Effort to Tighten Financial Privacy Clears 1st Hurdle

A bill that would give California some of the toughest financial privacy protections in the nation passed its first test in Sacramento on Tuesday as lawmakers squared off over whether the government should give consumers more power to restrict the use and sale of their personal information.

AB1707, sponsored by Assemblywoman Sheila Kuehl (D-Santa Monica), would require banks to obtain a customer’s authorization before disclosing any personal information about the individual to telemarketing firms or affiliated companies.

The bill, one of three proposals working their way through the Legislature, passed the Kuehl-chaired Assembly Judiciary Committee, 10 to 5.

But all three bills, including SB1337 by state Sen. Jackie Speier (D-Daly City) and SB1372 by state Sen. Tim Leslie (R-Tahoe City), face an uphill battle against banks and business groups.

Five of the nation’s top financial industry trade groups--the American Bankers Assn., the American Council of Life Insurance, the American Insurance Assn., the Securities Industry Assn. and the Investment Co. Institute--have joined forces to create a lobbying arm to defeat proposals in California and nearly two dozen other states where similar bills are pending.

Kuehl’s bill now goes to the Assembly Banking and Finance Committee, where it is likely to face a tougher reception. The other two bills are scheduled for hearing in early April.

A key point of dissension is whether California lawmakers should adopt a stricter privacy rule than the one approved last year in Washington. The federal rule, set to take effect in November, allows banks to share information with telemarketing firms as long as they permit customers the opportunity to opt out of such information-sharing.

Kuehl’s bill would take the protection a step further, requiring banks to get a customer’s approval every time they wish to share personal information with third parties or affiliates and to disclose exactly what information will be released.

“I don’t believe most people know what kind of information is being shared,” Kuehl said.

She said her bill would clarify that a consumer’s right to financial privacy is more important than the financial industry’s right to collect information and market new products.

California Atty. Gen. Bill Lockyer, who spoke in favor of the bill Tuesday, is investigating the practices of several large California banks that last year admitted selling or disclosing customer account information to telemarketing firms.

Minnesota and New York have taken enforcement actions against banks in those states for similar practices.

Lockyer said AB1707 would help strengthen the rights of Californians to preserve the privacy of their financial information, ensuring that banks serve as “keepers” of personal information, not “peepers.”

Banks and business groups warn that the bill could backfire on consumers by restricting the ability of banks to offer products and discounts.

If banks and other financial services companies are unable to use and share information freely, consumers may be deprived of such products as low-rate credit cards, home-equity loans or consolidated monthly statements, according to opponents of the bill.

“We want to preserve the consumer benefits that arise from a free flow of information,” said John Dugan, a Washington attorney representing the industry’s new lobbying group, Financial Services Coordinating Council.

Dugan also questioned the legality of the bill’s restrictions on banks sharing customer information within their own family of companies, such as between a bank’s credit card unit and its mortgage division. Such affiliate-sharing is protected by the federal Fair Credit Reporting Act, he said.

Fred Main, senior vice president of the California Chamber of Commerce, warned that AB1707 would dampen the state’s economic growth by placing burdensome new requirements on financial companies that do business in the state.

Assemblyman Tom McClintock (R-Northridge) said that AB1707 would restrict consumer choice and interfere with a free marketplace. “That’s not the role of the government,” McClintock said.

Assemblyman Robert Pacheco (R-Walnut) criticized a provision that would permit consumers to sue their banks in the event that personal information would be disclosed improperly. The bill permits consumers to sue for $1,000, even if they have not suffered actual damages from the release of the information.