Banking As We Knew It Passes On

The Financial Modernization Bill Greets Y2K
The financial industry has struggled and overcome many changes, particularly in the past few years. But none that compare to the changes ahead. After much debate, committee hearings, testimony, rewriting, proposals and compromises, the modernization bill is finally a reality. How much will the fallout have an effect on what you do? That's easy! No matter what part of the financial institution you work in, you'll feel the effect.

The meaty part of the Financial Services Act creates a regulatory structure that helps to level out the competitive field, but remains flexible for the future. Banks can now freely affiliate with securities firms and insurance companies through a holding company.

One of the standards set by the bill is the industry practice of posting of privacy policies and the ability of customers to decide who can gain access to their account information. The arguments on privacy concerns led to one of the critical compromises.

A major benefit to consumers is our capability of being able to offer, as part of financial services holding companies, a sort of one-stop-shopping, from financial planning, stocks, insurance, and mortgages all the way to checking and savings accounts. Of course, that's a shared privilege. According to Treasury Department studies, this increased product competition will give underserved communities and small business owners total access to a full range of financial services and save them considerable expense in the bargain. Treasury predicts an estimated savings of $15 billion a year over three years. We sought out Hotline advisor John Byrne in Washington and asked for his run down of the changes. He summarized the bill this way:
Federal and State Regulators
Under the terms of the Act, shall:

establish "appropriate" standards relating to administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information;
protect against any anticipated threats or hazards to the security and integrity of such records; and
protect against unauthorized access to or use of such information which could result in substantial harm or inconvenience to any customer.

New Opt-Out Requirements
Customers of financial institutions must be allowed to "opt out" of having their nonpublic personal financial information shared with unaffiliated third parties. For example, a financial institution could share information to process customer transactions, to perform services or functions on behalf of the financial institution, for fraud or risk control and to enter into certain joint marketing arrangements for financial products or services. The institution must fully disclose such activity to its customers and enter into a contractual agreement requiring the third party to maintain the confidentiality of any such information. The disclosure must be clear and conspicuous in writing or in electronic form and given before the first time that they occur.

Non Disclosure of Account Number Information
All financial institutions, which under the terms of the Act are banks, savings and loans, credit unions, securities firms, and insurance companies - are barred from disclosing customer account numbers or access codes to unaffiliated third parties for telemarketing or other direct marketing purposes.

Privacy Policy Disclosure
All financial institutions must disclose at the time of establishing the customer relationship and thereafter, annually, to all customers, its policies and procedures for protecting customers' nonpublic personal information, both for existing customers and those who have ceased to be customers.

State Law Preemption
Allows state laws that give consumers greater privacy protections than the provisions in this new law as long as the state laws are not inconsistent with this law. (Editor's Note: John cautions to watch for this. State law could be harmful to this modernization.)
Pretext Calling Made a Federal Crime
Makes it a federal crime, punishable by up to five years in prison, to obtain or attempt to obtain private customer financial information through fraudulent or deceptive means.

And more?
There are other sections concerned with community lending and the CRA, as well as sections dealing with financial institution mergers and changes.

Many regulations and explanations will be created before all of this is final and implemented. The face of banking is changing as rapidly as technology and the laws will allow it.

Copyright © 1999 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 9, No. 10, 11/99