Tighter controls on personal financial information may leave consumers a lot poorer but no more protected

In his state of the state address, California Governor Gray Davis vowed to introduce new financial privacy legislation. But a federal law already protects Californians and new legislation could be harmful to consumers if it constrains day-to-day information exchange.

The debate over financial privacy centers on what financial institutions, such as banks and insurance agencies, can and can’t do with a consumer’s personal information such as credit history or even names and addresses.

Some state legislators, such as Senator Jackie Speier, favor what is called “opt-in” legislation. Opt-in privacy laws force companies to contact their customers before they share customer information. This regulation sounds good in theory but would be disastrous in practice.

Opt-in laws generally have one of two effects. They will either cause customers to be pursued by businesses more frequently in order to get their permission to send them an offer or, if the costs of contacting customers are too onerous, consumers will lose out on deals that could have been offered to them.

For example, when a consumer closes a mortgage, they might be interested in their bank’s affiliated home insurance that offers a discount because no extensive marketing is needed to find the customer. Under an opt-in regime, that bank would have to ask the customer’s permission before contacting them again with an offer of low-rate insurance.

Not only would customers be bothered twice, but the bank and the insurance agency would incur extra costs through meeting the opt-in requirement. Companies would either pass these costs on to the consumer in the form of a price increase or not offer the service at all.

Other benefits that are threatened by opt-in privacy laws are fast credit-card approval and low credit rates. Shoppers who are offered discounts by opening a store credit card, such as a Banana Republic card or a Macy’s card, would no longer get instant credit under an opt-in regime because consumer credit histories would no longer be shared freely.

Likewise, the greater costs incurred from the red tape involved in heavier information regulation would push up costs for financial institutions, resulting in interest rate hikes on all credit cards. Perhaps these costs would be justified if consumer information were truly being abused by banks, but that is not the case.

Not only is there no evidence of consumer harm when it comes to financial institutions and privacy, but banks also have a fairly good reputation for safeguarding customer information. For instance, according to a 2001 American Banker/Gallup Consumer Survey, only 12 percent of respondents believe that banks are doing a “poor” job protecting their customers' privacy.

It seems that the governor and a whole lot of legislators are jumping on this issue for political purposes only. There are a number of polls showing that privacy is a key issue with the public, but these polls are misleading. Privacy can mean many things to many people, such as privacy from government wiretaps or security issues. It’s unlikely that most people think privacy means increasing their interest payments.

Governor Davis should also remember that there is already a federal law in place that protects consumers’ personal financial information. Six months ago, the Financial Services Modernization Act—also known as Gramm-Leach-Bliley (GLB)—went into effect.

GLB is an “opt-out” law requiring customers to communicate their privacy preferences to the company—a much more sensible, balanced, and affordable solution. California legislators should wait to see how this law works before rushing to pass new laws.

At a time when Californians face a $12-billion deficit, Governor Davis should avoid the path that other states have already tried and rejected. Since Congress passed GLB in 1999, North Dakota, Maine, Florida, and Louisiana have reversed their opt-in legislation in favor of opt-out.

New financial privacy regulations would do little to protect privacy and would instead put a dent in the pocketbooks of California consumers. This year, all California lawmakers should resolve to put poll-driven politics aside and think about the practical effects of their proposals, rather than the soundbites.

Examiner columnist Sally Pipes is the President and CEO of the Pacific Research Institute, a California-based think tank. She can be reached via email at spipes@pacificresearch.org.