talking about consent being obtained.
If we are talking about the opt-in or opt-out or whatever
the choice is being on the document that opens the account or
you apply for the loan, clarity of the notice will I think
undoubtedly come and getting consumers to respond is
comparatively easy because they have to respond. They have to
do something to move on.
What Gramm-Leach-Bliley did and what I think is of greater
concern, is to apply a requirement to data that has already
been collected, so consumers who are not coming to an
institution looking for service, but rather, requiring the
institution to go out to the consumer. We know that it is very
difficult and enormously intrusive to the consumer to actually
reach them.
There are many studies, there is testimony before the
Federal Communications Commission, there have been court cases
on this about the number of phone calls it takes, the number of
letters it takes, and the fact that adding money to the offer
makes absolutely no difference statistically. For example, the
Post Office tells us that unsolicited commercial mail, not
first-class mail, but unsolicited commercial mail, that half,
52 percent of those are thrown away without being opened. So it
won't matter how many $5 bills you stuff in the envelope. If
they are thrown away without being opened, it is going to be
very difficult to get consent, no matter what the consent
system is.
The first point is that it is critical to keep in mind here
the difference between the settings in which we might ask for
consent. The second point is the question of liability related
to notice.
It would be much easier to write standardized notices,
which I think were suggested earlier and are a terrific idea,
notices you could compare across institutions like food
labeling.
The problem right now is that all of the information you
have to explain to comply with the law, and if you explain
inaccurately in any degree, you are liable. It is a strict
liability standard.
So if you say, ``no, we do not share your information with
third parties,'' but it turns out you actually have a
processing service that does work for you under contract, even
though it cannot do anything with the information other than
process it, that violates the terms of the notice.
Then you get these complicated statements--``we do not
share information with third parties, other than for processing
purposes''--and these lengthy explanations.
If we move to a common sense regulatory system, if the FTC,
for example, were empowered to develop a system of basic
questions that consumers would find the answers useful to--``Do
you share information with third parties for marketing? Yes or
no?'' That would be a question that I think all of us would
understand the answer to, and I think frankly that is what many
of us care about.
We are not actually interested in who processes your
payroll or who processes your checks. We want to know, ``Are
you sharing the information so that I am going to be getting
mail.''
That type of notice offers tremendous opportunities because
it also allows for real customization. You can say, not only
``Do you want to hear from us or not,'' but also you can say,
``Do you want to hear from us by e-mail? Do you want to hear
from us by mail?''
We can actually allow a tremendous amount of consumer
choice. But we are going to have to back away from this very
complex strict liability regime to make that work.
Senator Akaka. Mr. Kasper, did you have a comment?
Mr. Kasper. I did, Senator. Thank you.
I just wanted to be sure the record reflected, in
responding to your question about what the notice should say.
That does not mean that I agree that that is what the notice
should be. I support no-opt for affiliate-sharing and opt-in
for nonaffiliate-sharing.
The comments from the industry spokesmen begs to ask, are
you assuming, then, that the people of the United States are
sitting at home breathlessly waiting for their telephone to
ring so that they can buy something from you on the telephone
that they neither want, nor need?
I happen to believe that the answer is no. People will buy
when they want, from whom they want, and what they want, if
they are left alone. This bombardment by the telemarketing
organizations and the banking organizations assumes that the
people want the stuff. They do not want it. They do not want to
be intruded upon. They want to be left alone.
Senator Akaka. Mr. Chairman, I know that my time is up. I
just want to mention that next year, we may be considering the
Fair Credit Reporting Act. We will need to look at possible
changes in the legislation to ensure that consumers have the
necessary privacy protections.
Thank you very much, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Akaka.
Senator Carper.
COMMENTS OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman.
To our witnesses, welcome. We thank you for your testimony
today and for your response to the questions that are being
posed.
When Congress was debating and finally passing Gramm-Leach-
Bliley, I was back in Delaware trying to govern the State as
their Chief Executive and I did not participate in the debate
here or in the conference.
I do not know if any of you are comfortable in taking us
back a couple of years to the time when that debate was ongoing
and the compromise was worked out, which is now part of the law
of the land. And just take a minute and tell this old governor,
how did we end up with the compromise that we now have?
Mr. Dugan. Well, I was involved at the time representing
financial institutions.
I think--and this is just one person's view of how this
came about--that there was, in fact, tremendous concern about
imposing an opt-in regime and that, on the other hand, I think
there was true concern about when information is shared outside
a corporate family, and it led to the notion that something
should be done to provide consumers with control when
information gets shared outside of a corporate family.
That is where the debate first started about providing--
some people wanted to go further and some people thought that
we did not need anything. But that is where Congress struck the
balance and said, we should allow consumers the right, make
institutions give consumers the right, to opt-out for sharing
outside of the corporate family.
On the other hand, smaller financial institutions came in
and said, that is not quite fair because for us to compete and
offer a range of financial services, there are relationships
that we have to enter into, joint marketing relationships with
other financial institutions--not just any company, but other
financial institutions--in order to survive, and we have to be
put on the same footing, the same playing field as affiliates.
That is what caused the creation of the joint marketing
exception for the sharing of information with other financial
institutions.
Congress also imposed strict limits on the redisclosure and
reuse of information, however it was shared. There was also
tremendous debate--when this thing got started, everybody
thought it was simple, but there were many, many kinds of
information that needed to be shared, and not just to carry out
a transaction. The law recognized a whole host of exceptions
from the opt-out restriction, these exceptions were very
suspiciously viewed at the time, but turned out to be very
wisely put in and have not been controversial since then. For
example, sharing information with regulators, for judicial
process, to detect fraud, to share with credit bureaus, etc.
That was the basic structure that was put in place. The
notion also was, you had to have notices because opt-out only
works if you have meaningful notices, and you had to have a
regulatory scheme to enforce it and actually write detailed
regulations about it.
What has happened since then is that this is the first time
that the Government has written such detailed privacy
regulations. In a sense, the financial services industry has
been something of a guinea pig in that you have very detailed
regulations being written for the first time where people had
to struggle on how these kinds of things were sorted out and a
number of decisions were made.
I think a lot of progress was made, but, obviously, as I
mentioned in context with the notices, there are more
improvements that could be made.
Senator Carper. General Hatch.
Mr. Hatch. Mr. Chairman, Senator Carper, this is my
recollection and it is from the hinterland. So, I could be
totally wrong and I am sure the Chairman has a much better
recollection of how this privacy provision got into play. But
in the hinterland, in June, I sued a bank, U.S. Bank, and
alleged that they had taken a million depositors and sold 22
pieces of information to telemarketers, making a lot of money
on this thing.
The day before, the OCC Chairman Hawke had given a speech
in San Francisco, and he had been harping about this for years,
saying, banks, you have to clean up your act.
They are all denying it.
So the day afterwards--they all denied it--we filed the
suit. Very clearly, we were in communication with the OCC on
this issue. We filed the suit, and I will never forget it. On
Wednesday, all the banks said, oh, we are not doing this. Just
U.S. Bank.
By Thursday, all of them were saying, I guess we are doing
it. We are not going to do it any more, because we were
basically saying, it was consumer fraud because they had said
that there was a right to privacy in their literature. We were
also alleging a common law right to privacy with regard to
financial data.
They were disclosing, for instance, your high balance, your
low balance, all sorts of information from whence, you know, a
telemarketer will know when to hit you, which day of the month,
how much disposable income you have, what your age is. And, as
I mentioned earlier, two-thirds of this is targeted to the
senior citizens.
We were plowing through on this suit, and the bank came in
and we started doing some negotiation. We had an opt-in agreed.
But then, I get a call and I am told that the GLB, Gramm-
Leach-Bliley, is going through, which had nothing to do, to my
knowledge, with privacy. The Chairman would know better than I.
But my understanding was that it did not have anything to do
with privacy at that time.
There was a grand debate over Glass-Steagall that was
passed in 1933, and the Douglas Amendment that was passed in
1956 with regard to what banks, what business they could get
into.
And next thing I know, all these banks are plowing into
Minnesota, or at least these lobbyists plowing in, all these
threats and no, you cannot settle this thing with an opt-in.
Congress is going to preempt everything.
But for the Chairman's amendment, everything we were
involved with then would be worthless.
I do not think this was any great thought-out privacy act.
But for the efforts to hold it off and allow the States to do
something, it was just simply a way to get around killing the
right to privacy as it relates to banks. Maybe I am wrong.
Chairman Sarbanes. Well, for the sake of full and of fair
disclosure----
[Laughter.]
--we should register that the position of the industry at
the time was that there should be no privacy protection. That
was their basic position.
Now, what we ended up with in the bill was, there was an
effort made to try to deal with the privacy issue and we got
what I regard as some minimal provisions. But also, in light of
the fact that they were so minimal, we were able to get a
provision in, an explicit provision, that the States could go
beyond the Federal.
My own view is that if we had not gotten that provision in,
that we would still not have preempted. But it would have left
open the argument to be made, which I am sure the industry
would have made, that simply putting the standard, the minimal
standards, in constituted a preemption, even though the
legislation might not have said that there was a preemption.
In any event, we were able to avoid all of that by getting
the
explicit provision that the States can go beyond, and
therefore, I think, saving the Attorneys General a lot of
litigation that otherwise would have occurred, asserting that
the minimal standards in Gramm-Leach-Bliley constituted a
preemption.
But to put all of this into perspective, the industry's
position at the time that we were considering this legislation
was that there should be no privacy protections.
Mr. Dugan, I have to say to you and your clients here today
that this issue has not reached a point of equilibrium or a
point of repose, in my judgment. In other words, I do not think
that the current provisions about privacy protection are
perceived by most people as being adequate.
Therefore, I think this issue is going to remain on the
agenda. And it seems to me that it behooves those that are
interested in it to start thinking in a positive and
constructive way about what the system could be that would
provide the extent of protection that most people would
conclude is appropriate, that puts the issue to rest and might
well encompass within it accommodations for some of the
administrative things that the industry is concerned about. At
least that should be examined and considered.
Otherwise, it is my prediction that if we continue along in
the current path, there will be the equivalent of Enron and
Worldcom one of these days in the privacy field, and you may
well end up with a regime which you say, oh, how did we ever
get to this point? And the answer is going to be, you got there
because you weren't trying to work through to a positive and
rational solution.
Now, I want to commend the Attorneys General for the
interest they have taken. It is extremely important. And I know
the two of you are only reflective of many others in other
States across the country who have interested themselves in
this issue.
Mr. Kasper, certainly you contributed immeasurably by
coming here today and telling us the North Dakota experience.
Of course, Mr. Mierzwinski has been working on this issue.
Ms. Schlafly, I have to say, you added this property
dimension issue, property rights dimension. It is a very
interesting dimension. I had not really thought about it as
much as I probably should have until you started speaking here
today. It is very interesting.
If it means so much economically to these institutions to
get this information and use it, obviously it has some kind of
property value. It starts out coming from the consumer. That
value should be protected or at least compensated for, perhaps.
It raises a very interesting question, over and above the basic
privacy issues.
Anything else, Senator Carper?
Senator Carper. Just one last thing, if I could. I am going
to ask if maybe Mr. Dugan would just reply for the record and
not here today because the hour is late.
My wife is from North Carolina. A member of her family's
identity was stolen, a victim of identity theft. Probably
everybody here knows someone personally who has gone through
what she has gone through. It has not been fun.
And just in the last week, I get a weekly report from a
person on my staff in Delaware who heads up constituent
services for me. We are beginning to see a growing number of
people who call our office because they too are victims of
identity theft.
The question I am going to ask, perhaps, for Mr. Dugan--I
do not mean to pick on you, but just for the record, if you
could let me know what steps you are aware of that the
financial services industry is taking to help combat this
problem.
Mr. Dugan. I would be happy to do that, Senator. And I do
just want to say, very briefly, that you raise a very good
point.
That is precisely the kind of thing, we do think that that
is a real issue. And it is that kind of issue that, if there is
a need, should be addressed, that there is legislation that
needs to be done to take some steps in that direction. That is
something, a targeted kind of harm where there is a problem.
Then we should try to come up with things that go right at
that, as opposed to something very nebulous and broad-based
about information-sharing generally, to try to get at the same
thing.
But we would be happy to respond.
Senator Carper. Thank you.
Mr. Mierzwinski. Senator, if I could add briefly. From the
consumer groups' perspective, identity theft results largely
from a failure of the big banks, the credit card companies, and
the credit
bureaus to adhere to all of the Fair Information Practices and
take care of our information.
It is too easy for a thief to represent themselves as me.
All they need is my Social Security number, a very poor unique
identifier, and my name. And then they apply in my name. The
credit bureau gives the bank a copy of a credit report that
says, he passes, and then the credit card is mailed to the
wrong guy.
That is how easy it is.
We consider this debate over opt-in and opt-out sometimes
covers up all of the other issues related to privacy. But how
the institutions take care of information is just as important.
Senator Carper. Thanks, Mr. Chairman.
Chairman Sarbanes. I may note as we draw to a close that
the European Union has developed privacy protections well
beyond anything that we have here.
American companies are trying to meet an adequacy standard.
They have not been able to do that yet. They may have to go to
Safe Harbor, which they do not want to do because they would
have to elevate the protections they provide. But I am
increasingly concerned about this. The EU is a growing economic
force, and its size, both in terms of population and gross
national product compares with the United States.
If we are not careful, many of the advantages that we have
had as the economic leader, and I think, suppose the EU moves
ahead with better privacy protections. They seem to be moving
ahead with better accounting standards, although we may now be
able to remedy that situation.
But they have this accountability--we used to say to them,
you have to do American-style accounting because that is the
best in the world, the most transparent. We have the best
integrity of the markets. And now they are saying to us, what?
[Laughter.]
They are out there trying to compete with us because we are
falling short. These issues have far-ranging implications, I
think. And this does not strike me as the issue that you are
either here or you are there.
There is obviously a whole area in which we can work to try
to reach a reasonable solution. But I do think if we are going
to do that, we have to move significantly back in the direction
that our starting point is that this information belongs to the
individual who provides the information. And then you go from
there in terms of what uses can be made of it and the
individual's involvement in making that judgment.
We want to thank all of you for coming. This has been an
extremely helpful panel. We appreciate the time and the effort
that each of our witnesses gave in preparing for it.
The hearing stands adjourned.
[Whereupon, at 12:35 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF WILLIAM H. SORRELL
Attorney General, State of Vermont
September 19, 2002
Good morning, and thank you for inviting me to speak with you today
on the important issue of financial privacy. I would like at the outset
to recognize and express my gratitude for the critical role played by
this Committee in the protection of consumers' financial privacy.
Unfortunately, the Gramm-Leach-Bliley Act (GLB) \1\ does not protect
consumers' financial privacy as intended by this Committee. I recommend
that this Committee take further action to ensure that its previous
good work results in real protections for consumers.
---------------------------------------------------------------------------
\1\ Pub. L. No. 106 -102 (1999).
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In these comments I address the following topics:
1. The inability of GLB, as currently construed by Federal
regulators, to stop the abusive telemarketing practices that gave rise
to the financial privacy provisions of GLB in the first instance.
2. The inability of consumers to exercise their rights under GLB
because industry notices are incomprehensible.
3. The problems associated with sharing of financial information
among corporate affiliates.
4. The need to allow States to continue to address problems
associated with sharing of financial information both among affiliates
and nonaffiliated third parties.
5. Recommendations for Congressional action in these areas.
GLB Does Not Protect Consumers From Harms Associated With Sharing
Nonpublic Financial Information
Congress intended Title V of GLB to protect consumers from abuses
associated with sharing of nonpublic personal financial information. As
a result of enforcement actions brought by State Attorneys General
against information-sharing practices of major banking institutions,
Congress created Title V to protect consumers with respect to such
sharing of their financial information. However, the provisions of
Title V are insufficient to protect consumers from the harms associated
with these practices, and pose considerable risks to consumers. The
provisions that allow financial institutions to share encrypted account
numbers and other forms of billing information for marketing purposes
are particularly troublesome. Moreover, the notices issued by financial
institutions under GLB have been dense and require a high reading level
to comprehend, resulting in consumer confusion and inability to
exercise informed choice. Congress should act to correct these
problems, thus ensuring Title V's capacity to protect consumers in the
area of financial privacy.
GLB Does Not Protect Consumers From Fraudulent Telemarketing
The information held by financial institutions about their
customers is highly valuable. While financial institutions might not
disclose this highly valuable information to their competitors, they do
disclose this information to marketing partners and to third parties
for the purpose of jointly marketing products and services unrelated to
the customers' current service selection, and even unrelated to the
particular type of services performed by the financial institution
itself. The harm to a consumer resulting from this type of information-
sharing stems from the tactics sometimes used in marketing new products
to the consumer, who usually does not realize that the marketer already
has the consumer's credit card number, or access to the credit card
account through an encrypted number or other unique means of
identification.
Indeed, it was well known in 1999 that practices of sharing
customer financial information by major banking institutions
facilitated these telemarketing abuses. In the spring of 1999, the
Minnesota Attorney General announced a settlement with U.S. Bancorp,
resolving allegations that U.S. Bancorp misrepresented its practice
of selling highly personal and confidential financial information
regarding its
customers to telemarketers. One year later, thirty-nine additional
States and the District of Columbia entered into a similar
settlement.\2\ The States' investigation focused on the bank's sale of
customer information--including names, addresses, telephone numbers,
account numbers, and other sensitive financial data--to marketers.
Based on this confidential information, the marketers made
telemarketing calls and sent mail solicitations to the bank's customers
in an effort to get them to buy the marketers' products and services,
including dental and health coverage, travel benefits, credit card
protection, and a variety of discount membership programs. Buyers were
billed for these products and services by charges placed on their U.S.
Bancorp credit card. In return for providing confidential information
about its customers, U.S. Bancorp received a commission of 22 percent
of net revenue on sales with a guaranteed minimum payment of $3.75
million.
---------------------------------------------------------------------------
\2\ The basis for the States' action was their charge that U.S.
Bancorp misrepresented its privacy policy to its customers. In some
account agreements provided to its customers, the bank listed the
circumstances under which information would be disclosed, but failed to
include any
reference to the bank's practice of providing such information to
vendors for direct marketing purposes.
---------------------------------------------------------------------------
As a result of the evidence uncovered through the U.S. Bancorp
case, Congress intended to limit the ability of financial services
companies to sell or give their customers' nonpublic personal
information to third-party telemarketers. Congress intended to
forestall these abusive telemarketing practices by specifically
prohibiting financial institutions from sharing an account number or
similar form of access number or access code for a credit card account,
deposit account, or transaction account of a consumer with any
nonaffiliated third-party for use in telemarketing, direct mail
marketing, or other marketing through electronic mail to the
consumer.\3\
---------------------------------------------------------------------------
\3\ Gramm-Leach-Bliley Act, Pub. L. 106 -102, Nov. 12, 1999, 113
Stat. 1338, Section 502(d).
---------------------------------------------------------------------------
However, the regulations adopted to implement GLB allow financial
institutions to sell or to share encrypted credit card numbers or other
unique identifiers, which enables the telemarketing abuses that were at
the heart of Congressional concern to continue unabated. The Federal
agencies' rules implementing this section on sharing of account numbers
sets forth two ``examples,'' the first one of which states:
Account number. An account number, or similar form of access
number or access code, does not include a number or code in an
encrypted form, as long as the bank does not provide the
recipient with a means to decode the number or code. CFR
Sec. 40.12(c) [emphasis added].
Thus, a telemarketer or other recipient of an encrypted account
number or unique identifier is able to notify a financial institution
that a particular consumer indicated a desire to purchase an item, thus
causing the consumer's account to be charged, without ever asking the
consumer for permission to charge the account. The financial
institution then uses its decode mechanism, which it never shares with
an unaffiliated party, to determine which account to charge. This type
of marketing is known as ``preacquired account'' telemarketing. The
possibility of unauthorized charges and fraudulent practices in such
circumstances is greatly increased over situations where the consumer
must affirmatively give a credit card number for the account to be
charged.
Preacquired account telemarketing is inherently unfair and
susceptible to causing deception and abuse, especially with elderly and
vulnerable consumers. Preacquired account telemarketing turns on its
head the normal procedures for obtaining consumer consent. Other than a
cash purchase, providing a signature or an account number is a readily
recognizable means for a consumer to signal assent to a deal.
Preacquired account telemarketing removes these shorthand methods of
consumer control. The telemarketer not only establishes the method by
which the consumer will provide consent, but also decides whether the
consumer actually consented.
The Federal Trade Commission, in its recent Notice of Proposed
Rulemaking
regarding the Telemarketing Sales Rule, has proposed prohibiting
``preacquired account'' telemarketing.\4\ Forty-nine States, the
District of Columbia, and three Territories recently filed comments
with the Federal Trade Commission that strongly support this
proposal.\5\ In their comments, these States, Territories, and the
District of Columbia noted that the consequence of this fundamentally
unfair selling method is clear: Consumers are assessed charges for
products they did not want, and did not understand they were
purchasing.
---------------------------------------------------------------------------
\4\ 67 Fed. Reg. 4491.
\5\ Comments of 52 Attorneys General, the District of Columbia
Corporation Counsel, and the Hawaii Office of Consumer Protection
Regarding Proposed Amendments to the Telemarketing Sales Rule, April
12, 2002, available at www.naag.org.
Fleet Mortgage Corporation, for instance, entered into
contracts in which it agreed to charge its customer-homeowners
for membership programs and insurance policies sold using
preacquired account information. If the telemarketer told Fleet
that the homeowner had consented to the deal, Fleet added the
payment to the homeowner's mortgage account. Angry homeowners
who discovered the hidden charges on their mortgage account
called Fleet in large numbers.\6\ . . . Approximately one-fifth
of all calls by Fleet customers were about these preacquired
account ``sales.'' Customers overwhelmingly told Fleet that
they did not sign up for the product, and wanted to know how it
was added to their mortgage accounts without their approval,
consent, or signature.\7\
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\6\ The mortgage statements issued by Fleet hid the charges under
the rubic ``opt.prod.'' at the very bottom of the bill in small print,
such that it was extremely difficult to discover the charge or discern
the purpose of the charge. For consumers on auto-draft from their
checking or other bank account, Fleet gave no written notice of the
charge.
\7\ Comments of 52 Attorneys General, the District of Columbia
Corporation Counsel, and the Hawaii Office of Consumer Protection
Regarding Proposed Amendments to the Telemarketing Sales Rule, supra
note 5.
This Committee should take the lead in protecting consumers from
such abusive telemarketing practices by prohibiting the use of
encrypted numbers, unique identifiers, and other means for accessing a
consumer's account.
Moreover, it seems likely that, as information-sharing increases,
the risk of misuse or misappropriation of such information increases as
well. It may well be that the greater the quantity and level of detail
of confidential information, and the more entities that possess such
information, the higher the chance that the information will be stolen
or misappropriated, or used for other inappropriate purposes, such as
the improper denial of credit, insurance, or employment. I therefore
urge this Committee to look beyond the known risks of telemarketing
abuses to identify and evaluate less obvious risks, including potential
identity theft.
GLB Notices are Inadequate to Advise Consumers of Their Rights With
Respect to Information Sharing
The notices to consumers that are required under GLB \8\ are
woefully inadequate. Consumers have been greatly confused by the dense
information in the notices, which require a high education level to
comprehend. As a result, consumers have not been adequately informed
about their rights to opt-out of information-sharing with third
parties.
---------------------------------------------------------------------------
\8\ 15 U.S.C. Sec. 6802(b)(1)(A).
---------------------------------------------------------------------------
The opt-out notices provided by financial institutions in their
effort to comply with GLB have not been ``clear and conspicuous,'' as
those terms are commonly understood. Opt-out notices mailed by many
financial institutions have been unintelligible and couched in language
several grade levels above the reading capacity of the majority of
Americans.\9\ Experts have highlighted the inadequacy of such
statements. Mark Hochhauser, Ph.D., a readability expert, reviewed
sixty GLB opt-out notices. Dr. Hochhauser determined that these notices
were written at an average third or fourth year college reading level,
rather than the junior high level comprehensible to the general
public.\10\ For example, the notice sent to customers by one financial
institution stated:
---------------------------------------------------------------------------
\9\ See Robert O'Harrow, Jr., ``Getting a Handle on Privacy's Fine
Print: Financial Firms' Policy Notices Aren't Always `Clear and
Conspicuous,' as Law Requires,'' The Washington Post, June 17, 2001, at
H-01.
\10\ Mark Hochhauser, Ph.D., ``Lost in the Fine Print: Readability
of Financial Privacy Notices,'' http://www.privacyrights.org/ar/GLB-
Reading.htm (2001).
If you prefer that we not disclose nonpublic personal
information about you to nonaffiliated third parties, you may
opt-out of those disclosures, that is, you may direct us not to
make those disclosures (other than disclosures permitted by
law).\11\
---------------------------------------------------------------------------
\11\ See Hochhauser, supra n. 10.
Recent surveys demonstrate that consumers either never see and read
such complicated opt-out notices, or they do not understand them. A
survey conducted by the American Bankers Association \12\ found that 41
percent of consumers did not recall receiving their opt-out notices, 22
percent recalled receiving them but did not read them, and only 36
percent reported reading the notice. Another survey, conducted by
Harris Interactive for the Privacy Leadership Initiative, announced its
results in early December 2001.\13\ The Harris Survey indicated that
only 12 percent of consumers carefully read GLB privacy notices most of
the time, whereas 58 percent did not read the notices at all or only
glanced at them. The Harris Survey further
indicated that lack of time or interest and difficulty in understanding
or reading the notices top the list of the reasons why consumers do not
spend more time reading them.
---------------------------------------------------------------------------
\12\ Available at http://www.aba.com/Press+Room/bankfee060701.htm.
\13\ Available at http://www.ftc.gov/bcp/workshops/glb (hereinafter
``Harris Survey'').
---------------------------------------------------------------------------
Those consumers that do read the GLB notices have voiced numerous
complaints, raising concerns that the financial institutions'
unintelligible notices are an attempt to mislead them.\14\ The opt-out
approach promulgated under GLB has proven so problematic that the
Federal agencies that administer the regulations under GLB convened an
Interagency Public Workshop to address the concerns that have been
raised ``about clarity and effectiveness of some of the privacy
notices'' sent out under GLB.\15\ The agencies noted that consumers
have complained that ``the notices are confusing and/or misleading and
that the opt-out disclosures are hard to find.'' \16\
---------------------------------------------------------------------------
\14\ Harris Survey, supra n. 13.
\15\ Interagency Public Workshop, ``Get Noticed: Effective
Financial Privacy Notices,'' http://www.ftc.gov/bcp/workshops/glb/; see
also Press Release, ``Workshop Planned to Discuss Strategies for
Providing Effective Financial Privacy Notices,'' http://www.ftc.gov/
opa/2001/09/glbwkshop.htm (September 24, 2001).
\16\ See Joint Notice Announcing Public Workshop and Requesting
Public Comment, ``Public Workshop on Financial Privacy Notices,'' at 3.
---------------------------------------------------------------------------
Where the vast majority of consumers do not even read opt-out
notices, and those who read the notices cannot understand them, it
cannot be said that they are able to understand their rights and
exercise their choices intelligently. As a result, the Attorneys
General of forty-two States, the District of Columbia, and two
Territories called on the FTC and other Federal regulatory agencies to
create standard notices and require much simpler language so that
consumers can understand them.\17\
---------------------------------------------------------------------------
\17\ See Comments of 44 Attorneys General to Federal Trade
Commission Regarding GLB Notices, dated February 15, 2002, available at
www.naag.org.
---------------------------------------------------------------------------
Congress should step in and require the Federal agencies to create
standard notice forms for use by the financial services industry under
GLB. Standard notices for financial privacy could be modeled on the
nutritional labeling required by the Congress under the Nutritional
Labeling and Education Act. Use of such standard notices would enable
consumers to much more easily understand their rights, and to exercise
their choices allowed under Federal law.
The FCRA Does Not Adequately Protect Consumers From Abuses
Associated With Sharing of Nonpublic Personal Financial
Information Among Affiliates
The concerns with respect to sharing of information with
unaffiliated third parties --abusive telemarketing practices and
incomprehensible notices--apply with equal force with respect to
sharing of nonpublic personal financial information among corporate
affiliates. The breadth and number of affiliates of some financial
institutions is breathtaking, yet most consumers remain unaware of the
existence or identity of their financial institutions' affiliates.
Consumers should be better protected from the harms associated with
affiliate-sharing by giving consumers an effective choice before
credit-related information can be shared throughout a vast corporate
complex.
Under the FCRA, consumers have no choice as to whether their
transaction and experience information will be shared with their
financial institution's corporate affiliates. Moreover, once they are
given a notice and opportunity to opt-out, all other information can
also be shared with the corporate affiliate group. Thus information
about the consumer's income, employment history, credit score, marital
status, and medical history can be shared with ease among corporate
affiliates.
GLB greatly expanded the activities that were permissible under one
corporate umbrella, as it allowed insurance, securities, and banking
institutions to affiliate with each other. Even prior to enactment of
GLB, financial institutions were allowed to affiliate with a broad
spectrum of companies. The list of activities that are identified by
the Federal Reserve Board in its rulemaking as ``financial'' in nature
or closely related to financial activities, and therefore permissible
for inclusion within a financial holding company, goes well beyond
traditional financial activities, and includes the following:
Insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and issuing
annuities, and acting as principal, agent, or broker for purposes
of the foregoing, in any State.
Providing financial, investment, or economic advisory
services, including advising an investment company (as defined in
Section 3 of the Investment Company Act of 1940).
Issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly.
Underwriting, dealing in, or making a market in securities.
Leasing real or personal property (or acting as agent, broker,
or advisor in such leasing) without operating, maintaining, or
repairing the property.
Appraising real or personal property.
Check guaranty, collection agency, credit bureau, real estate
settlement services.
Providing financial or investment advisory activities
including tax planning, tax preparation, and instruction on
individual financial management.
Management consulting and counseling activities (including
providing financial career counseling).
Courier services for banking instruments.
Printing and selling checks and related documents.
Community development or advisory activities.
Providing financial data processing and transmission services,
facilities (including hardware, software, documentation, or
operating personnel), databases, advice, or access to these by
technological means.
Leasing real or personal property (or acting as agent, broker,
or advisor in such leasing) where the lease is functionally
equivalent to an extension of credit.
Providing investment, financial, or economic advisory
services.
Operating a travel agency in connection with financial
services.\18\
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\18\ Examples 1- 4 are from 12 U.S.C. Sec. 4(k); examples 5 -13 are
from 12 CFR Sec. 225.28; and examples 14 -16 are from 12 CFR
Sec. 211.5(d).
Thus the types of businesses with which traditional financial
institutions may now affiliate themselves, in addition to banking,
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insurance, and securities brokerage, include:
mortgage lenders;
``pay day'' lenders;
finance companies;
mortgage brokers;
account servicers;
check cashiers;
wire transferors;
travel agencies operated in connection with financial
services;
collection agencies;
credit counselors and other financial advisors;
tax preparation firms;
non-Federally insured credit unions; and
investment advisors that are not required to register with the
Securities and Exchange Commission.\19\
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\19\ 16 CFR Sec. 313.1 (b).
Also included among the list of permissible affiliates are
institutions that are ``significantly engaged in financial
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activities,'' such as:
A retailer that extends credit by issuing its own credit card
directly to consumers.
A personal property or real estate appraiser.
An automobile dealership that, as a usual part of its
business, leases automobiles on a nonoperating basis for longer
than 90 days.
A career counselor that specializes in providing career
counseling services to individuals currently employed by or
recently displaced from a financial organization, individuals who
are seeking employment with a financial organization or individuals
who are currently employed by or seeking placement with the
finance, accounting or audit department of any company.
A business that prints or sells checks for consumers, either
as its sole business or as one of its product lines.
An accountant or other tax preparation service that is in the
business of completing income tax returns.
An entity that provides real estate settlement services.\20\
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\20\ 16 CFR Sec. 313.3 (k)(2).
The number and breadth of affiliates currently associated with some
of the country's major financial institutions is astounding. Submitted
with these comments for the Committee's official record are the
corporate affiliate lists for Bank of America Corporation, Citigroup,
Inc., and KeyCorp,\21\ which serve as three examples of the level of
affiliation at large- and mid-sized banking institutions in this
country. Bank of America lists 1,476 corporate affiliates; Citigroup
lists 2,761 corporate affiliates; and KeyCorp lists 871. A perusal of
these corporate affiliate lists demonstrates that these holding
companies appear to be involved in widely disparate activities,
including insurance, securities, international banking, real estate
holdings, and development, and equipment leasing. Some of these
affiliate operations may, in the normal course of their business,
gather highly personal health information about consumers. A consumer
holding a credit card with the lead bank or a property and casualty
insurance policy with a major insurer in any of these affiliate groups
would not expect that his or her transaction and experience information
would be spread throughout the corporate affiliate structure for the
purpose not of servicing the consumer better, but of marketing products
to the consumer.
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\21\ These lists, and other corporate affiliate lists for bank
holding companies can be obtained at http://132.200.33.161/nicSearch/
servlet/NICServlet?$GRP$=INSTHIST&REQ=MERGEDIN &MODE=SEARCH.
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The only appropriate mechanism for giving consumers control over
sharing of information within such broad affiliate groups is to require
that consumers be given effective notice and choice before their
information may be shared with affiliates.
Unfortunately, current notices to consumers about their rights
under the FCRA with respect to sharing of nonpublic personal financial
information with affiliates are highly inadequate, just like the
notices about consumers' rights under GLB. Indeed, both GLB and the
FCRA require that notices about information-sharing practices and
information about how consumers can exercise their opt-out rights must
be written in a ``clear and conspicuous'' manner.\22\ The Federal
regulatory agencies have not yet issued any guidance on how these two
notice requirements work together. Many financial institutions have
incorporated their affiliate-sharing notices required under the FCRA
within their notices about the sharing of information with unaffiliated
third parties required under GLB. Consumers have experienced the same
problems outlined previously, with respect to affiliate-sharing notices
as they have experienced with notices about sharing of information with
unaffiliated third parties.
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\22\ 15 U.S.C. Sec. 6802(b)(1)(A); 15 U.S.C.
Sec. 1681a(d)(2)(A)(iii).
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Accordingly, Congress should require financial institutions to give
consumers an effective choice before nonpublic personal financial
information can be shared among affiliates. Moreover, Congress should
direct that the standard financial privacy notices to be created by the
Federal regulatory agencies contain a standard format for information
about affiliate-sharing practices and consumers' choices to control
such sharing.
Congress Should Continue to Allow States to Enact More Protective
Laws With Respect to Financial Privacy
Prior to GLB, States had enacted provisions relating to financial
privacy that were more protective than the provisions of Federal law.
This Committee ensured the ability of States to continue to protect
their citizenry by enacting Section 507 of GLB, which allows States to
adopt financial privacy laws relating to sharing with unaffiliated
third parties that are more protective than Title V. Due to the
inadequacies of GLB discussed above, States and localities have been
exercising this authority to ensure that their consumers' financial
information is protected. Moreover, under the FCRA, the current
preemption of more protective State laws relating to affiliate-sharing
is due to sunset on December 31, 2003.
This Committee should ensure that States continue to be entitled to
enact more protective laws with respect to sharing of financial
information with third parties and affiliates.
State Law on Information Sharing With Unaffiliated Third Parties
Recognizing that many of the problems inherent with GLB stem from
the Federal law's acceptance of consumer ``opt-out'' as an appropriate
means of registering consumer choice, States and local governments have
been actively adopting laws that require consumers to opt-in before
their information can be shared. There are currently six States that
have enacted laws that require some form of opt-in before
financial information can be shared by banks.\23\ Fourteen States have
enacted laws or regulations that require some form of consumer consent
before financial information can be shared by insurance companies.\24\
In addition, North Dakota voters recently adopted a referendum
reversing the State legislature's repeal of that State's opt-in law,
putting that State's banking opt-in law back on the books. Two
California localities--San Mateo County and Daly City--also have
recently adopted ordinances requiring affirmative consumer consent
before financial information can be shared. These laws are a reaction
by State and local governments to the problems associated with GLB, and
an effort by these governments to provide consumers with protections
greater than those afforded under Federal law.
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\23\ Alaska (Alaska Stat. Sec. 06.05.175); Connecticut (Conn. Gen.
Stat. Ann. Sec. 36a- 42); Illinois (205 Ill. Comp. Stat. Ann. 5/48.1);
Maryland (Md. Code Ann., Financial Institutions Sec. 1-302); North
Dakota (N.D. Cent. Code Sec. 6-08.1-04); and Vermont (VT. Stat. Ann.
tit. 8, Sec. 10201 and BISHCA Regulation B-2001-01).
\24\ Arizona (Ariz. Rev. Stat. Ann. Sec. 20-2113); California (Cal.
Ins. Code Sec. 791.13); Connecticut (Conn. Gen. Stat. Ann. Sec. 38a-
988); Georgia (Ga. Code Ann. Sec. 33-39-14); Maine (Me. Rev. Stat. Ann.
tit. 24-A, Sec. 2215); Massachusetts (Mass. Gen. Laws Ann. ch. 175I,
Sec. 13); Minnesota (Minn. Stat. Ann. Sec. 72A.502); Montana (Mont.
Code Ann. Sec. 33-19-306); Nevada (Nev. Admin. Code ch. 679B
Sec. Sec. 679B.560 - 679B.750); New Jersey (N.J. Stat. Ann.
Sec. 17:23A-13); New Mexico (N.M. Admin. Code tit. 13,
Sec. Sec. 13.1.3.1 -13.1.1.28); North Carolina (N.C. Gen. Stat.
Sec. 58 -39 -75); Ohio (Ohio Rev. Code Ann. Sec. 3904.13); Oregon (Or.
Rev. Stat. Sec. 746.665); and Vermont (VT. BISHCA Regulation IH-2001-
01).
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Some States have adopted laws or regulations that are designed to
address some of the specific problems consumers face under Federal law.
For example, Vermont's new financial privacy regulations specifically
prohibit banks, insurance companies, and securities firms from sharing
encrypted account numbers or other unique identifiers that would allow
telemarketers and others to access a consumer's account. See, that is,
Vermont Department of Banking, Insurance, Securities, and Health Care
Administration Regulation B-2001-01, Section 13 (available at http://
www. state.vt.us/atg/Banking%20Adopted%20Rule.pdf ).
Congress should ensure that States can continue to be allowed to
protect their consumers with respect to sharing of financial
information with third parties by enacting laws that are more
protective than GLB's Title V.
State Law on Affiliate Sharing
Similarly, Congress should ensure that States can adopt laws that
are more protective than the FCRA with respect to affiliate-sharing.
The FCRA prohibits States from enacting or enforcing provisions with
respect to sharing of information among affiliates until January 1,
2004.\25\ Congress should allow this preemption provision to sunset, as
scheduled, on January 1, 2004. After that date, States will be allowed
to enact laws with respect to affiliate-sharing if two conditions are
met:
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\25\ See 15 U.S.C. Sec. Sec. 1681t(b)(2) and (d).
The State provision explicitly states that it is intended to
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supplement the Federal FCRA.
The State provision gives greater protection to consumers than
is provided under the Federal FCRA.\26\
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\26\ 15 U.S.C. Sec. 1681t(d).
Currently, Vermont is the only State that has a law directly
regulating affiliate-sharing. Vermont law, like Federal law, allows
affiliates to share transaction and experience information without any
notice to a consumer and without any way for a consumer to prevent the
sharing. However, before financial institutions can share credit
reporting information about Vermont consumers with their affiliates
under Vermont law, the institutions must obtain affirmative consent--or
opt-in--from the consumer.
Because Vermont was the only State to have addressed the issue of
affiliate-sharing at the time of the 1996 revisions to the FCRA,
Congress specifically exempted Vermont's State consent provision from
FCRA preemption ``with respect to the exchange of information among
persons affiliated by common ownership or common corporate control.''
\27\ Congress should allow other States to address concerns with
respect to affiliate-sharing by allowing the preemption of such State
laws to sunset as scheduled.
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\27\ 15 U.S.C. Sec. 1681t(b)(2).
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Recommendations for Congressional Action
In sum, I recommend the following as appropriate steps for this
Committee to take to ensure that consumers' financial privacy is
protected:
1. To prevent abusive telemarketing practices of the type that led
to enactment of Title V in the first instance, prohibit financial
institutions from using encrypted account numbers, unique identifiers,
or other means to access a consumer's account without explicit
authorization from the consumer.
2. To ensure that consumers understand their rights under Federal
law with respect to financial privacy, require the Federal Agencies
responsible for GLB regulation to develop standard financial privacy
notices similar to the nutritional labels developed by the Food and
Drug Administration under the Nutritional Labeling and Education Act.
3. Ensure that consumers have effective notice and choice with
respect to affiliate-sharing.
4. Continue to allow States to enact more protective provisions
with respect to sharing of financial information among unaffiliated
third parties.
5. Allow the preemption of more protective State laws governing
affiliate-sharing to sunset as scheduled on December 31, 2003.
PREPARED STATEMENT OF FRED H. CATE
Professor of Law, Indiana University School of Law
September 19, 2002
My name is Fred Cate, and I am a Professor of Law and Ira C. Batman
Faculty Fellow at the Indiana University School of Law in Bloomington,
and a Senior Policy Advisor at the Hunton & Williams Center for
Information Policy Leadership. For the past 13 years, I have
researched, written, and taught about information laws issues
generally, and privacy law issues specifically. I directed the
Electronic Information Privacy and Commerce Study for the Brookings
Institution, served as a Member of the Federal Trade Commission's
Advisory Committee on Online Access and Security, and currently am a
Visiting Fellow, addressing privacy issues, at the American Enterprise
Institute.
I appreciate the opportunity to testify today, and I am doing so on
my own behalf. My views should not be attributed to Indiana University
or to any other institution or person.
The Importance of Consumer Concern
The polling data, newspaper editorial pages, this summer's
referendum in North Dakota, and anecdotal evidence all suggest that
consumers are concerned about personal financial information and how it
is accessed and used both by the Government and private industry. It is
important to view this concern in context.
The concern is not surprising, given the amount of press and
political attention given privacy issues, the increased focus on
privacy issues and the dramatic growth in privacy-related products and
services by financial institutions, and the deluge of a billion or more
privacy notices that financial institutions are required by Federal law
to mail to their customers annually.
When viewed in this context, I believe the existence of consumer
concern is not only predictable but largely healthy: It tells us that
consumers are paying more attention to important privacy issues, and
are interested in how their privacy can be better protected. Given that
many of the most effective privacy protections--especially to guard
against identity theft--are the steps that individuals alone can each
take individually, this new interest is critical.
The Absence of Consumer Action
It is also important not to lose sight of the context of consumer
action--as opposed merely to polls. Under the requirements of Gramm-
Leach-Bliley, by July 1, 2001, tens of thousands of financial
institutions had mailed approximately 1 billion notices. If ever
consumers would respond, this would appear to be the occasion: The
notices came in an avalanche that seems likely to have attracted
consumer attention, the press carried a wave of stories about the
notices and about State efforts to supplement Gramm-Leach-Bliley's
privacy provisions, privacy advocates lauded the opt-out opportunity
and offered online services that would write opt-out requests for
consumers, and the information at issue--financial information--is
among the most sensitive and personal to most individuals.
Yet the response rate was negligible. The available published
information indicates that fewer than 5 percent of consumers responded
to the deluge of notices by opting out of having their financial
information shared with third parties. For many financial institutions,
the response rate was lower than 1 percent. And this appears to be
consistent with response rates to other privacy-related opt-out
opportunities, such as the Fair Credit Reporting Act's opt-out
provisions applicable to prescreening and sharing credit reports with
affiliates; the Direct Marketing Association's mail, telephone, and e-
mail opt-out lists; and other company-specific lists.
Before considering the adoption of new privacy laws, I would urge
Congress to first consider why consumers do not take advantage of
existing opportunities to restrict the sharing or use of information.
The Interference with Competing Desires
Consumers' concern about privacy protection must also be examined
in the context of other consumer issues. Consumers want not only more
privacy, but also lower rates on mortgages and loans, higher returns on
CD's and investments, and faster and more personalized service. Privacy
laws can interfere with these other objectives, both by restricting the
flow of information on which they depend, and by imposing high
transaction costs on consumers and financial institutions alike.
Restricting the Benefits of Open Information Flows
Consider just a few of the many examples of the consumer benefits
that depend on accessible information and that are threatened by more
restrictive privacy laws. Businesses and other organizations use
personal information to identify and meet customer needs. According to
Federal Reserve Board Governor Edward Gramlich: ``Information about
individuals' needs and preferences is the cornerstone of any system
that allocates goods and services within an economy.'' The more such
information is available, ``the more accurately and efficiently will
the economy meet those needs and preferences.'' \1\
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\1\ Financial Privacy, Hearings before the Subcommittee on
Financial Institutions and Consumer Credit of the House Committee on
Banking and Financial Services, July 21, 1999 (statement of Edward M.
Gramlich).
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Information-sharing allows financial institutions to ``deliver the
right products and services to the right customers, at the right time,
more effectively and at lower cost,'' Fred Smith, Founder and President
of the Competitive Enterprise Institute, has written.\2\ The use of
personal information to recognize and respond to individual customer
needs is the definition of good customer service. Personalized
service--epitomized by George Bailey, small-town banker played by Jimmy
Stewart in ``It's a Wonderful Life''--is what many consumers want. The
Los Angeles Times reported in December 1999, about customers who are
understandably ``irritated if the bank fails to inform them that they
could save money by switching to a different type of checking
account.'' But, of course, as the newspaper noted, ``to reach such a
conclusion, the bank must analyze the customer's transactions. . . .''
\3\
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\2\ Fred L. Smith, Jr., Better to Share Information, Desert News
(Salt Lake City, UT), October 14, 1999, at A22.
\3\ Edmund Sanders, Your Bank Wants to Know You, The Los Angeles
Times, December 23, 1999, at A1.
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By having a complete picture of its customers' financial
situations, banks can offer them bundled services at a single lower
price than if provided on an a la carte basis. Customers benefit in two
ways: First, they are offered a range of diversified services that are
most appropriate for their individual financial situations. Second,
they get those services at a lower price.
For example, a consumer may choose to link her mortgage loan with a
checking or savings account at the lender's affiliate, and thereby
avoid minimum balance requirements for the checking or savings account,
and enjoy the convenience of being able to arrange for direct
deductions from a bank account to make the monthly mortgage payment. A
financial services institution can aggregate all of a customer's
accounts to satisfy minimum balance requirements. It can make an
instant decision whether to increase a credit line, based on its total
relationship with the customer. Washington attorney L. Richard Fischer
writes: ``Information-sharing also enables financial institutions to
offer consumers popular products such as `affinity' or `co-brand'
credit card accounts. Such programs provide frequent flyer miles,
grocery, or gasoline rebates, and other benefits to credit cardholders.
Other such programs permit universities and other not-for-profit
organizations to benefit from cardholder use of their accounts.'' \4\
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\4\ Financial Privacy Hearings, supra (statement of L. Richard
Fischer).
---------------------------------------------------------------------------
To provide all of these and other opportunities, access to data is
essential. Laws restricting affiliate-sharing or requiring opt-in
consent make the provision of these services untenable. How could an
affinity program work if the card issuer and unaffiliated partner could
not share customer data? How could a lender accurately and rapidly
judge the risk of increasing a customer's credit line if it could not
look at all of her accounts with affiliated companies? How would a
financial services institution identify appropriate candidates for debt
consolidation, if it could not examine both the range of outstanding
debts and homeownership or other relevant criteria?
Information-sharing is especially critical for new and smaller
businesses. By restricting the availability of information about their
customers, privacy laws help to protect established businesses from
competition. Laws designed to protect privacy act as barriers to that
information-sharing, and therefore, writes Robert E. Litan, Director of
the Economic Studies Program and Vice President of the Brookings
Institution, ``raise barriers to entry by smaller, and often more
innovative, firms and organizations.'' \5\
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\5\ Robert E. Litan, Balancing Costs and Benefits of New Privacy
Mandates, Working Paper 99 -3, AEI-Brookings Joint Center for
Regulatory Studies (1999).
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The Cost of Regulation
There is also a financial cost to privacy regulation. We have
already seen that a major component of that cost is caused by the
interference of privacy laws with open information flows. Another
source of that cost is the burden of complying with privacy laws.
Crafting, printing, and mailing the billion or more disclosure notices
required by Gramm-Leach-Bliley, for example, is estimated to have cost
$2-$5 billion. Much of that cost will be repeatedly annually.
More burdensome opt-in laws, as discussed below, would prove even
more costly. During its opt-in test, U.S. West found that to obtain
permission to use information about its customer's calling patterns to
market services to them cost between $21 and $34 per customer,
depending on the method employed.\6\
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\6\ Brief for Petitioner and Interveners at 15-16, U.S. West, Inc.
v. FCC, 182 F.3d 1224, 1239 (10th Cir. 1999) (No. 98 -9518), cert.
denied 528 U.S. 1188 (2000).
---------------------------------------------------------------------------
A 2000 Ernst & Young study of financial institutions representing
30 percent of financial services industry revenues, found that
financial services companies would send out three to six times more
direct marketing material if they could not use shared personal
information to target their mailings, at an additional cost of about $1
billion per year.\7\
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\7\ Ernst & Young LLP, Customer Benefits from Current Information
Sharing by Financial Services Companies 16 (December 2000).
---------------------------------------------------------------------------
The study concluded that the total annual cost to consumers of opt-
in's restriction on existing information flows--precisely because of
the difficulty of reaching customers--was $17 billion for the companies
studied, or $56 billion if extrapolated to include the customers of all
financial institutions. Those figures do not include the costs
resulting from the reduced availability of personal information to
reduce fraud, increase the availability and lower the cost of credit,
provide co-branded credit cards and nationwide automated teller machine
networks, and develop future innovative services and products.
These costs do not include the increased burden to consumers of
additional letters, telephone calls, and e-mails seeking consent: U.S.
West had to call its customers an average of 4.8 times per household
just to find an adult who could consent.
The Special Problem of Opt-In
The burden of privacy laws is even greater when they forbid the use
of information without affirmative, opt-in consent. While both opt-in
and opt-out give consumers the same legal control about how their
information is used, the two systems differ in the consequences they
impose when consumers fail to act.
The U.S. Post Office reports that 52 percent of unsolicited mail in
this country is discarded without ever being read. It will not matter
how great the potential benefit resulting from the information use, if
the request is not read or heard, it cannot be acted on. Corporate
trials of consent-based privacy systems demonstrate that no matter how
good the offer or how easy the opt-in or the opt-out method, customers
rarely respond.
Under opt-out, consumers like those under Gramm-Leach-Bliley who
failed to read or respond to a privacy notice, still received services.
Under opt-in, consumers who did not respond could not have their
information used. By virtue of not responding--whatever the reason--
those subject to opt-in are excluded from receiving information-
dependent services. Opt-in is more costly to consumers precisely
because it fails to harness the efficiency of having them reveal their
own preferences as opposed to having to explicitly ask them.
For a practical, specific example of the impact of opt-in on
consumers, Michael Staten, an economist, Distinguished Professor, and
Director of the Credit Research Center at Georgetown University's
McDonough School of Business, and I conducted a case study of MBNA
Corporation, a diversified, multinational financial institution.
Incorporated in 1981, and publicly-traded since 1991, by the end of
2000, the company has experienced 40 consecutive quarters of growth,
provided credit cards and other loan products to 51 million consumers,
had $89 billion of loans outstanding and serviced 15 percent of all
Visa/MasterCard credit card balances outstanding in the United
States.\8\
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\8\ Michael E. Staten & Fred H. Cate, ``The Impact of Opt-In
Privacy Rules on Retail Credit Markets: A Case Study of MBNA,''_Duke
Law Journal_(forthcoming 2002).
---------------------------------------------------------------------------
The case study examined the impact of three forms of opt-in: (1)
Opt-in for sharing personal information with third parties; (2) Opt-in
for sharing personal information with affiliates; and (3) Opt-in for
any use (other than statutorily excluded uses) of personal information.
The study found that any form of opt-in would have significant
economic effects on MBNA and its customers, because of the company's
extensive use of direct marketing to attract customers and its heavy
reliance on personal information to identify out of the 1 billion
prospect names the company receives annually from its more than 4,700
affinity groups for which MBNA issues credit cards the 400 million
names of people who are likely to be both qualified for and interested
in a credit card solicitation.
Given the low response rates to opt-in requests universally
reflected by organizations that seek consent other than at time of
service or in response to a communication initiated by the customer,
the case study concludes that even the least restrictive opt-in
regime--for third-party information-sharing--would result in the MBNA's
marketing materials being 27 percent less well targeted. As a result,
109 million people would receive solicitations who should not have.
This translates into an 18 percent lower response rate and a 22 percent
increase in direct mail costs per account booked. There would also be
an additional 8 percent reduction in net income because of increased
defaults and reduced account activity, resulting from less qualified
people receiving credit card solicitations.
The broader opt-in regimes would result in more significant losses
to MBNA and its customers, largely in three areas. First, MBNA's
affiliates would be unable to cross-sell services to existing customers
or provide one-stop customer service, because of the restriction of
sharing information across affiliates. Second, MBNA's corporate
structure, which currently includes affiliates because of tax and
regulatory reasons, would be less efficient and more expensive because
centralized service units would no longer be able to provide services
for all of the affiliates. Third, opt-in would interfere with fraud
detection and prevention efforts which depend on information-sharing
across affiliates and among companies.
These costs would be incurred despite the fact that as of the end
of 2000, only about 130,000 customers (one-quarter of 1 percent of
MBNA's customer base) had exercised their legal right to opt-out of
having their credit report information transferred across MBNA
affiliates, and approximately 1 million customers (less than 2 percent)
had taken advantage of MBNA's voluntary opt-out from receiving any type
of direct mail marketing offers.
The important point is not simply that complying with privacy laws
is expensive, but rather that it imposes costs on consumers. Privacy
polls rarely if ever ask consumers whether they are ready to bear that
cost. But ultimately, it is consumers and individuals, in the words of
Alabama Attorney General Bill Pryor, who ``pay the price in terms of
either higher prices for what they buy, or in terms of a restricted set
of choices offered them in the marketplace.'' \9\
---------------------------------------------------------------------------
\9\ Bill Pryor, Protecting Privacy: Some First Principles, Remarks
at the American Council of Life Insurers Privacy Symposium, July 11,
2000, Washington, DC, at 4.
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The Bigger Context
It is also important to evaluate consumer concerns about financial
privacy in a broader context. Gramm-Leach-Bliley was passed in 1999 and
the first notices were required to be mailed by July 1, 2001. Only 14
months has passed since that date, examinations of financial
institutions under the new requirements are only now beginning, and
enforcement has been limited. It is simply too early to judge
meaningfully how well the new system is working.
Despite the short time, however, financial institutions have been
busy working with Federal regulators, consumer advocates, and others
attempting to improve their privacy notices and increase the
effectiveness of consumer education. There was considerable criticism
of the first round of Gramm-Leach-Bliley privacy notices, a key element
of the law. While some of that criticism may be justified, the
complexity of privacy notices seems in large part to have reflected the
complexity of the law and regulations requiring them. Title V uses many
terms that consumers would likely find confusing and that must be used
precisely to make sense of the law's requirements. For example, the law
makes a significant distinction between ``consumers'' and
``customers,'' and this distinction was necessarily reflected in many
notices, even though many people use the terms interchangeably.
It should also be noted that clarity may be in the eye of the
beholder. On June 18, 2001, at a hearing on financial privacy of the
California General Assembly's Committee on Banking and Finance, the
Committee Chairman challenged the financial services industry
representatives in the audience to live up to the standard set by
American Express' privacy notice. In fact, he distributed to every
person attending the hearing a copy of the American Express notice so
that they could, in the Chairman's words, use it as a ``model.'' Two
weeks later, on July 9, 2001, USA Today editorialized in favor of
clearer privacy notices, citing American Express' notice--the same
notice lauded only 2 weeks earlier--at its first example of a difficult
to comprehend notice.\10\
---------------------------------------------------------------------------
\10\ ``Confusing Privacy Notices Leave Consumers Exposed,'' USA
Today, July 9, 2001, at 13A.
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As Federal Trade Commission Chairman Timothy Muris has noted, we
are still learning:
The recent experience with Gramm-Leach-Bliley privacy notices
should give everyone pause about whether we know enough to
implement effectively broad-based legislation based on notices.
Acres of trees died to produce a blizzard of barely
comprehensible privacy notices. Indeed, this is a statute that
only lawyers could love--until they found out it applied to
them.\11\
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\11\ Timothy J. Muris, Protecting Consumers' Privacy: 2002 and
Beyond, 2001 Conference, Cleveland, OH, October 4, 2001.
Today, regulators, industry, and consumers are learning from the
emerging experience with Gramm-Leach-Bliley, and are collectively
improving the quality and
variety of available privacy protections. The Hunton & Williams Center
for Information Policy Leadership, for example, hosts a project in
which leading financial institutions are trying to develop layered
notices--an approach that would make privacy disclosures easier to
understand and compare. The Federal Trade Commission has hosted a
workshop on effective financial privacy notices, and is working with
industry and privacy rights advocates to improve notices. The
Commission is also pushing forward related privacy initiatives,
including a national do-not-call list and increased privacy
enforcement.
Many financial services companies have also responded with privacy-
related products and services, or options for individuals to control
the use of their information beyond what is required by law. Many
financial services companies report today that they do not share
personal nonpublic financial information about their customers with
third parties. Some provide opportunities for customers to opt-out of
information-sharing that is expressly permitted by Gramm-Leach-Bliley.
Citicorp, Capital One, Visa, and American Express all advertise credit
cards offering privacy- and security-related enhancements. Bank of
America and other banks are openly competing for consumer business
based on how privacy protective they are. Companies are developing best
practices for a variety of privacy protections; for example, Citigroup
has released telemarketing best practices developed with State
attorneys general.
None of these developments is likely to prove a panacea for privacy
protection, but their variety and the speed with which they are being
developed suggest that they will afford consumers a greater choice of
privacy alternatives than any law is likely to. Most importantly, there
is virtually no evidence of tangible harms to consumers that are not
already covered by Gramm-Leach-Bliley, the Fair Credit Reporting Act,
or some other financial privacy law.
Consumers have understandable concerns about their privacy, and
some adjustments to Federal financial privacy law may eventually prove
necessary. But in the absence of evidence consumers being physically or
financially harmed by unregulated uses of their personal financial
information, the Congress has the time to wait to see how existing laws
are working and to allow market responses to more fully mature.
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PREPARED STATEMENT OF JOHN C. DUGAN
Partner, Covington & Burling
on behalf of the
Financial Services Coordinating Council
September 19, 2002
My name is John Dugan, and I am a Partner with the law firm of
Covington & Burling. I am testifying today on behalf of the Financial
Services Coordinating Council (FSCC), whose members include the
American Bankers Association, American Council of Life Insurers,
American Insurance Association, and Securities Industry Association.
These organizations represent thousands of large and small banks,
insurance companies, and securities firms that, taken together, provide
financial services to virtually every household in America. I have
represented the FSCC on financial privacy issues since the organization
was formed in late 1999, and in that capacity I have advised on
implementation issues involving the privacy provisions of the Gramm-
Leach-Bliley Act (GLB Act) and related regulations; participated in the
Federal Trade Commission's interagency task force on notices; helped
coordinate our task force devoted to improvements in privacy notices;
and testified on a number of occasions before the Congress and State
legislatures on GLB Act issues and various financial privacy
legislative proposals.
The FSCC appreciates the opportunity to testify before this
Committee on the status of financial privacy regulation, in our case
from the perspective of the financial services industry. Our testimony
focuses on: (1) the balance Congress struck in the Gramm-Leach-Bliley
Act (GLB Act); (2) our experience with implementing the Act, including
the reaction of our customers; (3) our views on the appropriate
relationship between Federal and State privacy laws; and (4) some
thoughts going forward.
The Balance Struck in the GLB Act
Every commercial privacy law strikes a balance between protecting
the privacy
interests of consumers and preserving the clear consumer benefits that
arise from the free flow of information in the economy. While consumers
expect limits on the disclosure of their information, they also expect
companies to provide them with benefits that can only be provided
through information-sharing. For example, a loyal, long-time depositor
in a bank wants and expects to receive a discount on a mortgage loan
offered by a related mortgage company affiliate, and such
``relationship discounts'' can only be provided through information-
sharing. Privacy laws try to balance these competing consumer
expectations.
In terms of financial privacy, we believe that Congress struck the
right balance in 1999 when it adopted the privacy provisions of the GLB
Act against the backdrop of the preexisting privacy protections
provided by the Fair Credit Reporting Act and other Federal and State
statutes. Through exceptionally broad definitions, the GLB Act's
protections apply to virtually all personal information held about the
individual consumers of more than 40,000 financial institutions in this
country--including less traditional ``financial institutions'' such as
check cashers, information aggregators, and financial software
providers. Coupled with protections mandated by the Fair Credit
Reporting Act (FCRA), these consumers now must be provided:
Notice of the institution's practices regarding information
collection and disclosure, which must be clear, conspicuous, and
updated each year.
Opt-Out Choice regarding the institution's sharing of
information with nonaffiliated third parties, and in certain
instances, with affiliates.
Security in the form of mandatory policies, procedures,
systems, and controls to ensure that personal information remains
confidential.
Protection against inappropriate redisclosure or reuse of
personal information that is shared with third parties.
Enforcement of privacy protections via the full panoply of
enforcement powers of the agencies that regulate financial
institutions, for example, the Federal bank regulators, the
Securities and Exchange Commission, State insurance authorities,
and the Federal Trade Commission.
In addition to these protections, customers of financial
institutions that handle personal health information, for example,
insurance companies, receive the extensive privacy protections of
Federal and State medical privacy laws. Taken together, the FSCC
believes that this set of provisions forms the most comprehensive set
of privacy protections that has yet been implemented in the United
States.
We recognize that these protections are not as restrictive as some
would have wanted, including some of the witnesses on today's panel.
But by any measure, compared to 3 years ago consumers have much more
meaningful information, choice, and security regarding the way that
financial institutions handle their personal information.
At the same time, the GLB Act appropriately allows financial
institutions to share information with others for a variety of plainly
legitimate purposes without separate consumer consent, that is, to
carry out transactions requested by the consumer, to deter and detect
fraud, to respond to regulators and judicial process, etc. While many
of these ``doing business'' exceptions were viewed suspiciously by
critics at the time the Act was passed, they have proven to be sensible
and noncontroversial provisions covering sharing for which consumer
consent is simply inappropriate.
The FSCC also continues to support Congress' decision to treat
information-sharing by companies under common control in the same
manner as sharing within a single institution; both are situations in
which the GLB Act's opt-out requirement does not apply. The fact is
that many financial institutions operate through affiliated financial
entities, often with very similar names, rather than through divisions
of a single institution. For purposes of the opt-out, Congress sensibly
elected to ignore such artificial separations and treat affiliates as
part of a single organization rather than as entirely distinct
entities. This decision reflected the fact that consumers are unlikely
to distinguish between, for example, a community bank and the community
bank's affiliated mortgage lending company. Instead, consumers are
likely to expect that both affiliates are part of a single community
banking organization where information is shared within that corporate
family. The decision also
reflected the fact that the sharing of sensitive credit and insurance
application information with affiliates is already subject to an opt-
out requirement under the Fair Credit Reporting Act.
Finally, we also continue to believe that Congress made the right
choice in requiring that a financial institution provide its consumers
with the right to opt-out of the financial institution's sharing of the
consumers' personal information with third-party commercial companies.
This decision reflected the view that the sharing of personal
information with such nonaffiliated third parties (other than for the
exceptions described above) is different in nature than sharing
information with companies within a corporate family or with financial
institution marketing partners--and that it is sufficiently different
from consumer expectations that a consumer should be given the choice
to opt-out of such sharing.
In making this choice, however, Congress rightly rejected an opt-in
approach,
because there is a fundamental flaw with the way such requirements
work. Opt-in provisions deprive consumers of benefits from information-
sharing (such as the
depositor's relationship discount on a mortgage loan described above),
because consumers rarely exercise opt-in consent of any kind-- even
those consumers who would want to receive the benefits of information-
sharing if they knew about them. In essence, an opt-in creates a
``default rule'' that stops the free flow of information. This in turn
makes the provision of financial services more expensive and reduces
the products and services that can be offered, which actually
frustrates consumer expectations. In contrast, an opt-out gives
privacy-sensitive consumers just as much choice as an opt-in, but
without setting the default rule to deny benefits to consumers who are
less privacy-sensitive.
Implementation of the GLB Act
The privacy provisions of Gramm-Leach-Bliley were enacted in 1999,
and financial institution regulators subsequently issued detailed
privacy regulations that became effective just over a year ago. This
appears to be the first time that the Federal Government has
implemented such a comprehensive commercial privacy regulatory
regime affecting such an important sector of the Nation's economy. In a
sense, financial institutions have been the ``guinea pigs'' for this
process, and much has been learned by both the regulators and our
industry.
The implementation process has been massive, involving eight
Federal regulators, 51 State insurance regulators, and over 40,000
financial institutions. Companies have conducted detailed auditing of
their information practices; developed and issued over 2.5 billion
privacy notices; established new compliance systems; trained personnel;
and reconfigured systems to handle and monitor consumer opt-outs.
Financial institutions have also upgraded their already extensive
security policies, procedures, and systems to comply with the security
mandates of the Act. For example, company employees with access to
confidential customer information are often required to adhere to many
different types of procedures designed to protect the physical security
of that information, including disclosing information to other
employees only on a ``need to know'' basis; locking confidential files
and clearing desks before going home; and using special passwords to
access information. In addition, some companies control access through
use of security systems and computing platforms, where users are
authenticated by means of logon identifications and/or secret
passwords. In some cases digital certificates are also used for
purposes of authentication and nonrepudiation; access control lists
limit levels of access based on job employee functions; and formal data
classification schemes ensure that sensitive data is stored only on
secure platforms. These are just a sample of the many steps that firms
are taking in the security area.
In short, while tremendous progress has been made, GLB
implementation is still very much a work in progress, and financial
institutions continue to learn, adjust, and improve their privacy and
security practices over time. One thing is certain, however: As the
result of the Gramm-Leach-Bliley's notice, choice, and security
requirements, financial institution customers are far more privacy and
security-protected than they were 3 years ago, and far more protected
than the customers of most other types of companies. We believe that
consumers have responded favorably by continuing to put their trust in
the companies that handle their financial assets and their financial
needs.
Indeed, despite generic polls showing that consumers remain
concerned about their privacy, financial institutions have received a
minuscule number of customer complaints about the GLB Act procedures or
other privacy concerns. The same is true of financial regulators. For
example, in response to a Freedom of Information Act request regarding
all financial institution complaints received in 2001, the Federal
Reserve reported that it had received only 25 privacy-related
complaints out of the 4,503 complaints it received, or .0056 percent of
the total, with similarly low numbers reported by the Office of Thrift
Supervision (6 of 4,921, or .0012 percent), Federal Deposit Insurance
Corporation (137 of 6,849, or .02 percent), and Office of the
Comptroller of the Currency (368 of 17,228, or .0214 percent).
In addition, most financial institutions do not share information
with third parties, such as commercial companies, in a way that
triggers the need for the GLB Act opt-out requirement. For example,
roughly 89 percent of a recent sample of approximately 400 banks
conducted by the American Bankers Association did not share information
in this way. For those institutions that do share with third parties in
a way that requires providing the opt-out to consumers, the opt-out
rates have generally been low, and in nearly all cases under 10
percent. The FSCC strongly disagrees with those who suggest that low
opt-out rates mean that the GLB process is not working. To the
contrary, our members believe that the low rates show that consumers
trust their financial institutions to share their information in an
appropriate manner, or that they are less sensitive to privacy concerns
than has been suggested.
Based on initial implementation experience, the FSCC recognizes
that the privacy notices constitute one area in which improvements can
be made. This is by no means as easy as it sounds, however, because the
notice requirements of the GLB Act are quite detailed. The financial
institution regulators tried hard to simplify these requirements in
their implementing regulations, including through the use of sample
clauses, and they told institutions that a notice complying with the
GLB Act could fit on a six-page, ``tri-fold'' brochure. In their first
round of notices, financial institutions generally took this approach
and used the sample clauses, while at the same time carefully scrubbing
the language to ensure compliance will all requirements of the statute
and regulations.
Proceeding this way was absolutely necessary to ensure that the
notices satisfied the regulators' ``clear and conspicuous'' requirement
and minimized exposure to legal liability. Indeed, the regulators have
challenged very few privacy notices as failing to comply. Nevertheless,
a six-page notice is not short, and language from the sample clauses
such as ``nonaffiliated third-party'' and ``nonpublic personal
information'' are obviously the type of ``legalese'' that some
consumers and critics have found difficult to understand.
Unfortunately, financial institutions now find themselves in a bit
of a ``Catch-22.'' They spent hundreds of millions of dollars to
carefully develop the first round of compliant notices and mail them to
consumers, and financial institution consumers received more
information about company privacy practices than consumers of virtually
any other industry in the country. Yet these very same notices, because
of their length and use of legalistic terms suggested by the
regulations, have received a great deal of negative attention in the
media.
To address these concerns, the financial services industry is
proceeding down two paths simultaneously. First, a number of
institutions have simplified the language used in their second round of
annual privacy notices, though carefully so as not to stray from the
requirements of the regulation. We believe the second round of notices
will be more ``user friendly'' than the initial notices.
Second, both financial institutions and their regulators have
focused on the idea of exploring a simplified ``short-form'' version of
the notice that would supplement, but not replace, the longer ``legal
notice'' required by the GLB Act and regulations. The FTC convened an
interagency and industry workshop to discuss this and other notice
issues, and industry efforts are underway to examine the short-form
concept more carefully. The basic idea of the short-form notice is to
use simplified terms, be much less legalistic than the longer notice,
keep the length to one page, and use common language that would make it
easier for consumers to compare institution privacy policies over time.
The FSCC is leading a project on the short-form notice. We have
convened a task force representing a cross-section of institutions from
the banking, insurance, and securities industries; hired a well-known
language expert to advise on short-form issues; and have nearly
completed the initial drafting phase of several possible
alternatives.
While we believe this project is promising, it is by no means
simple, as I mentioned previously. There is no true ``one-size-fits-
all'' solution, because institutions have different privacy practices
that call for different types of disclosures.
Relation Between Federal and State Privacy Laws
There seems to be a great deal of misunderstanding about Gramm-
Leach-Bliley's effect on State privacy laws, as well as on the amount
of State legislative action that has occurred on financial privacy
issues generally. On the first point, Section 507 of the GLB Act makes
clear that its privacy provisions would not preempt any State law in
effect simply because the State law affords greater privacy protections
to consumers than the Act's provisions. Of course, this provision by
its terms does nothing to limit the preemptive effect of any other
Federal statute, specifically including the Fair Credit Reporting Act's
preemption provision that applies to State law restrictions on
affiliate information-sharing.
Some State legislators seemed to interpret Section 507 as an
affirmative invitation by the Federal Government to the States to adopt
more restrictive financial privacy laws than Gramm-Leach-Bliley. This
interpretation spawned a great deal of State legislative interest in
new financial privacy laws immediately after passage of the GLB Act in
1999. The FSCC and numerous other representatives disagreed with that
interpretation and testified to that effect before a number of State
legislatures. Our position consistently has been that there was no such
Federal invitation for States to act in Gramm-Leach-Bliley; that States
should not rush to act before the GLB Act has been fully implemented
and given a chance to work; and that a patchwork, uneven body of
differing State privacy regulation would be extremely costly and
counterproductive. In short, we believe that a single uniform standard
in Federal law is the most appropriate method for regulating financial
privacy.
This leads me to the second point of confusion. While there has
been a flurry of activity and debate at the State level in the wake of
passage of the GLB Act in 1999, during this period no State legislature
has adopted a comprehensive financial privacy statute that has exceeded
the obligations of the GLB Act. Nearly 40 States considered such
privacy legislation in 2000, but no such statute was enacted. About
half that number revisited the issue in 2001, again without final
action. And this year, only California has come close to enacting a new
privacy law, but for the third time in 3 years, the legislature has
chosen not to act.
We recognize that North Dakota first chose to conform a preexisting
bank privacy opt-in law to the limits of Gramm-Leach-Bliley, only to
have an initiative restore the preexisting law. In addition, regulators
(but not legislatures) in New Mexico and Vermont have issued additional
financial privacy regulations (though the Vermont legislature had
earlier rejected an effort to increase financial privacy restrictions,
and a lawsuit has been filed to challenge the Vermont regulation as
beyond the scope of Vermont statutory authority). But taken together,
these few actions simply do not constitute a groundswell of State
action to impose more restrictive financial privacy regulation.
To the contrary, with the notable exception of California, the
State focus on financial privacy legislation has diminished
considerably over time since the GLB Act was enacted. The FSCC believes
this is due in large part to an increased understanding that: (1) The
Gramm-Leach-Bliley protections are substantial and need to be given a
chance to work before States decide to act further; and (2) it is not
nearly as easy as it seems at first blush to adopt financial privacy
restrictions without causing unintended consequences that increase
costs and deprive consumers of real benefits.
Actions in the Future
The Gramm-Leach-Bliley's privacy protections are real, and the
implementation, adjustment, and enforcement process is ongoing. This is
not to say that improvements cannot be made, however. In particular,
the FSCC believes that the process for improving privacy notices is
well worthwhile, and we plan to pursue that process actively in the
coming months, both within the industry and with our regulators.
In terms of Federal legislation, we believe that any additional
action that Congress considers with respect to privacy issues should be
targeted to specific harms rather than take the form of sweeping data
protection restrictions. If the harm to consumers is identity theft,
then the focus of legislation should be on deterring and remedying that
problem specifically. Similarly, if consumers are most concerned about
excessive telemarketing calls resulting from information-sharing, then
we believe that solutions should address that issue specifically. To do
otherwise by imposing broad restrictions on information use and
sharing: (1) May do little to solve the specific harms at issue; and
(2) may have very negative unintended consequences. Accordingly, the
FSCC stands ready to work with this Committee and other public
policymakers to address specific consumer harms.
In this regard, however, the FSCC could not support any new
financial privacy legislation that did not include Federal preemption
to ensure a uniform national privacy standard. The FSCC has similar
concerns with respect to the FCRA provision that preempts State
restrictions on affiliate-sharing, but is scheduled to sunset by the
end of 2003. The FSCC supports extending the sunset, as we believe that
the uniform national affiliate-sharing provision has allowed financial
institutions to serve their customers in the most efficient manner
possible.
Thank you for allowing me to present the views of the FSCC today. I
would be happy to answer any questions.
PREPARED STATEMENT OF MIKE HATCH*
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*All Exhibits held in Committee files.
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Attorney General, State of Minnesota
September 19, 2002
I appreciate the opportunity to address the Senate Committee on
Banking, Housing, and Urban Affairs on the critical issue of protecting
the privacy of our citizens' financial information. This Committee has
taken a leading role in the challenge to protect consumer financial
privacy. I commend the bipartisan efforts of Senators Sarbanes and
Shelby in addressing these issues.
Unfortunately, Title V of the Gramm-Leach-Bliley Act (GLBA) is not
working to protect consumers from the misuse of their financial
information. The Act has confused consumers, provided a green light to
the unauthorized sharing of personal
financial data as part of misleading telemarketing campaigns, and is
riddled with loopholes that exempt many business practices from any
control. I will focus my
remarks on three aspects of GLBA: (1) The opt-out provisions in Section
502(b); (2) the limitations on sharing of account numbers in Section
502(d); and (3) the favorable preemption standard in the Sarbanes
Amendment, Section 507. While the alleged consumer ``protections'' in
Section 502 have proven of limited value in protecting consumers,
Section 507 is an important part of GLBA that may ultimately provide
various State models for how to more fairly balance the needs of
business with the privacy rights of consumers.
Opt-Out Is Ineffective To Protect Consumers
The opt-out system is not an effective means of protecting consumer
financial privacy. It puts the burden on consumers to look for the
privacy notices, read and attempt to understand them, and then take
affirmative action to halt the sharing of their nonpublic personal
information with nonaffiliated third parties, such as telemarketers.
This system is contrary to how consumers act in the marketplace and
what consumers expect from Government efforts to remedy the imbalance
of power in the marketplace. Businesses that want to share personal
financial information should do no more and no less than is required in
any consumer transaction--obtain prior express consent of the consumer;
in other words, opt-in to the deal.
The current system does more to confuse than to assist consumers.
The opt-out notices flooding consumers' mailboxes have been a boon for
the printing and postal industry, but they have not meant much for the
typical consumer. The notices are dense and impenetrable. Even the most
educated and persistent of consumers would have a hard time deciphering
statements such as ``we may disclose [information to] . . . carefully
selected business partners (that is, so they can alert you to valuable
products and services)'' \1\ to mean the financial institution will
allow telemarketers to charge your credit card account without
obtaining a signature or account number from you. The ineffectiveness
of the notice and opt-out procedure has been thoroughly documented.\2\
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\1\ See http://www.capitalone.com/indexn.nhp.
\2\ See Mark Hochhauser, Ph.D., Lost in Fine Print II: Readability
of Financial Privacy Notices, Privacy Rights Clearinghouse, May 2001,
available at http://www.privacyrights.org/ar/GLB-Reading.htm. The eight
Federal agencies that issued regulations implementing GLBA held a
workshop in December 2001, that also documented consumer
misunderstanding and noncomprehension of the notices. See http://
www.ftc.gov/bcp/workshops/glb/index.html.
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GLBA Limitations On Account Number Sharing Have Had No
Meaningful Impact On Preacquired Account Telemarketing Abuses
Each year, American consumers experience millions of dollars of
unauthorized charges on bank, credit card, mortgage, and other accounts
as a direct result of financial institutions sharing personal financial
data. Despite an attempt at appearing to address this concern, GLBA has
had no effect on the problem. In fact, GLBA may have inadvertently
acted to legitimize financial institutions' participation in data-
sharing practices that result in deceptive telemarketing practices.
Preacquired Account Telemarketing Abuses
Financial institutions sell to telemarketers the names, phone
numbers, and other information about their customers along with the
right to charge the accounts of those customers. Telemarketers use this
charging authority to call consumers with a ``free trial'' or ``no
risk'' offer for services like travel membership clubs and credit card
protection insurance. The telemarketer, because it has the ability to
directly charge the account, never obtains an account number, a
signature, or any other
traditional evidence of consent from the customer. This sales practice,
known as preacquired account telemarketing, has led to a constant and
heavy flow of complaints to Attorneys General and other consumer
protection agencies.
Preacquired account telemarketing is inherently unfair and causes
deception and abuse, especially with elderly and vulnerable consumers.
This sales practice turns on its head the normal procedures for
obtaining consumer consent. Other than for a cash purchase, providing a
signature or an account number is a readily recognizable means for a
consumer to signal assent to a deal. Decades of consumer education have
made many consumers aware that disclosing their account number may
result in unexpected charges. The corollary to this is that many
consumers believe that as long as they do not disclose their account
number, no charge can be made on the account. Preacquired account
telemarketing exploits this belief.
When financial institutions share with the telemarketer the
information needed to directly charge a customer's account, it removes
these short-hand methods of consumer control over consent to a
purchase. Preacquired account telemarketing strips the consumer of
control over the transaction and exploits the belief that being careful
about disclosing an account number provides protection. The
telemarketer not only establishes the method by which the consumer will
provide consent, but also decides whether the consumer actually
consented.
Our Office has brought a series of cases exposing this practice.\3\
Fleet Mortgage Corporation, for instance, entered into contracts in
which it agreed to charge its customer-homeowners for membership
programs and insurance policies sold using preacquired account
information. If the telemarketer told Fleet that the homeowner had
consented to the deal, Fleet added the payment to the homeowner's
mortgage account. Angry homeowners who discovered the hidden charges on
their mortgage account called Fleet in large numbers.\4\ A survey taken
by Fleet of its customer service representatives is attached as Exhibit
A. It showed that customers overwhelmingly told Fleet that they did not
sign up for the product, and wanted to know how it was added to their
mortgage accounts without their approval, consent, or signature.
Fleet's employees shared the resentment of these consumers, with
comments such as ``unethical for Fleet to add [optional insurance]
without my permission;'' ``[homeowner] knows they are being slammed w/
ins they never authorized (and) thinks unethical & bad business by us .
. . I agree with the customer;'' and ``they feel this is fraud. . . .
It is a scam.'' \5\
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\3\ State of Minnesota v. U.S. Bancorp, Inc., Case No. 99-872
(Consent Judgment, D. Minn. 1999); In The Matter of Damark
International, Inc., Case No. C8-99-1038 (Assurance of Discontinuance,
Damsey Cty. Ct. 1999); State of Minnesota v. Memberworks, Inc., Case
No. MC99-010056 (Consent Judgment, Hennepin Cty. Dis. Ct. 2000); State
of Minnesota v. Fleet Mortgage Corporation, 158 F.Supp.2d 962 and 181
F.Supp.2d 995 (D. Minn. 2001) (Consent Judgment, D. Minn. 2002).
\4\ Approximately one-fifth of all calls by Fleet customers were
about these preacquired account charges. The mortgage statements issued
by Fleet hid the charges under the rubric ``opt.prod.'' (optional
product) at the very bottom of the bill in small print, such that it
was extremely difficult to discover the charge or discern the purpose
of the charge. For consumers on auto-draft from their checking or other
bank account, Fleet gave no written notice of the charge.
\5\ As a result of a settlement of our Office's case against Fleet
Mortgage Corporation, its customers were given the opportunity to
request a refund of charges for membership programs sold through
preacquired account telemarketing. Over 72 percent of the customers
currently being charged for such a program returned a form requiring a
refund of charges, stated that they did not authorize the charge, and
asked to have the program cancelled.
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The number of financial institution customers affected by this
sales practice is staggering. An investigation of a subsidiary of one
of the Nation's largest banks revealed an extraordinary number of
complaints of unauthorized charges. During a 13 month period, this bank
processed 173,543 cancellations of membership clubs and insurance
policies sold by preacquired account sellers. Of this number of
cancellations, 95,573, or 55 percent, of the consumers stated
``unauthorized bill'' as the reason for the request to remove the
charge.\6\
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\6\ The other primary reason given for cancelling (by 56,794
customers, or 32 percent of the total) was a general ``request to
cancel'' code that may have also included many consumers claiming
unauthorized charges.
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The frail elderly, consumers who speak English as a second
language, and other vulnerable groups are especially at risk with
preacquired account telemarketers. A review of randomly selected sales
of one preacquired account telemarketer investigated by our Office
showed 58 percent of customers whose accounts were charged were over
60. Sellers continually use preacquired account telemarketing to sell
elderly consumers membership clubs, magazines, and other products for
which they have no possible use. Examples from our Office's
investigations of telemarketers using preacquired billing information
include the following: Charges to the credit card of an 85-year old man
with Alzheimer's; charges to the credit card of a 90-year old woman who
asked to ``quit this'' and said ``sounds like a scam to me;'' charges
to the credit card account of an Hispanic man who says ``no se es'' in
response to a telemarketer's question; and charges to the bank checking
account of an impaired 90-year old man who did not believe he consented
to the charge. Attached as Exhibit B is a letter from a Legal Aid
attorney listing a variety of useless and expensive membership clubs
charged to the credit card of a retired church janitor in his late
80's. The janitor was charged for a home protection plan even though he
lived in a nursing home; an auto club membership even though he had no
car; a dental plan even though he already had coverage; and a credit
card security plan even though Federal law already protected him from
theft of a credit card.
These are just a few of the substantial number of consumer
complaints our Offices have received about this sales practice. In
fact, this Office receives as many complaints about these practices
post-GLB as it did before enactment of the law.
GLBA Has Had No Impact On Preacquired Account Telemarketing Abuses
GLBA has not changed the involvement of financial institutions in
preacquired
account telemarketing, and the abuses continue to occur. All 50 State
Attorneys
General recently filed comments with the Federal Trade Commission (FTC)
stating that consumer complaints and State consumer protection
enforcement actions against preacquired account telemarketers have
continued without significant change after passage of the GLBA. The
reason is not hard to discern.
GLBA, in Section 502(d), prohibits a financial institution from
disclosing, ``other than to a consumer reporting agency, an account
number or similar form of access number or access code for a credit
card account, deposit account, or transaction account of a consumer to
any nonaffiliated third-party for use in telemarketing, direct mail
marketing, or other marketing through electronic mail to the
consumer.'' Thus, Section 502(d) prohibits the practice by financial
institutions of providing the credit card numbers of its customers to
nonaffiliated third-party telemarketers. When sellers of magazines,
membership clubs, insurance programs, and other services solicited the
financial institutions' customers via telemarketing calls, the
customers were never asked to recite their credit card numbers because
the sellers already had the numbers on hand with the capability to send
through a charge.
After Section 502(d) of GLBA was enacted, however, the Federal
banking agencies promulgated rules that permitted financial
institutions to continue sharing account numbers with third-party
sellers as long as they were in encrypted form. As a result of this
Rule, the practices of financial institutions and their third-party
sellers have remained the same. Financial institutions may share
encrypted or randomly generated reference numbers for their customer's
accounts with third-party sellers. These sellers can still send through
charges to consumers' accounts without consumers giving their credit
card numbers. The encrypted numbers are simply decrypted by the
financial institution and the charges are put directly on the
consumer's account. This allows preacquired account telemarketing
process to continue--legally and unimpeded. Unscrupulous telemarketers
can still cause a charge to a consumer's account even when a consumer
says ``no'' to the sale, or simply believes he or she is trying out a
free trial offer.
The essential characteristic of preacquired account telemarketing
is the ability of the telemarketer to charge the consumer's account
without traditional forms of consent--for example, paying cash,
providing a signature, or providing a credit card or bank account
number. The key is how the agreement between a company controlling
access to a consumer's account and the telemarketer who preacquires the
ability to charge a consumer's account affects the bargaining power
between that telemarketer and the consumer. GLBA, as interpreted in
implementing regulations, does not address this relationship.
GLBA's Favorable Preemption Language Is Critical To Future
Consumer Privacy Protections
Although Title V of GLBA has done little to address the privacy
needs of financial institution customers, the Sarbanes Amendment,
Section 507, offers the best hope to secure protections for consumers.
It is imperative that GLBA retain favorable preemption standards for
State legislation.
State legislatures have taken or considered a variety of approaches
to protecting consumer information. North Dakota voters recently
reinstated an opt-in approach to consumer financial information that
had previously been in effect. California's legislature has alternately
passed and seriously considered various consumer privacy initiatives.
The Minnesota Senate has passed an opt-in financial privacy bill.
State privacy initiatives have been the subject of enormous
industry legislative pressure. In an article entitled, ``Lobbyists
Swarm to Stop Tough Privacy Bills in States,'' The Wall Street Journal
reported on the ``regimented lobbying forces of the Old Economy'' that
have opposed such measure.\7\ Despite this intense effort, State
privacy bills continue to advance in State legislatures. Proposed
revisions to GLBA that would preempt such State action would be the
death knell for meaningful reforms to protect consumers against misuse
of their personal financial information.
---------------------------------------------------------------------------
\7\ Zimmerman, R. and Simpson, G., ``Lobbyists Swarm to Stop Tough
Privacy Bills in States,'' The Wall Street Journal (April 21, 2000).
---------------------------------------------------------------------------
Conclusion
I thank the Committee for its consideration. Consumer protection
efforts in the area of financial privacy are in a beginning stage of
development. Title V of GLBA has not adequately protected the privacy
of the average citizen. I hope that the Congress will support the
continuation of State legislative efforts at meaningful reform of our
privacy laws.
----------
PREPARED STATEMENT OF JAMES M. KASPER
Representative North Dakota House of Representatives
September 19, 2002
Chairman Sarbanes and Members of the Senate Committee on Banking,
Housing, and Urban Affairs. Thank you for the opportunity to share my
views on financial privacy and consumer protection.
Background
I am a first term member of the North Dakota House of
Representatives and I am considered a conservative in my State of North
Dakota. I have been active in political affairs for over 20 years in
North Dakota. I believe I bring a unique perspective to the financial
privacy issues as my business career is in the financial services
industry. I am an independent licensed insurance and securities broker,
and my practice is in the area of employee benefits plans and business
insurance planning. My entire career has been spent in Fargo, North
Dakota, with the exception of 1 year in Minneapolis, Minnesota. Because
North Dakota law has allowed banks to sell insurance for many years, I
have competed with banks this entire time, and have a very good
understanding of how they compete and what their marketing practices
are.
My First Legislative Term--2001
Little did I realize that in my first Legislative session,
beginning in January of 2001, a great deal of my time would be spent
attempting to stop North Dakota banks from changing the very protective
financial privacy law that North Dakota has had in effect since 1985.
North Dakota privacy law protects not only consumer transactions, but
all business and commercial transactions as well. Our bank privacy law,
enacted in 1985, prohibited the sharing and sale of consumer
information to anyone, affiliates and nonaffiliates, for any reason. In
today's vernacular, we had a No-Opt for affiliates and a No-Opt for
nonaffiliates. In 1997, the banking lobbyists quietly amended ND law to
allow affiliate-sharing of information, so the banks in ND could
legally share confidential information with their affiliates, without
consent. Many citizens feel this needs to be addressed in our 2003
Legislative Session.
National Strategy of Banking Industry
As you know, the Gramm-Leach-Bliley Act (GLB) was passed by the
Congress, with an implementation date for Title V of GLB of July 1,
2001. GLB deregulated the financial services industry and allows banks,
insurance companies, and securities companies to have common ownership
and to market each other's products. It is my understanding that two
organizations, the Financial Roundtable and the Financial Services
Coordinating Council, have targeted all States that have a more
protective privacy law than the minimum requirements of GLB, to
eliminate those States' privacy laws. They seem to be determined to
stop any State Legislature from enacting any privacy laws that are more
protective of consumer privacy than GLB and also to repeal any State
privacy laws that are more protective than GLB.
ND Banks Work to Repeal ND Privacy Law in 2001 Legislative Session
To accomplish the bankers national goals required the repeal of our
1985 North Dakota privacy law. Therefore, the North Dakota Bankers
Association, the North Dakota Independent Bankers Association and the
North Dakota Credit Union Association had Senate Bill 2191 (SB 2191)
introduced in the North Dakota Senate. This bill's intent was to repeal
our 1985 North Dakota privacy law, and replace it with the GLB
definitions of privacy, thus reducing ND citizen's privacy protections.
Senate Bill 2191 passed the ND Senate, in February 2001, and was
assigned to the House of Representatives Industry, Business, and Labor
Committee, of which I am a member. When I became aware of the intent of
SB 2191, I made the decision to work to kill the bill. For 30 years, I
have competed against the banks in ND and I have seen how they use
credit leverage to obtain sales and to eliminate competition. I had
also learned how people's personal and confidential financial
information is being gathered all over the country, fed into huge
computer data bases, and how consumer profiles of the citizens of our
Nation are developed and sold to telemarketing companies. I believe
these practices need to be stopped. I also believe they may be
unconstitutional.
The banks focused all of their power in the ND House to pass SB
2191. They had 3 full-time lobbyists at the capitol for about 6
consecutive weeks. The Credit Unions had two full-time lobbyists.
Additionally, representatives of Wells Fargo, U.S. Bank, and other
large banks, made numerous visits to most of the Legislators and almost
every one of the Legislators had personal visits from their local
bankers. All of these lobbyists were urging the Legislators to support
SB 2191. Their reasons were quite interesting:
The Banks and Credit Unions Used the Following Arguments in Support of
SB 2191 in North Dakota:
``North Dakota needs to pass SB 2191 to adopt GLB in North
Dakota law, so we will be in compliance with GLB.'' We know this is
not correct, because GLB is the law in all States, but does
specifically allow State privacy law to supercede GLB, if the State
law provides greater privacy protection for consumers than GLB.
``North Dakota will experience job loss, if we do not pass SB
2191.'' Many of us believe the opposite is true. Because ND privacy
law provides protection for all financial transactions, including
businesses, ND could actually attract business and gain jobs, due
to our privacy laws.
``North Dakota will experience negative economic development
if we do not pass SB 2191. Businesses won't want to come to ND if
we do not have the GLB privacy definitions in our law. It will be
too expensive and too onerous to do business in ND.'' Again, this
argument was not correct. If a business does not have to waste its
time to Opt-Out, business expenses are reduced. With a No-Opt law,
a business will not need to use any of its resources to track its
privacy records, because there are none to track.
``We do not want North Dakota to be the only State in the
Nation, an `island,' which has different privacy laws than the
other States.'' Again, an untrue argument. I believe there are 5
States that have more protective privacy laws than GLB; Alaska,
Connecticut, Illinois, Maryland, and Vermont.
``If we do not pass SB 2191, the people of North Dakota may
not be able to use their ATM, credit cards, and their checking
accounts.'' Since June 11, 2002, when the people of ND repealed SB
2191, our ATM's, credit cards, and checking accounts are working
just fine, as they have since 1985, when we first passed our
privacy law.
All of these scare tactics and more were part of a carefully
orchestrated campaign by the ND banks, in conjunction with their
national associations, to confuse the issues at best, and out and out
lie to the Legislators at worst, about the truth of SB 2191.
There were just a handful of Legislators that worked to stop this
onslaught by the Bankers and Credit Unions. The final vote in the ND
House, was 77 to 20 to pass SB 2191. The ND Senate voted by 34 to 12 to
pass SB 2191. The Governor, a former banker, signed the bill and it
became North Dakota law on July 1, 2001.
The Referral of SB 2191--The People of North Dakota Speak
Fortunately, this was not the end of the story. In early July 2001,
a small group of ordinary citizens formed a group to repeal SB 2191.
They called themselves ``Protect Our Privacy.'' In North Dakota, the
people are allowed to refer any act of the Legislature by gathering the
minimum amount of signatures on petitions. In about 6 weeks volunteers
gathered over 17,000 signatures, about 2.5 percent of our States
population, far exceeding the minimum needed to refer SB 2191. The
people of ND would now vote on the referral on June 11, 2002, to decide
if they wanted to repeal SB 2191. That meant we had about 10 months
before the referral vote. During this time the banks organized, hired
an advertising agency, and raised big money to fight the referral. They
even hired two incumbent North Dakota Legislators to be the co-chairs
of their committee, which they ironically named ``Citizens for North
Dakota's Future.''
Grass Roots Organization: ``Protect Our Privacy'' to Repeal SB 2191
The grass roots organization against SB 2191 ``Protect Our
Privacy,'' had no money and no paid staff. All we had was a small group
of committed volunteers, who like Winston Churchill, were determined we
would ``Never, Never, Never, Never Give Up.''
To counter the power and money of the big banks, we wrote letters
to the editor, appeared as guests on radio talk shows, held press
conferences, and made appearances before civic groups. About 2 weeks
before the vote on June 11, 2002, we obtained a contribution of $25,000
from the National ACLU, which allowed some radio spots to be run the
last 10 days before the vote. Prairie Public Television also hosted a
half hour debate about 2 weeks before the vote. Other than this, the
campaign to repeal SB 2191 was by word of mouth, truly grass roots. Mr.
Chairman, I would like to provide the Committee with copies of relevant
documents for the record, concerning these matters.
Big Bank Media Campaign to Keep SB 2191 Backfires
All of this was small in comparison to the huge amounts of money
the big banks spent on their advertising. Their media campaign was
overwhelming in ND. Radio, TV, newspapers, talk shows, and civic
presentations, began statewide. They obtained endorsement from our
State Chamber of Commerce, from our former popular Governor, and most
of the local Chambers of Commerce in our major cities. They even
pirated the ``Protect Our Privacy'' group's name, adopting and
registering the slogan, ``Protect Your Privacy'' and used it on their
literature to further attempt to confuse ND voters. The various banks
and credit unions placed pamphlets and brochures in their customers
checking and savings statements and they placed signs in many lobbies,
encouraging a yes vote on SB 2191.
In their most memorable TV ad, they actually showed a wall being
built around North Dakota, stating that we would become an island if SB
2191 was repealed. The one thing the bankers would not talk about,
however, was the truth about SB 2191. The banks want unlimited access
to and the ability to sell and share their customers' personal and
confidential financial information, without the customers' consent or
knowledge. The Opt-Out notices required by GLB, which are supposed to
be privacy notices and are supposed to provide consumers with an
opportunity to stop the banks from sharing information, are a joke.
Statistics indicate that over 95 percent of the people of our country
throw these notices away because they: (1) Do not understand them; (2)
do not realize their importance; and (3) do not know the ramifications
of not sending them back to the financial institution.
The Vote in North Dakota-- June 11, 2002
The people of North Dakota spoke loudly and clearly on June 11,
2002, when by a 73 percent vote, they threw out and repealed SB 2191
and thus returned North Dakota privacy law to our very protective
privacy statutes. Despite being out-spent 10 to 1, despite the bankers
deliberate attempt to confuse the issues with their media campaign and
despite the power of the banks and their hired staff, the people of ND
saw through the charade of SB 2191. Their message is a national message
for the Congress as well.
The Message to the Congress from the People of ND by Their June 11,
2002
Vote on Privacy is:
Give us back and protect our privacy.
Our financial and personal information is ours. It does not
belong to the banks and other financial service companies, or
anyone else for that matter. It is not for sale.
If we want to purchase a financial product, we are very
capable of initiating the call or contact ourselves.
We are not waiting breathlessly at home for our phone to ring,
to be solicited by someone with the latest, greatest product,
financial or otherwise, that we just cannot do without.
We want our identity protected.
Our financial and personal information is a property right we
believe is protected under the U.S. Constitution.
A bank should have no more right to sell my information than
it does to enter my property, steal my car and sell it without my
consent.
Why Do Banks Need Unlimited Access to People's Financial and
Personal Information?
It is all about market share, profit, and corporate greed, just
like what our Nation has recently experienced with the Enron scandal,
wherein too many corporate executives will do anything to make profits
and gain market share.
The lifeblood needed to increase market share by the Financial
Services companies is the free flowing and easy access to consumers'
personal and confidential financial information. The GLB Act does not
result in fair, open and more competition in the financial services
industries. It results in the elimination of competition, wherein the
big get bigger and small businesses by the thousands and hundreds of
thousands will eventually be driven out of business, because they
cannot compete with the financial might of the Citicorps and other mega
financial conglomerates. GLB will have a long-term negative impact on
rural America, as well. In ND, our State Legislature spends millions of
dollars to attract new businesses to relocate to our State and our
rural areas. Yet, we have a Federal Law, GLB, which places small
businesses at a tremendous competitive disadvantage. When jobs
disappear, the people leave. We are already experiencing this result
all over America today.
Example of How Banks Share Information
My best client is a small business in Fargo, North Dakota. I have
handled their insurance needs for almost 20 years. When they have an
insurance need they call me. Recently, one of the principals called and
asked me to come to his office to look at a life insurance proposal
they had just received from their big bank insurance agent. This agent
had been given their corporate and personal financial information,
including salaries, ownership percentages, ages, tax bracket, Social
Security numbers, dates of birth, and additional confidential
information, without their consent or knowledge. They had never met or
heard of the insurance agent and they had not asked for any insurance
proposals. My clients were astonished and upset that the bank gave this
insurance agent their information without their consent or knowledge.
My Mother's Financial Needs
My mother, who is a 79-year-old widow, just had a CD come due at
her local bank, worth about $14,500. When discussing the CD renewal
with the bank teller, she was told she should look at transferring the
CD to an annuity. We learned later the bank teller was not licensed to
sell annuities and did not know a thing about the rest of my mother's
financial affairs. She just advised her to buy an annuity from the
bank.
The bank teller had no knowledge of my mother's financial needs,
other than the fact she had a CD due. Despite this fact, a financial
recommendation was made to purchase an insurance product from someone
who was not licensed and had no idea what the impact would be on my
mother's overall needs.
These are two examples of what goes on literally thousands of times
every day.
A California Trip in July 2002--Bank Tactics the Same Everywhere
Senator Jackie Speier, (D) California, invited me to come to
Sacramento to help move forward her privacy bill, which was in trouble
in the California Assembly (House of Representatives). I spent 4 days
in CA in early July 2002, a few weeks after the repeal of the SB 2191
in North Dakota. I found the big banks were using the identical tactics
in CA as they had in ND. One of their tactics was to confuse the
issues. They also used intense lobbying pressure from banking
representatives. Unfortunately, their tactics worked, as Senator
Speier's bill was just recently defeated by a few votes. As I stated
earlier, there appears to be a national strategy by the Banking
Industry, to kill all attempts by State Legislatures to enact any State
Legislation that is more protective than the GLB privacy rules. It
worked again in California.
Where Should Congress and the Senate Banking Committee Go from Here
It is imperative, in my opinion, that this Committee draft
amendments to Title V of GLB, to do the following:
For nonaffiliate transactions, enact a No-Opt provision,
prohibiting the sharing and selling of personal and financial
information to nonaffiliated third parties for any reason, with the
exception of data processing for customer requested transactions such
as ATM's etc., and for transactions required by law to comply with
Federal and State statutes.
Amend GLB to provide for an Opt-In method of privacy protection for
all affiliates-sharing and selling of information. The people of our
Nation should have the right to stop their information from being
passed around, to affiliated companies, and it should only be allowed
with their advanced written consent and knowledge.
Repeal the Joint Marketing loophole. This charade of an exemption
makes a mockery of the already weak privacy protections in current GLB,
as almost any transaction can be designed by the banks to be exempt
under this part of GLB.
Enact Legislation to provide privacy protections for all financial
transactions from all sources, including business, agriculture, and
nonprofit financial transactions. Under GLB these types of entities
have no privacy protection whatsoever. They should have the same
privacy protections that consumers do.
What Will Happen if Congress Fails to Amend GLB?
The people of the United States and the Legislators of the State
Legislatures are beginning to realize the damage that has been done to
the people of our country over the past number of years, due to the
free flowing and public availability of their private and confidential
information. I know of three States where Legislators are currently
working on State Legislation to override the GLB privacy rules and to
enact State Legislation similar to North Dakota's recently restored
privacy law. I believe this is just the beginning of what will become a
national ground swell, wherein the State Legislatures will enact real
privacy protection for their citizens. Congress should act immediately
to correct the mistakes made in GLB and change its privacy provisions,
as suggested in this testimony.
California Initiative--2004 Vote
Due to the failure of the CA Legislature to pass Senator Speier's
privacy law in California, an initiated measure has begun, headed by
Chris Larsen, Chairman and CEO of e-Loan.com an Internet mortgage loan
company. I predict it will be overwhelmingly successful in 2004,
regardless of how much money the big banks spend to defeat it. In fact,
the more they spend, the larger the vote will be to pass the privacy
law in CA, because the banks cannot address the truth about how they
use people's private and confidential information. It is their dirty
little secret, their Achilles heal. They want to be able to sell it and
share it without the people's knowledge or consent, but they cannot
talk about it truthfully and openly, because they know their customers
are overwhelmingly against this practice.
The Real Tragedy Perpetrated on the American People
I believe that the Congress needs to realize the damage and danger
they have perpetrated on the American people by failing to pass real
privacy protection. What has been done under GLB and its sister law,
the Fair Credit Reporting Act, is to make people's private information
a public commodity, available to all those who have the money to buy
it. By allowing the privacy protections of the people of our Nation to
continually be eroded, traded, and sold as just another commodity, the
very fabric of our Republic is threatened. When our citizens no longer
feel safe and secure in their homes and in the workplace, because their
most personal and private information is no longer personal and
private, we face the very real possibility that our citizens will lose
confidence in our financial services industries. If that occurs, we
will be in tremendous trouble. If you do not think it can happen today,
all you need do is look back to 1929 and what occurred in our Nation
then. Those who do not remember history are bound to repeat it.
Strong and meaningful amendments are necessary now to strengthen
the Federal privacy law in GLB. I urge this Committee to courageously
move forward to do so.
Thank you, Mr. Chairman, and all of the Committee Members, for the
opportunity to share my experiences and viewpoints with you today. It
has been an honor.
----------
PREPARED STATEMENT OF PHYLLIS SCHLAFLY
President, Eagle Forum
September 19, 2002
Totalitarian governments keep their subjects under constant
surveillance by
requiring everyone to carry ``papers'' that must be presented to any
Government functionary on demand. This is an internal passport that
everyone must show to authorities for permission to travel within the
country, to move to another city, or to apply for a new job.
Having to show ``papers'' to Government functionaries was bad
enough in the era when ``papers'' meant merely what was on a piece of
paper. In the computer era, personal information stored in databases
can be used to determine your right to board a plane, drive a car, get
a job, enter a hospital emergency room, start school, open a bank
account, buy a gun, or access Government benefits such as Social
Security, Medicare, or Medicaid.
While each classification currently has its own set of rules,
connecting all these dots would amount to the personal surveillance and
monitoring that are the indicia of a police state. The Washington buzz
words ``information-sharing'' are often put forth as the solution to
21st Century problems, but this has significant privacy implications
that must be addressed.
Invasions of privacy are no longer limited to Government. Big
business has become nearly as powerful in demanding, collecting,
sharing, and selling our personal information. Information-gathering
and sharing by Big Brother and Big Business raise varying levels of
concern, and both are privacy invaders. Government and business often
commingle and corroborate their information-sharing in the name of
catching deadbeat dads, terrorists, money launderers, drug peddlers,
and criminals.
The global economy is obsessed with gathering information. The
lifestyle or profile of each consumer is a valuable commercial
commodity. The checks you write and receive, the invoices you pay, and
the investments you make reveal as much about you as a personal diary.
Where I shop, how often I travel, when I visit my doctor, how I save
for retirement are all actions known to financial institutions, which
connect the dots of my life and create a valuable personal profile.
This compilation of personal information is bad enough, but the sharing
of it without my consent is even worse.
Thus far, big business has largely been unwilling to exercise self-
restraint to respect the privacy of consumers. The bottom-line dollar
is viewed as more important. Financial institutions do not want to seek
prior express permission to share customer profiles because they know
that most people will not sign-up.
True privacy protections encompass the principles of notice,
access, correction, consent, preemption, and limiting data collection
to the minimum necessary. These form the core of the Fair Information
Practices (FIP) first codified in the 1974 Privacy Act, and they should
serve as the model for every classification or compilation of personal
information.
Three years ago, Congress had the opportunity to dramatically
change how financial institutions treat personal information by
embracing these core principles, but the resulting law was only a
slight improvement over no protections at all.
On November 12, 1999, President Clinton signed into law the
Financial Services Modernization bill, known more commonly as Gramm-
Leach-Bliley (GLB). This Act included several sections aimed at
protecting sensitive personal information obtained and maintained by
financial institutions, but in practice, these meager provisions are
proving inadequate.
Achieving true financial privacy was conflicted by the underlying
goal of GLB, which was to streamline financial services, thereby
increasing affiliation and cross-company marketing once affiliated.
Greater affiliation meant greater information-sharing. Interjecting the
right of individuals to control their personal information into that
streamlining equation was perceived as a threat to this big business
scheme.
As a result, the GLB sections on privacy were severely watered
down. Instead of personal information being kept confidential,
financial institutions collect, repackage, and share the data. In some
instances personal information is shared with the Government, and in
other instances, it is shared with hundreds of other ``affiliated''
companies. Even under GLB, it is still legal. GLB failed to recognize
that consumers are the rightful owners of their personal information.
Your financial diary should be your property, not the bank's.
GLB does not provide consumers with any opportunity to decide for
themselves about the transfer of their private information among
affiliates. Particularly troubling is the large number of companies
marked as affiliates. For instance, Bank of America has nearly 1,500
corporate affiliates, and Citigroup has over 2,700. There is no
opportunity to stop this free flow of personal information.
GLB did include a privacy notice provision. Privacy notices should
be simple documents outlining what kinds of information are collected
and how the business uses that information. However, the notices sent
to consumers as a result of GLB turned out to be too complicated for
the public to cope with.
When GLB was set to go in effect, few consumers understood their
rights. Notices began reaching consumers, and we began receiving
questions about them through our website. Making the situation even
more confusing, a mass e-mail was sent out by an unknown source
claiming that anyone could opt-out of all information-sharing of
banking, credit, and other financial records by calling the credit
reporting companies. We tried to provide clarification and assistance
through a special alert on our website, but financial institutions
failed to explain the companies' privacy policies in simple terms.
GLB also provided the right to opt-out of information-sharing but
only to third parties. With all the confusion in the notices, figuring
out how to prevent the sale of your personal financial diary, and to
whom you were actually denying it, was yet another significant
obstacle. Opt-out consent depends on being able to understand what you
are saying no to. This is a misplaced burden, especially when combined
with complex, unintelligible privacy notices. Again, the design of GLB
failed to begin with answering the essential property rights question.
The individual was burdened with seeking further explanation of his
options and consent rights to ensure protection of his financial diary.
If financial institutions want to offer such a range of popular
services, they should have no problem simply explaining those services
and letting individuals decide whether they want to sign-up for such
offers. The burden should be on the financial institutions to be
honest, to better market their products, and to respect the best
interests of the customer. This would contribute to more confidence and
trust in the customer-business relationship.
One redeeming factor of GLB was in the area of preemption. To the
financial institutions' chagrin, GLB set a floor of protections rather
than ceiling. Stronger State privacy laws can be placed on top of GLB's
limited protections. Some States have already taken action and more are
likely to do so. For instance, when the question was put to the people
of North Dakota, information-sharing without consent lost by 73
percent. A financial privacy bill in California was narrowly defeated
this year, but State legislators are expected to revisit the issue.
The problems with the GLB privacy provisions are clear. Exceptions,
such as sharing among affiliates, make notices very complex. Typically
buried in small print, the limited opt-out consent burdens individuals,
insufficiently protects nonpublic data, and minimizes the confidence in
financial institutions' practices. The banking lobby is working hard to
defeat greater financial privacy, but they should embrace better
business practices that put their customers' interests first.
It is also important to mention a disturbing trend in Government
exchange and reliance on private collections of information, such as
through financial institutions. The post-9/11 atmosphere encourages
more information-sharing and verification of identity, but any actions
should be done cautiously so as to not impact law-abiding citizens.
In 1998, the Clinton Administration proposed a Federal regulation
called Know Your Customer, which would have turned your friendly local
banker into a snoop reporting to the Federal database called FinCEN any
deviation from what the bank decided is your deposits/withdrawal
profile. The American people responded with 300,000 angry e-mail
criticisms and the regulation was withdrawn. However, the Bank Secrecy
Act still requires banks to share personal information with the
Government through suspicious activity reports.
The Bush Administration's proposed regulations announced on July 17
to implement the USA PATRIOT Act's Anti-Money Laundering provisions
call for identity verification, but they are even more intrusive than
Know Your Customer. On that very same day, The Wall Street Journal
reported that the Treasury Department entered into an agreement with
the Social Security Administration (SSA) ``to develop and implement a
system by which financial institutions may access a database to verify
the authenticity of Social Security numbers provided by customers at
account opening.''
Congress promised us that the SSN would never be used for anything
else when it was created, and certainly not for identification
purposes. Giving financial institutions access to SSA's database
embraces the SSN as a national ID number, which is a step in the wrong
direction. Such so-called antimoney laundering provisions are threats
to the privacy of law-abiding citizens. Is access to our personal
records housed in the Internal Revenue Service the next step?
In conclusion, neither Government nor private business should act
as if they can own, share, display, or traffic our personal information
without our consent. Our personal financial data should be protected by
a firewall and accessible only to those who have authority. Financial
institutions are in a unique position of housing our financial diaries
that often contain all the dots of life. Extra caution and care should
be taken by these corporations to ensure protection not only from fraud
but also from misuse and overuse within the companies. Unless financial
institutions are willing to raise their privacy standards
independently, Congress should revisit GLB to raise the floor of
privacy protection for our financial diaries.
PREPARED STATEMENT OF EDMUND MIERZWINSKI
Consumer Program Director
U.S. Public Interest Research Group (U.S. PIRG)
on behalf of
Consumer Action, Consumer Federation of America
Consumer Task Force on Automotive Issues and Remar Sutton, President
Consumers Union, Electronic Privacy Information Center
Identity Theft Resource Center, Junkbusters, Inc.
Privacy Rights Clearinghouse, Private Citizen, Inc., U.S. PIRG
September 19, 2002
Chairman Sarbanes and Members of the Committee, thank you for the
opportunity to testify before you today. As you know, U.S. PIRG \1\
serves as the national lobbying office for State Public Interest
Research Groups, which are independent, nonprofit, nonpartisan research
and advocacy groups with members around the country. Our testimony is
also on behalf of Consumer Action, Consumer Federation of America,
Consumer Task Force on Automotive Issues and Remar Sutton, President,
Consumers Union, Electronic Privacy Information Center, Identity Theft
Resource Center, Junkbusters, Inc., Privacy Rights Clearinghouse,
Private Citizen, Inc.\2\ Many of these groups participating are members
of the Privacy Coalition.\3\
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\1\ U.S. PIRG, www.uspirg.org is the national lobbying office for
the State Public Interest Research Groups, www.pirg.org. State PIRG's
are nonprofit, nonpartisan public interest advocacy groups.
\2\ Consumer Action, www.consumer-action.org founded in 1971, is
active on privacy issues both in California and on the national level
working through its network of more than 6,500 community-based
organizations. Consumer Federation of America, www.consumerfed.org is a
coalition of 240 national, State, and local consumer groups around the
country. Consumer Advocate Remar Sutton is President of the Consumer
Task Force on Automotive Issues, http://www.auto issues.org/. He and
the Task Force are founding members of www.privacyrightsnow.com.
Consumers Union, www.consumer.org is the nonprofit, nonpartisan,
noncommercial publisher of Consumers Report magazine and maintains
advocacy offices in California, Washington, DC, and Texas. The
Electronic Privacy Information Center (EPIC), www.epic.org was
established in 1994 to focus public attention on emerging civil
liberties issues and to protect privacy, the First Amendment, and
Constitutional values. The Identity Theft Resource Center, http://www.
idtheftcenter.org is a nationwide nonprofit organization dedicated to
developing and implementing a comprehensive program against identity
theft. Junkbusters, Inc., www.junkbusters. com offers free software and
other tools to fight junk mail, spam, cookies, and other forms of
privacy invasion. The Privacy Rights Clearinghouse,
www.privacyrights.org is a nonprofit consumer information and advocacy
program. Private Citizen, Inc., http://www.private-citizen.com is
nationally known and respected as America's foremost consumer
organization fighting against the direct marketing industrys privacy-
abusive practices.
\3\ The Privacy Coalition was established in 2001 by a broad range
of consumer, privacy, civil liberties, family-based, and conservative
organizations that share strong views about the right to privacy. The
groups had previously worked together on a more informal basis in
opposition to the intrusive Know-Your-Customer rules and in support of
financial privacy proposals offered in the 106th Congress by Members of
the bi-partisan Congressional Privacy Caucus, Co-Chaired by Senate
Banking Committee Members Richard Shelby and Christopher Dodd and House
Energy and Commerce Committee Members Joe Barton and Ed Markey. Groups
endorsing the
coalition's legislative candidate Privacy Pledge are listed at
www.privacypledge.org.
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Summary
The Congress knew that the 1999 Gramm-Leach Bliley Financial
Services Modernization Act \4\ (GLBA)--a law long-sought by the
financial industry to encourage the creation of integrated financial
services firms--would exacerbate already-identified financial privacy
threats. So Congress incorporated Title V to protect financial privacy,
which included the following five key provisions. The most important
and most successful is the last: The fail-safe States' rights provision
allowing States to enact stronger financial privacy laws.
---------------------------------------------------------------------------
\4\ Public Law 106 -102, 15 U.S.C. Sec. 6801, et seq. enacted
November 12, 1999.
(1) Title V defined certain confidential information as ``nonpublic
---------------------------------------------------------------------------
personal information'' subject to strong privacy protection.
Status: An important recent decision by the DC Circuit U.S. Court
of Appeals upholding the GLBA financial privacy regulations has
effectively closed the so-called credit header loophole exploited by
Internet information brokers to obtain Social Security Numbers from
credit bureaus without consumer consent. Creating a strict definition
of protected information is an important and successful result of GLBA.
(2) Title V required covered firms to provide, by July 2001, annual
notice of their information-sharing practices with both affiliated and
nonaffiliated third parties.
Status: The core of the GLBA privacy scheme is limited to notice.
Industry lobbyists will falsely portray their distribution of billions
of privacy notices as successful privacy protection. Notice is not
enough to protect privacy. Data collectors should adhere to a broader
set of Fair Information Practices (discussed below). Worse, the first
year's privacy notices were unreadable; this year's no better. Although
notice is not enough to protect privacy, covered firms should do a
better job of providing notice and regulators should penalize those
that do not.
(3) Title V required covered firms to provide in that notice an
extremely limited statutory consumer right to opt-out (affirmatively
act to say no) to the sharing of information with some, but not all,
nonaffiliated third parties. Transactions between affiliates and also
with many nonaffiliated third parties engaged in joint marketing
contracts with an affiliate could continue regardless of whether or not
a customer had chosen to ``opt-out.''
Status: Notice is not enough, nor is the limited opt-out, to
satisfy the Fair Information Practices. The vast majority of all
information-sharing with both affiliates and many third parties is only
covering by notice, not by this limited opt-out ``right.'' The
provision is inadequate and fails to even rein in the practices of the
telemarketers it is narrowly targeted at (see (4) ). The partial opt-
out should be replaced by an across-the-board affirmative consent (opt-
in) provision for all affiliate and third-party information-sharing.
The failure of the GLBA to require any form of consumer consent for the
vast majority of information-sharing transactions affected is one
example of how the GLBA fails to meet the Fair Information Practices
(discussed below).
(4) Title V attempted, through an encryption provision, to restrict
the tawdry practice of nonaffiliated telemarketers obtaining credit
card numbers from banks, then signing consumers up for expensive
``membership clubs'' and billing them when the consumer failed to
affirmatively cancel within 30 days.
Status: As Attorneys General Hatch of Minnesota and Sorrell of
Vermont have testified today, telemarketers continue to find loopholes
enabling them to bill consumers for products the consumer never
ordered, using credit card numbers provided by the consumer's bank, not
by the consumer. Consumers do not think they ordered anything, when
they do not hand over cash, a check, or a credit card number.
Unfortunately, the encryption provision has codified, instead of
stopped, the growing epidemic of anticonsumer, controversial
``preacquired account telemarketing.''
(5) Finally, recognizing that it hadn't really completed the job of
protecting privacy adequately, the Congress--in an extremely rare
departure from its normal policy of preempting State action--explicitly
included a fail-safe provision allowing States to enforce existing and
to enact new stronger financial privacy laws.
Status: The States' rights fail-safe is the most important, and
most successful, privacy protection in GLBA. We commend the Chairman
for his sponsorship of the provision added in conference committee
known as the ``Sarbanes Amendment.'' States have been very active and
although not all have yet been successful, we believe that there is a
good chance that passage of strong new privacy laws in a few more
States will provide Congress with the encouragement it needs to raise
the bar nationally.
Financial Privacy and the Gramm-Leach-Bliley Act
The 1999 Gramm-Leach-Bliley Financial Services Modernization Act
was enacted to respond to changes in the marketplace. Banks, insurance
companies, and securities firms were more and more selling products
that looked alike. The firms wanted the privilege of and synergies
derived from selling them all under one roof. Yet, the Gramm-Leach-
Bliley Act was also enacted against a backdrop of financial privacy
invasions, and members wanted to ensure that the new law wouldn't make
things worse. Consumer and privacy groups argued that if the Congress
was going to create one-stop financial supermarkets, then privacy
protections should extend to all information-sharing, whether with
affiliates or with third parties. At the time, two examples were given
of the need for stronger privacy laws.
First, NationsBank (now Bank of America) had recently paid
civil penalties totaling $7 million to the Securities and Exchange
Commission and other agencies, plus millions more in private class
action settlements, over its sharing of confidential bank
accountholder information with an affiliated securities firm.
``Registered representatives also received other NationsBank
customer information, such as financial statements and account
balances.'' \5\ In this case, conservative investors who held
maturing certificates of deposits (CD's) were switched into risky
financial derivative products. Some lost large parts of their life
savings.
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\5\ See the SEC's NationBank Consent Order, http://www.sec.gov/
litigation/admin/337532.txt.
Second, Minnesota Attorney General Mike Hatch had recently
sued U.S. Bank and its holding company, accusing them of having
``sold their customers' private, confidential information to
MemberWorks, Inc., a telemarketing company, for $4 million dollars
plus commissions of 22 percent of net revenue on sales made by
MemberWorks.'' \6\ As General Hatch has testified today in detail,
MemberWorks and other nonaffiliated third-party telemarketers sign
credit card customers up for add-on ``membership club'' products
and bill their credit cards as much as $89 or more if they do not
cancel within 30 days. The catch? The consumer never gave the
telemarketer her credit card number; her bank did, in a scheme
known as preacquired account telemarketing. General Hatch has
settled with both U.S. Bank and MemberWorks.
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\6\ See the complaint filed by the State of Minnesota against U.S.
Bank, http://www.ag.state. mn.us/consumer/privacy/pr/
pr%5Fusbank%5F06091999.html.
Industry has argued that these ``aberrations'' occurred before the
enactment of GLBA. Yet, as General Hatch has also testified today,
however, he has also recently settled a post-GLBA lawsuit with Fleet
Mortgage Company over similar practices in the post-GLBA
environment.\7\ He and numerous other Attorneys General have filed
comments with the U.S. Treasury Department and the Federal Trade
Commission seeking stronger laws restricting ``preacquired account
telemarketing'' transactions involving banks and membership clubs run
by telemarketers.
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\7\ See the complaint filed by the State of Minnesota against Fleet
Mortgage, 28 December 2000, http://www.ag.state.mn.us/consumer/news/pr/
Comp_Fleet_122800.html.
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In response to these documented concerns about the risks to
financial privacy, Congress included a specific financial privacy title
in the Gramm-Leach-Bliley Act.
Basic Structure of the GLBA Financial Privacy Scheme and Its
Limitations
The principal privacy protection in GLBA is an annual notice
requirement. GLBA defines nonpublic personal information that must be
protected. GLBA then requires covered entities to disclose their
information-sharing policies with both affiliated companies (companies
under the same corporate umbrella and ``common control'') and with
nonaffiliated third parties. GLBA then requires firms to grant
customers a limited right to opt-out of a small number of transactions
with some nonaffiliated third parties (primarily telemarketers).
The opt-out applies to neither affiliates nor any nonaffiliated
third parties in a joint marketing relationship with the bank or other
covered entity. The rationale for treating marketing partners as
affiliates was ostensibly to create a level playing field for smaller
institutions that might not have in-house affiliates selling every
possible product larger firms might sell.\8\ Of course, large firms use
joint marketing partners, too.
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\8\ The GLBA also includes numerous other exceptions to opt-out
protections, including sharing for Government or law enforcement
purposes and sharing for purposes related to completing a consumer
transaction (such as a credit card purchase or ATM withdrawal).
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The result of this scheme is that most information-sharing is only
``protected'' by notice. Sharing of confidential consumer information
with either affiliates or joint marketing partners continues regardless
of a consumer's privacy preference. Although we have no way of knowing
how many joint marketing partners a company may have, we do know how
many affiliates some of the largest financial services holding
companies and bank holding companies have. For their recent joint
comments to the Treasury Department on GLBA, State Attorneys General
accessed the Federal Financial Institutions Examination Council and
Federal Reserve websites and counted affiliates for Citibank (2,761),
Key Bank (871), and Bank of America (1,476).\9\
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\9\ See 1 May 2002 Attorneys General Comments, http://
www.ots.treas.gov/docs/r.cfm?95421. pdf or http://www.epic.org/privacy/
financial/ag_glb_comments.html on the GLBA Information Sharing Study
(Federal Register: February 15, 2002 (Volume 67, Number 32) ).
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The GLBA has failed to provide adequate protections for consumer
privacy in modern financial services. Individuals face a multitude of
potential risks through unrestricted and undisclosed information-
sharing of personal financial data information under the GLBA.
Unfettered affiliate and nonaffiliate sharing permits comprehensive
profiling, which results in aggressive target marketing techniques,
identity theft, profiling, and fraud. Consumers have not been
adequately informed or been given effective choice to evaluate the
benefits of information-sharing against the potential harms causes by
unrestricted information-sharing.
The inherent weaknesses of the GLBA notwithstanding, the July 2002
decision by the Court of Appeals upholding GLBA's regulations is
nevertheless an important decision upholding the Constitutionality of a
broad Government privacy regulation.\10\ Government has an important
interest in protecting privacy and regulating the activities of
companies that share and sell confidential consumer information.
Financial privacy is not merely an issue of a few ``nuisance'' phone
calls, as industry would like to portray it. When data collectors do
not adhere to Fair Information Practices (discussed below) consumers
face numerous privacy risks:
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\10\ See http://pacer.cadc.uscourts.gov/common/opinions/200207/01-
5202a.txt.
Consumers pay a much higher price than dinner interruptions
from telemarketers. Many unsuspecting constituents of yours may be
paying $89/year or more for essentially worthless membership club
---------------------------------------------------------------------------
products they did not want and did not order.
Easy access to confidential consumer identifying information
leads to identity theft. Identity theft may affect 500,000-700,000
consumers each year. Identity theft victims in a recent PIRG/
Privacy Rights Clearinghouse survey faced average out-of-pocket
costs of $808 and average lost time of 175 hours over a period of
1- 4 years clearing an average $17,000 of fraudulent credit off
their credit reports. It is difficult to measure the costs of
higher credit these consumers pay, let alone attempt to quantify
the emotional trauma caused by the stigma of having their good
names ruined by a thief who was aided and abetted by their bank and
credit bureau's sloppy information practices.\11\
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\11\ See ``Nowhere To Turn: A Survey of Identity Theft Victims, May
2000, CALPIRG and Privacy Rights Clearinghouse, http://calpirg.org/
CA.asp?id2=3683&id3=CA&.
Reliance on the Social Security Number as a unique identifier
in the private sector has proliferated. Easy access to Social
Security Numbers by Internet information brokers and others also
---------------------------------------------------------------------------
leads to stalking.
The failure to safeguard information and maintain its accuracy
leads to mistakes in credit reports and consequently consumers pay
higher costs for credit or are even denied opportunities.
Although the industry witnesses will testify to a vast ``free
flow of information'' driving our economy that should not be
constrained, more and more firms are choosing to stifle the flow of
information themselves--to maintain their current customers as
captive customers. When a bank intentionally fails to report a
consumer's complete credit report information to a credit bureau,
that consumer is unable to shop around for the best prices and
other sellers are unable to market better prices to that
consumer.\12\
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\12\ See speech by Comptroller of the Currency John Hawke at http:/
/www.occ.treas.gov/ftp/release/99-51.txt 7 June 1999: ``Some lenders
appear to have stopped reporting information about subprime borrowers
to protect against their best customers being picked off by
competitors. Many of those borrowers were lured into high-rate loans as
a way to repair credit histories.'' According to U.S. PIRG's sources in
the lending industry, this practice continues.
The unlimited collection and sharing of personal data poses
profiling threats. Profiles can be used to determine the amount one
pays for financial services and products obtained from within the
``financial supermarket'' structure. As just one example,
information about health condition or lifestyle can be used to
determine interest rates for a credit card or mortgage. Even with a
history of spotless credit, an individual, profiled on undisclosed
factors, can end up paying too much for a financial service or
product. Because there are no limits on the sharing of personal
data among corporate affiliates, a customer profile can be
developed by a financial affiliate of the company and sold or
shared with an affiliate that does not fall within the broad
definition of ``financial institution.'' A bank, for instance, that
has an affiliation with a travel company could share a customer
profile resulting in the bank's customer receiving unwanted
telephone calls and unsolicited direct mail for offers of
memberships in travel clubs or the like that the individual never
wanted or requested.\13\
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\13\ For additional discussion of the profiling issue, and related
privacy threats posed by information-sharing, see 1 May 2002 comments
of EPIC, U.S. PIRG, Consumers Union, and Privacy Rights Clearinghouse
on the GLBA Information Sharing Study (Federal Register: February 15,
2002 (Volume 67, Number 32) ) available at http://www.epic.org/privacy/
financial/glb_
comments.pdf.
We will now discuss the success or failure of the five key privacy
---------------------------------------------------------------------------
provisions summarized above in greater detail.
(1) Title V defined certain confidential information as ``nonpublic
personal information'' subject to strong privacy protection.
Status: An important recent decision by the DC Circuit, U.S. Court
of Appeals upholding the GLBA financial privacy regulations has
effectively closed the so-called credit header loophole exploited by
Internet information brokers to obtain Social Security Numbers from
credit bureaus without consumer consent. Creating a strict definition
of protected information is an important and successful result of GLBA.
The GLBA created a category of protected ``nonpublic personal
information.'' The final GLBA financial privacy rules issued by 7
Federal financial agencies defined Social Security Numbers as nonpublic
personal information (NPPI). A key provision is that the transfer of
Social Security Numbers from financial institutions to credit bureaus
is only allowed for regulated Fair Credit Reporting Act purposes (e.g.,
for use in a credit report) but not for unregulated purposes, where the
credit bureau would be considered a nonaffiliated third-party. The
agencies correctly interpreted the law to prevent the sharing of Social
Security Numbers unless consumers are given notice of the practice and
a right to opt-out.
In 1993, the Federal Trade Commission had (improperly in our view)
granted an exemption to the definition of credit report when it
modified a consent decree with TRW (now Experian). The FTC said that
certain information would not be regulated under the Fair Credit
Reporting Act (FCRA). The so-called credit header loophole allowed
credit bureaus to separate a consumer's so-called header or identifying
information from the balance of an otherwise strictly regulated credit
report and sell it to anyone for any purpose. Credit headers included
information ostensibly not bearing on creditworthiness and therefore
not part of the information collected or sold as a consumer credit
report. The sale of credit headers involves stripping a consumer's
name, address, Social Security Number, and date of birth \14\ from the
remainder of his credit report and selling it outside of the FCRA's
consumer protections. Although the information, marketing and locater
industries contend that header information is derived from numerous
other sources, in reality, the primary source of credit header data is
likely financial institution information.
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\14\ In a separate 2001 decision by the DC Circuit, U.S. Court of
Appeals (No. 00-1141, 13 April 2001, cert denied, 10 June 2002 by
Supreme Court), Trans Union I vs. FTC, http://laws.findlaw.com/dc/
001141a.html, the FTC's order against Trans Union, http://www.ftc.gov/
os/2000/03/transunionopinionofthecommission.pdf prohibiting Trans Union
from selling actual credit information for illegal marketing purposes
was upheld. This decision also removed dates of birth from credit
headers, since age is a determinant of credit scores and therefore has
a bearing on creditworthiness.
---------------------------------------------------------------------------
In their unsuccessful arguments to the courts, the credit bureau
Trans Union and a number of companies that sell information, organized
into the now-apparently-defunct Individual References Services Group,
argued that the GLBA included a Fair Credit Reporting Act savings
clause and therefore their sale of Social Security Numbers was legal.
As the FTC explains in the preamble to its Gramm-Leach-Bliley Financial
Privacy Rule:
The Commission recognizes that Sec. 313.15(a)(5) permits the
continuation of the traditional consumer reporting business,
whereby financial institutions report information about their
consumers to the consumer reporting agencies and the consumer
reporting agencies, in turn, disclose that information in the
form of consumer reports to those who have a permissible
purpose to obtain them. Despite a contrary position expressed
by some commenters, this exception does not allow consumer
reporting agencies to redisclose the nonpublic personal
information it receives from financial institutions other than
in the form of a consumer report. Therefore, the exception does
not operate to allow the disclosure of credit header
information to individual reference services, direct marketers,
or any other party that does not have a permissible purpose to
obtain that information as part of a consumer report.
Disclosure by a consumer reporting agency of the nonpublic
personal information it receives from a financial institution
pursuant to the exception, other than in the form of a consumer
report, is governed by the limitations on reuse and
redisclosure in Sec. 313.11, discussed above in ``Limits on
reuse.'' Those limitations do not permit consumer reporting
agencies to disclose credit header information that they
received from financial institutions to nonaffiliated third
parties. . . . If consumer reporting agencies
receive credit header information from financial institutions
outside of an
exception, the limitations on reuse and redisclosure may allow
them to continue to sell that information. This could occur if
the originating financial institutions disclose in their
privacy policies that they share consumers' nonpublic personal
information with consumer reporting agencies, and provide
consumers with the opportunity to opt-out. [Emphasis added,
Footnotes omitted.] \15\
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\15\ Excerpted from pages 80-83, Federal Trade Commission, 16 CFR
Part 313, Privacy Of Consumer Financial Information, Final Rule, http:/
/www.ftc.gov/os/2000/05/glb000512.pdf.
There is a slight chance that credit bureaus will eventually
convince financial institutions to provide notice of their sharing of
Social Security Numbers, triggering the right to share Social Security
Numbers for consumers who do not opt-out. So, the Congress should act
to close the credit header loophole completely. Several House bills and
a Senate bill, S. 1014, sponsored by Senator Bunning of the Banking
Committee (although the bill has been referred to the Finance
Committee) would completely close the credit header loophole and take
other steps to improve Social Security Number privacy.
In the 106th Congress, legislation named for the first-known victim
of an Internet stalker was defeated after it was seen that the proposal
actually was a Trojan Horse that expanded the availability of Social
Security Numbers to customers of the Individual References Services
Group (IRSG). IRSG member companies included credit companies and other
information firms engaged in the sale of nonpublic personal information
to information brokers, private detectives, and others.\16\ The IRSG
was established as a supposed self-regulatory organization and received
a tacit endorsement from the Federal Trade Commission \17\ for its
efforts to police its industry. The association reportedly has
dissolved following its unsuccessful attempts to overturn the GLBA
regulations.
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\16\ See the U.S. PIRG Fact Sheet, ``Why The Amy Boyer Law Is A
Trojan Horse'' at http://www.pirg.org/consumer/trojanhorseboyer.pdf.
\17\ See for example, Testimony of FTC Commissioner Mozelle
Thompson before the House Banking Committee, 28 July 1998, http://
www.ftc.gov/os/1998/9807/pretexttes.htm.
(2) Title V required covered firms to provide, by July 2001, annual
notice of their information-sharing practices with both affiliated and
---------------------------------------------------------------------------
nonaffiliated third parties.
Status: The core of the GLBA privacy scheme is limited to notice.
Industry lobbyists will falsely portray their distribution of billions
of privacy notices as successful privacy protection. Notice is not
enough to protect privacy. Data collectors should adhere to a broader
set of Fair Information Practices (discussed below). Worse, the first
year's privacy notices were unreadable; this year's no better. Although
notice is not enough to protect privacy, covered firms should do a
better job of providing notice and regulators should penalize those
that do not.
The notices provided by banks, securities firms, and other covered
institutions have been widely panned by a variety of experts for their
inscrutable, dense language. While the banks and others have complained
that the law required such detail, we respectfully disagree that the
law required banks to confuse customers. Mark Hochhauser, readability
consultant to the Privacy Rights Clearinghouse, analyzed dozens of the
initial notices: ``Readability analyses of 60 financial privacy notices
found that they are written at a 3rd- 4th year college reading level,
instead of the junior high school level that is recommended for
materials written for the general public.'' \18\
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\18\ See ``Lost in the Fine Print: Readability of Financial Privacy
Notices'' by Mark Hochhauser at http://www.privacyrights.org/ar/GLB-
Reading.htm.
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In response, a number of consumer and privacy groups formed a
coalition to petition the financial regulatory agencies to strengthen
the notices using existing authority. Apparently in response to the
petition of 26 July 2001 and other complaints, the agencies held a
workshop in December 2001. We are unaware of significant improvement to
the notices in 2002. According to the petition filed by the consortium
of consumer and privacy groups:
In passing Sec. Sec. 501-510 of the GLBA, Congress gave
consumers the right to prevent financial institutions from
transferring their personal financial information to third
parties. To that end, the Act requires the institutions to
notify customers of the right to opt-out and to provide
convenient means of exercising it. However, in notices mailed
out thus far, most financial institutions have employed dense,
misleading statements and confusing, cumbersome procedures to
prevent consumers from opting out. Such notices evince a clear
failure of the Act's implementing regulations to effectuate
Congressional intent. Accordingly, we ask the Agencies to
revise the regulations and require that financial institutions
provide understandable notices and convenient opt-out
mechanisms.\19\
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\19\ The petition is available at http://www.privacyrightsnow.com/
glbpetition.pdf. See the website http://www.privacyrightsnow.com for
additional information about the coalition.
---------------------------------------------------------------------------
According to a smaller August 2002 California PIRG survey \20\ of
10 bank privacy notices issued in the second year, 2002: ``Most banks
received a failing grade and the best received a ``C-.''
---------------------------------------------------------------------------
\20\ See the CALPIRG report Privacy Denied: A Survey Of Bank
Privacy Policies, 15 August 2002, http://calpirg.org/
CA.asp?id2=7606&id3=CA&.
---------------------------------------------------------------------------
As for the notion that no company would seek to make notices
confusing on purpose, so consumers would fail to take advantage of an
opt-out right, we would encourage the Committee to review a recent
Federal court decision. The U.S. District court decision in the case
Darcy Ting et al vs. AT&T describes how the long-distance carrier AT&T
may have used consultants to help it write legal notices to its
customers in such a way that the consumers would view an amendment to
their customer service agreement (CSA) as a ``nonevent'' and not either
``opt-out'' of the change or, worse, ``defect'' to another carrier. The
key provision reduced legal remedies (by requiring mandatory
arbitration). From the district court ruling:
22. AT&T conducted market research to assist it in developing
the contract documents. One part of AT&T's research, the
Quantitative Study, included the following key findings and
recommendations: In the letter it should be made clear that
this agreement is being sent for informational purposes only.
The fact that no action is required on the part of the customer
needs to be made. (sic) . . .
23. Another part of AT&T's research, the Qualitative Study,
concluded that after reading the bolded text in the cover
letter which States ``[p]lease be assured that your AT&T
service or billing will not change under the AT&T Consumer
Services Agreement; there is nothing you need to do,'' ``[a]t
this point most would stop reading and discard the letter.''
[Emphasis in original.] . . .
. . . 24. . . . While presenting the CSA as a nonevent may have
helped AT&T retain its customers, it also made customers less
alert to the fact that they were being asked to give up
important legal rights and remedies.
(U.S. District court decision, Darcy Ting et al vs.
AT&T \21\)
---------------------------------------------------------------------------
\21\ See especially paragraphs 21-24 of U.S. District Judge Bernard
Zimmerman's 15 January 2002 opinion in Darcy Ting et al vs. AT&T (Case
01-02969BZ, Northern District of California). Now on appeal to the 9th
Circuit Court of Appeals.
(3) Title V required covered firms to provide in that notice an
extremely limited statutory consumer right to opt-out (affirmatively
act to say no) to the sharing of information with some, but not all,
nonaffiliated third parties. Transactions between affiliates and also
with many nonaffiliated third parties engaged in joint marketing
contracts with an affiliate could continue regardless of whether or not
---------------------------------------------------------------------------
a customer had chosen to ``opt-out.''
Status: Notice is not enough, nor is the limited opt-out, to
satisfy the Fair Information Practices. The vast majority of all
information-sharing with both affiliates and many third parties is only
covering by notice, not by this limited opt-out ``right.'' The
provision is inadequate and fails to even rein in the practices of the
telemarketers it is narrowly targeted at (see (4) below). The partial
opt-out should be replaced by an across-the-board affirmative consent
(opt-in) provision for all affiliate and third-party information-
sharing.
The failure of the GLBA to require any form of consumer consent for
the vast majority of information-sharing transactions affected is one
example of how GLBA fails to meet the Fair Information Practices.
Ideally, consumer groups believe that all privacy legislation
enacted by either the States or the Congress should be based on Fair
Information Practices, which were originally proposed by a Health,
Education, and Welfare (HEW) task force and then embodied into the 1974
Privacy Act and into the 1980 Organization for Economic Cooperation and
Development (OECD) guidelines. The 1974 Privacy Act applies to
Government uses of information.\22\ Consumer and privacy groups
generally view the following as among the key elements of Fair
Information Practices:
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\22\ As originally outlined by a Health, Education, and Welfare
(HEW) task force in 1973, then codified in U.S. statutory law in the
1974 Privacy Act and articulated internationally in the 1980
Organization of Economic Cooperation and Development (OECD) Guidelines,
information use should be subject to Fair Information Practices. Noted
privacy expert Beth Givens of the Privacy Rights Clearinghouse has
compiled an excellent review of the development of FIP's, ``A Review of
the Fair Information Principles: The Foundation of Privacy Public
Policy.'' October 1997. http://www.privacyrights.org/AR/fairinfo.html.
The document cites the version of FIP's in the original HEW guidelines,
as well as other versions.
1) Collection Limitation Principle: There should be limits to the
collection of personal data and any such data should be obtained by
lawful and fair means and, where appropriate, with the knowledge or
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consent of the data subject.
2) Data Quality Principle: Personal data should be relevant to the
purposes for which they are to be used, and, to the extent necessary
for those purposes, should be accurate, complete. and kept up-to-date.
3) Purpose Specification Principle: The purposes for which personal
data are collected should be specified not later than at the time of
data collection and the subsequent use limited to the fulfillment of
those purposes or such others as are not incompatible with those
purposes and as are specified on each occasion of change of purpose.
4) Use Limitation Principle: Personal data should not be disclosed,
made available, or otherwise used for purposes other than those
specified in accordance with the Purpose Specification Principle
except: a) with the consent of the data subject; or b) by the authority
of law.
5) Security Safeguards Principle: Personal data should be protected
by reasonable security safeguards against such risks as loss or
unauthorized access, destruction, use, modification, or disclosure of
data.
6) Openness Principle: There should be a general policy of openness
about developments, practices, and policies with respect to personal
data. Means should be readily available of establishing the existence
and nature of personal data, and the main purposes of their use, as
well as the identity and usual residence of the data controller.
7) Individual Participation Principle: An individual should have
the right: a) to obtain from a data controller, or otherwise,
confirmation of whether or not the data controller has data relating to
him; b) to have communicated to him, data relating to him within a
reasonable time; at a charge, if any, that is not excessive; in a
reasonable manner; and in a form that is readily intelligible to him;
c) to be given reasons if a request made under subparagraphs (a) and
(b) is denied, and to be able to challenge such denial; and d) to
challenge data relating to him and, if the challenge is successful to
have the data erased, rectified, completed or amended.
8) Accountability Principle: A data controller should be
accountable for complying with measures which give effect to the
principles stated above.\23\
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\23\ Organization for Economic Cooperation and Development, Council
Recommendations Concerning Guidelines Governing the Protection of
Privacy and Transborder Flows of Personal Data, 20 I.L.M. 422 (1981),
O.E.C.D. Doc. C (80) 58 (Final) (October 1, 1980), at http://
www.oecd.org//dsti/sti/it/secur/prod/PRIV-EN.HTM as quoted in Gellman,
``Privacy, Consumers, and Costs: How The Lack of Privacy Costs
Consumers and Why Business Studies of Privacy Costs are Biased and
Incomplete,'' March 2002, http://www.epic.org/reports/dmfprivacy.html
or http://www.cdt.org/publications/dmfprivacy.pdf.
Consumer groups disagree with industry organizations over whether
certain self-regulatory or statutory schemes are adequately based on
Fair Information Practices. Industry groups often seek to block
legislation or offer substitute legislation intended to ``dumb-down''
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the Fair Information Practices, as they were able to do with the GLBA.
First, industry groups seek to substitute a weaker opt-out
choice, instead of providing opt-in consent before secondary uses,
Second, industry groups claim that notice is enough. They
claim that the right of review and correction are unnecessary.
Third, they contend that either agency enforcement or self-
regulation is an adequate substitute for a consumer private right
of action (also missing from GLBA).
Privacy advocates and other consumer groups believe that consumers
should provide consent for all information-sharing circumstances--by
and among both affiliates and third parties. Second, that protection
should be on an opt-in basis since it gives consumers control.
How The Gramm-Leach-Bliley Act Falls Short of the
Fair Information Practices:
First, it fails to require any form of consent (either opt-in or
opt-out) for most forms of information-sharing for secondary purposes,
including experience and transaction information shared between and
among either affiliates or affiliated third parties.
Second, while consumers generally have access to and dispute rights
over their account statements, they have no knowledge of, let alone
rights to review or dispute, the development of detailed profiles on
them created by financial institutions.
The Act does provide for disclosure of privacy policies, although a
review of a sample of privacy policies suggests that companies are not
following the spirit of GLBA. See (3). None are fully explaining all
their uses of information, including the development of consumer
profiles for marketing purposes. None are listing all the types of
affiliates that they might share information with. None are describing
the specific products, most of which are of minimal or even negative
value to consumers, that third-party telemarketers might offer for sale
to consumers who fail to opt-out. Yet all the privacy policies make a
point of describing how consumers who elect to opt-out will give up
``beneficial'' opportunities.
(4) Title V attempted, through an encryption provision, to restrict
the tawdry practice of nonaffiliated telemarketers obtaining credit
card numbers from banks, then signing consumers up for expensive
``membership clubs'' and billing them when the consumer failed to
affirmatively cancel within 30 days.
Status: As Attorneys General Hatch of Minnesota and Sorrell of
Vermont have testified today, the telemarketers continue to find
loopholes enabling them to bill
consumers for products the consumer never ordered, using credit card
numbers
provided by the consumer's bank, not by the consumer. Consumers do not
think
they ordered anything, when they do not hand over cash, a check, or a
credit card
number. Unfortunately, the encryption provision has codified, instead
of stopped,
the growing epidemic of anticonsumer, controversial ``preacquired
account telemarketing.''
In December 2000, the Minnesota Attorney General filed a new suit
against Fleet Mortgage, an affiliate of FleetBoston, for substantially
the same types of violations as U.S. Bank engaged in. That complaint
was settled in June. The State's complaint explains the problem with
sharing confidential account information with third-party
telemarketers. The complaint states that when companies obtain a credit
card number in advance, consumers lose control over the deal:
Other than a cash purchase, providing a signed instrument or
a credit card account number is a readily recognizable means
for a consumer to signal assent to a telemarketing deal.
Preacquired account telemarketing removes these short-hand
methods for the consumer to control when he or she has agreed
to a purchase. The telemarketer with a preacquired account
turns this process on its head. Fleet not only provides its
telemarketing partners with the ability to charge the Fleet
customer's mortgage account, but also Fleet allows the
telemarketing partner to decide whether the consumer actually
consented. For many consumers, withholding their credit card
account number or signature from the telemarketer is their
ultimate defense against unwanted charges from telemarketing
calls. Fleet's sales practices remove this defense.\24\
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\24\ 28 December 2000, Complaint of State of Minnesota vs. Fleet
Mortgage, see http://www. ag.state.mn.us/consumer/news/pr/
Comp_Fleet_122800.html.
This complaint alleged that the company was providing account
numbers to the telemarketer. In our view, either Gramm-Leach-Bliley or
the FTC Telemarketing Sales Rule needs to be amended so that
telemarketers cannot initiate the billing of a consumer who has not
affirmatively provided his or her credit card or other account number.
Whether this case stems from pre-Gramm-Leach-Bliley acquisition of full
account numbers, or post-Gramm-Leach-Bliley encrypted numbers or
authorization codes, is not the question. In either case, consumers
have lost control over their accounts.
How do the credit card companies and the telemarketers respond to
consumer complaints? Data from consumer complaints to U.S. PIRG and to
the FTC and the legal complaints and accompanying materials of the
State of Minnesota all show the following pattern: Consumers who call
their credit card company to complain about their bills are transferred
to the telemarketer, whose agents were trained to continue to try to
confuse the consumer. The telemarketer then claims that the consumer
assented to the confusing trial offer by giving their ``date of birth''
or some other piece of information (but not, of course, a credit card
number, let alone an ``expiration date.''). Sometimes the telemarketer
would play a piece of recorded tape from the call where the consumer
had provided a date of birth--arguing that providing your date of birth
was proof that the consumer had agreed to the transaction. This
response to complaints made about unauthorized charges was designed to
convince consumers to ``eat'' the charge.
Providing a date of birth in response to a trick question is not
providing a credit card number to order a product. Preacquired account
telemarketing should be banned. We are encouraged that the proposed FTC
amendments to the Telemarketing Sales Rule would ban preacquired
account telemarketing.\25\
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\25\ See 67 FR 4492 available at http://www.ftc.gov/os/2002/01/
16cfr310.pdf.
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No bank--indeed, no firm--should be allowed to earn commissions
from companies (whether affiliated, joint marketing partners, or third-
party telemarketers) that bill consumers for products they do not want
and have not ordered, through the scheme known as ``preacquired account
telemarketing,'' which eliminates a consumer's fundamental control over
her purchase decisions by allowing the consumer's bank to make purchase
decisions for her and bill her credit card without her knowledge or
consent.
(5) Finally, recognizing that it hadn't really completed the job of
protecting privacy adequately, the Congress--in an extremely rare
departure from its normal policy of preempting State action--explicitly
included a fail-safe provision allowing States to enforce existing and
enact new stronger financial privacy laws.
Status: The States' rights fail-safe is the most important, and
most successful, privacy protection in GLBA. We commend the Chairman
for his sponsorship of the provision added in conference committee
known as the ``Sarbanes Amendment.'' States have been very active and
although not all have yet been successful, we believe that there is a
good chance that passage of strong new privacy laws in a few more
States will provide Congress with the encouragement it needs to raise
the bar nationally.
Our organizations and others, including, as State Representative
Jim Kasper reports today, the grassroots-based Protect Our Privacy
coalition in North Dakota, have fought to enact stronger privacy
protections in State law. While we have faced significant opposition
from vested financial interests, we strongly believe that the fail-safe
States' rights' provision of Title V is its most important provision.
Five States have some form of ``opt-in'' financial privacy
provisions: Alaska, Connecticut, Illinois, Maryland, and Vermont. Each
has laws applying to different aspects of financial information. In
three States, legislative repeals of stronger pre-GLBA legislation
occurred in 2000-2001: North Dakota, Maine, and Florida. However, in
June 2002, North Dakota citizens reversed that State's repeal action on
a 73 percent-27 percent ballot referendum vote.\26\ The result of the
referendum was reinstatement of the previous opt-in based law. Vermont
is the only State that has a law that specifically regulates affiliate-
sharing.\27\ The State of Vermont is also vigorously defending a
lawsuit by insurance associations seeking to overturn its financial
privacy laws.
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\26\ See the website of the North Dakota grassroots group that beat
the banks 73 percent-27 percent in a June referendum on financial
privacy at http://www.protectourprivacy.net.
\27\ Comments of 44 Attorneys General to Federal Trade Commission
Regarding GLB Notices. February 15, 2002 (available at www.naag.org).
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Consumers Union, Privacy Rights Clearinghouse, California PIRG, and
other groups have been strong supporters of proposed California
legislation by State Senator Jackie Speier. As originally introduced,
SB 773 \28\ would have required that all information-sharing, whether
by and between affiliates or with third parties, would require opt-in
consent. In its final form, although still defeated in the State
assembly last month, the bill would have required an opt-out for all
sharing between
either affiliates or nonaffiliated joint marketing partners (no consent
protection under Federal law) and required an opt-in for sharing with
other third parties (opt-out under current Federal law).
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\28\ See legislative history of SB 773 at http://
www.leginfo.ca.gov/cgi-bin/postquery?bill_
number=sb_773&sess=CUR&house=B&author=speier.
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Passage of SB 773, even in its weakened form, would have granted
California consumers vastly improved financial privacy rights over
current law.
In our view, passage of such a strong bill in such a large State
would have had a very good chance to lead to similar Federal
legislation, vindicating the fail-safe States' rights model adopted by
GLBA. The success of the citizens of North Dakota and the near success
of the California legislature in enacting the Speier bill, despite an
overwhelming campaign by the industry, strongly suggest that the
States' rights provision of Title V has been successful and should be
continued.
We are also encouraged that extant preemption provisions in the
Fair Credit Reporting Act (15 USC 1681 et seq.) expire on 1 January
2004. At that time, States will be free to experiment with
strengthening both of the core laws protecting their financial
privacy--FCRA and GLBA. Uncertainty over the relationship between the
FCRA's preemption provisions and GLBA's FCRA savings clause regarding
affiliate sharing has helped the financial industry to successfully
oppose State laws seeking to further regulate financial privacy. When
that FCRA preemption provision expires, there will be greater clarity
for legislators about States' rights to regulate affiliated
transactions.
Recommendations
(1) Strengthen GLBA
Gramm-Leach-Bliley Act should be strengthened. Consumers should be
granted an affirmative informed consent right (opt-in) before nonpublic
personal information is shared with either affiliates or third parties.
Providing informed consent and providing notice are only two of a
set of Fair Information Practices that give consumers control over the
use of their confidential information. Protection of privacy requires
data collectors to adhere to all of the Fair Information Practices.
Efforts by industry groups to ``dumb-down'' the Fair Information
Practices should be resisted.
(2) Resist Efforts to Eliminate States' Right to Enact Stronger Laws
Congress should resist efforts by industry lobbies to eliminate the
right of States to pass stronger financial privacy laws. Congress
should also reject proposed Federal legislation (H.R. 3068) and similar
amendments to place a moratorium on stronger financial privacy laws.
In addition, Congress should reject the specious claims of some
financial industry lobbyists that strong State privacy laws deter
homeland security. According to a February 2002, Associated Press
story:
The banking industry is reaching out to Homeland Security
Director Tom Ridge and lawmakers in search of Federal help to
block State consumer privacy laws that bankers argue will
hinder their efforts to spot terrorists. Industry lobbyists
have been arguing that State laws that prohibit banks from
sharing consumer information without permission might preclude
them from alerting law enforcement to potential crimes. ``We
would have trouble communicating with law enforcement . . . and
it would be extremely chaotic. We need a uniform privacy
standard,'' said David Liddle of the Financial Services
Roundtable, an industry lobby. . . .'' \29\
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\29\ See ``Banks Seek to Block State Privacy Laws,'' 19 February
2002, Sharon Thiemer, Associated Press.
As far as we know, Director Tom Ridge has not dignified these
requests with any comment.
(3) Reject Claims That Costs of Privacy Are Too High
We urge the Congress to reject industry claims that privacy's costs
are too high and its benefits too low. We have reviewed a number of
presumably industry-funded studies purporting to make this claim and
find their methodology lacking. We refer the Committee to an alternate
study, by an independent consultant, which critiques the industry
studies and points out numerous benefits of privacy as well as the
costs of insufficient privacy protection. As Robert Gellman points out:
The cost of privacy is a legitimate issue, but the studies
and the conclusions drawn from them have serious flaws. . . .
In fact, the costs incurred by both business and individuals
due to incomplete or insufficient privacy protections reach
tens of billions of dollars every year. [Emphasis added.] \30\
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\30\ See Gellman, ``Privacy, Consumers, and Costs: How The Lack of
Privacy Costs Consumers and Why Business Studies of Privacy Costs are
Biased and Incomplete,'' March 2002, http://www.epic.org/reports/
dmfprivacy.html or http://www.cdt.org/publications/dmfprivacy.pdf.
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Conclusion
Thank you for the opportunity to provide our views before the
Committee today on the important matter of financial privacy. You, Mr.
Chairman, and other Committee Members, especially Senator Shelby and
Senator Dodd, Senate Co-Chairs of the Bi-Partisan Congressional Privacy
Caucus, should be commended for your leadership on financial privacy.
We look forward to working with you to strengthen consumer privacy
rights.