Judge Upholds California Financial Privacy Law; Bankers Vow to Appeal

SACRAMENTO, Calif. – When it comes to financial privacy legislation, the banking industry may be down , but it’s not out. “At this point, consumer organizations won round one and they won round two,” noted Bob Arnould, referring to privacy legislation passed by the California Legislature and then upheld in federal court. “But there’s going to be many fights yet to come as it winds its way through the courts.” The banking industry, which fought for four years to derail financial privacy legislation pushed by State Sen. Jackie Speier, now promises to appeal the judge’s ruling that upheld the law that went into effect July 1. At issue is the restriction on how financial institutions – including credit unions, banks, insurance companies and brokerages – can share customer information. Arnould, vice president of state governmental affairs for the California Credit Union League, noted that credit unions supported Speier’s SB1, also known as the California Financial Information Privacy Act. Banks, insurance companies and brokerages spent millions of dollars over the years trying to kill the measure and others like it. After supporters of financial privacy threatened to place the issue directly before California voters in the form of a ballot initiative if lawmakers failed to act, Speier’s bill was finally approved by the Legislature last year. Three trade associations then challenged the state’s tough new law in court. On Wednesday (June 30), one day before the measure was to go into effect, U.S. District Court Judge Morrison C. England dismissed the suit filed by the American Bankers Association, the Financial Services Roundtable and the Consumers Bankers Association. England ruled that states could enact tougher financial privacy rules under the Gramm-Leach Bliley Act, a federal law that addresses financial privacy. England, in a 14-page decision, noted that Gramm-Leach Bliley “allows states to enact more stringent privacy regulations . . . therefore permitting state laws like SB1.” He dismissed the bankers’ claims that provisions of the federal Fair Credit Reporting Act (FCRA) took precedence over the California law. He ruled that the “overriding purpose” of the FCRA “is to regulate the use and dissemination of consumer reports.” Bankers contended the judge’s ruling was flawed and vowed to appeal. “We are surprised and very disappointed in the ruling and plan to appeal,” said Edward L. Yingling, executive vice president at the ABA. Yingling contended that the Fair and Accurate Credit Transactions (FACT) Act passed by Congress last year preempts state law when it comes to privacy issues. “We strongly disagree with Judge England’s conclusion that the law affects only consumer reports and not the sharing of consumer credit information among affiliates,” Yingling said. “In our opinion, the clear language of the Fair Credit Reporting Act indicates otherwise. “When Congress debated the FACT Act last year, it clearly renewed the Fair Credit Reporting Act’s of state laws like California’s privacy statute . . .” he said. “Indeed, Congress concluded that federal preemption was the key to ensuring the continued success of a seamless nationwide credit reporting system.” Under SB1, financial institutions are prohibited from selling or sharing customer information with non-affiliated companies unless the they have received customer permission. Financial institutions must also give customers the option of “opting out” of having their information shared or sold within the same family of companies, such as a bank sharing customer information with an insurance or brokerage company owned by the same corporation. Arnould said the breadth of the judge’s decision caught some people by surprise. He noted that financial privacy legislation was still a “murky area” of the law that was still evolving. “The ruling isn’t that startling,” he added. “We did support SB1 and continue to think that credit union members deserve the right to voice their personal opinion about the sharing of their information.” Speier had hailed the judge’s ruling, as did consumer groups and politicians who supported the measure. “Victories of this magnitude, that uphold consumers’ privacy rights over financial institutions’ interest in profiting from client personal information don’t happen often – so I applaud the wisdom of the court in throwing out this lawsuit,” Speier said. “Californians clearly want and deserve the strongest financial privacy law in the nation and they’ve waited long enough.” She said she wasn’t surprised that the bankers planned to appeal England’s decision. “They’re not going to lose $400 million a year they get from selling our financial information without a fight,” Speier said. Shelley Curran of Consumers Union said financial institutions should give up the battle. “It’s time for banks and insurance companies to start delivering these privacy protections instead of fighting them in court,” she said. State Attorney General Bill Lockyer called the judge’s ruling a victory for consumers, saying it “places the interests of personal privacy over corporate profits.” -