Financial Services Integration: A Question of Privacy

Mailboxes throughout the West have been rapidly filling with literature outlining the “Privacy Policy” of virtually every organization that has ever taken a credit application.

As the Gramm-Leach-Bliley Act (GLBA) takes hold, predictions of massive corporate mergers, acquisitions and blending of databases within the financial services industry have not materialized. In fact, the largest beneficiary of the new law to date seems to be an increasingly busy U.S. Postal Service.

Privacy was just one element of the Financial Services Modernization Act that bounced around Congress in one form or another for almost 30 years. The new law allows insurance companies and the brokerage firm affiliates of banks to share consumer information, on the condition that they first inform customers of the diverse nature of their services.

GLBA provides methods for banking organizations to carry out securities, insurance and other operations while it restricts banks from conducting unrelated activities under the cloak of a subsidiary.

Consumers can deny any financial service firm the right to distribute their personal financial information to other companies. But banks and insurance companies have found a way to sidestep the need for permission by simply joining forces under a single corporate umbrella.

The passage of GLBA was the culmination of efforts to restrict or eliminate many of the limitations on banking organizations dating back to measures passed during the Depression. Temporary measures—including the Depository Institutions Deregulation and Monetary Control Acts, both approved during the 1980s—broadened permissible activities and served to deregulate the banking industry. The 1989 Financial Institutions Reform Recovery and similar legislation quickly passed through the hands of federal lawmakers when the industry was rocked by the failure of thrifts and banks in the late ’80s and early ’90s.

The original objective of GLBA was to provide cost savings through efficiencies to consumers by sharing information within a single corporation, according to a statement released by the bill’s namesake sponsor, Sen. Phil Gramm.

“This is a deregulatory bill,” Gramm told his colleagues in the Senate. “In this period of economic growth and prosperity, we believe this is the answer.”

The big get bigger
The defining deal for the financial services industry was the merger that combined Citicorp and Travelers to form Citigroup. That marriage of these two financial powerhouses was actually consummated before President Clinton signed GLBA into law in November 1999.

This was followed by 18 months of surprising inactivity in the merger sector. But that quiet period came to a screeching halt in May when Wells Fargo completed the acquisition of ACO, the parent company of Acordia Inc. The move gave the California-based bank full-service insurance agencies in 34 states, including 20 states in which Wells Fargo provides banking services.

“We’ve been cross-selling a long time,” said Tim King, president of Wells Fargo Insurance. “Now there will be even more obvious opportunities between Wells Fargo business partners and our agencies.”

Industry analyst Mary Eisenhart described the Wells Fargo move as an initial step that many banks will start taking to prepare themselves for eventually conducting business across the nation.

“Insurance companies offer the banks much richer offerings to a greater number of clients,” Eisenhart said. “Banks offer insurance companies reach to a far greater degree, specifically the life and health side of the insurance business. Right now, property and casualty is nothing more than the ugly sister in the financial equation.”

The lack of mergers may be a result of the slowing economy and the slide on Wall Street, according to Randy Farless, assistant vice president of property and casualty marketing at SAFECO in Seattle. He predicts that the merging of banks and insurance companies will resume when both become comfortable with elements of the new law and when the economy begins to rebound.

“Banks are probably just weighing their options and taking time to make sure they are comfortable with the new rules before they begin extending their wings into unknown territory,” Farless said. “Making a mistake when you are cross-selling can be very costly for every aspect of the business.”

Associations urge state compliance
The legislatures in a minimum of 29 states must approve the privacy provisions of GLB before July if the states hope to retain control of their own destiny. States will then have another year to comply with the balance of the new law. If the minimum numbers of states do not vote to approve the privacy guidelines, GLBA turns regulatory control over to national board insurance commissioners.

The latest projections seem to assure approval from the required number of states, but this is not without its own controversy. Many of the most populous states—where the majority of policies are written—may not approve each of the provisions, leaving the future of national regulation up to a majority of smaller, less-populated states.

John Norwood’s law firm serves as the lobbyist for four agent and broker associations in California. His associations stood ready to support AB 1727 in the state legislature that included accommodations for licensing reciprocity, privacy and consumer protection. However, debate on the bill was suspended in early May due to concerns brought up by consumer groups.

“If California, New York, Florida, Texas and some of the other populous states do not pass the privacy provisions of Gramm-Leach-Bliley, there will be serious political ramifications if, and when, the (federal) government tries to enforce regulations that are more severe than those on the books in the individual states,” Norwood said. “That’s not the case in California. The laws in this state are generally more protective when it comes to consumers and their privacy.”

Farless and Norwood agreed with other industry analysts who are forecasting that the first major influx of acquisitions will probably come from European companies looking for a foothold in America.

Keeping up with the times
Agents should rely on advice from the companies they represent, according to Wes Bissett, vice president-state relations and government affairs for the Independent Insurance Agents of America. Bissett said he doubted many independent agents have adequate firewalls to protect vital financial information from sophisticated hackers.

Analyst Eisenhart agreed with Bissett’s estimation of the average agent’s level of technology. She compared the status of privacy protection to the current situation dealing with electronic signatures.

Dan Holst, executive director of the Independent Insurance Agents of Washington (IIAWA), said his organization has come to the rescue of members who wish to comply with the privacy guidelines of GLBA prior to July 1. Both the IIAWA and IIAA websites provide step-by-step instructions, including templates for notices that must be sent to every client on file.

“Consumers received dozens of privacy statements in the mail during April and May,” Holst said. “Nobody is going to read them all. The longer and more detailed the text of the statement and the smaller the type, the less likely it is that anybody will actually take the time to read it.”

Dan Aznoff is the former editor of Insurance West magazine. To comment on this article, please send e-mail to ijtexas@insurancejournal.com.

Topics California Agencies Legislation