WASHINGTON - If regulators punt their effort to streamline consumer privacy notices to Congress as experts predict, the financial services industry would have to revisit the old question of whether the potential benefits of a privacy bill outweigh the risks.
Eight federal agencies issued a preliminary proposal in December to simplify the notices that financial companies must send each year to customers detailing their information-sharing practices.
The problem regulators are running into is the Gramm-Leach-Bliley Act's mandate that the notices include very specific categories of information and examples. That is making it hard to create notices that are both simple and comply with the complicated requirements, people familiar with the proposal said.
"The signals I'm getting from regulators is they will be clear about the need for shorter, clearer notices, but they will conclude they do not have the authority themselves to do it and Congress itself will have to weigh in," said L. Richard Fischer, a partner in the law firm of Morrison & Foerster LLP.
An FTC spokeswoman would not say whether the agency believes it has the authority to simplify the notices. She said the FTC and some of the bank regulators plan to conduct consumer research on the effectiveness of the notices but that "it's premature to consider how the research will be used." Spokesmen at the banking regulators did not comment or referred questions to the FTC.
Opening up Gramm-Leach-Bliley would pose risks and advantages for financial companies.
On the one hand, it could give them a new opportunity to add a preemption provision to the law that would prevent states from setting their own privacy requirements as California did last year.
On the other hand, some fear that the price of opening of Gramm-Leach-Bliley would be much tougher data-sharing standards. Further, amending the law to simplify the notices would leave the door open to potentially unlimited changes to the 5-year-old law.
Karl Kaufmann, an associate at Sidley, Austin, Brown, & Wood who specializes in financial privacy law, said, "Of course industry would like to see federal preemption with respect to the Gramm-Leach-Bliley Act, but until we have a better understanding of the congressional dynamics and the potential costs that would be imposed to obtain that preemption, I think it's too early to determine whether or not industry is going to make a strong push for preemption."
The Bush administration, which has called for making the privacy notices as easy to understand and compare as the nutrition labels on packaged food products, has no immediate plans to weigh in on national privacy standards.
"Let's give it a little more time before we come to any conclusion," said Wayne Abernathy, the Treasury assistant secretary for financial institutions, in an interview last week.
The agency's latest opportunity to take a position came in June, when it issued a Gramm-Leach-Bliley-mandated report on the security of personal financial information. The 56-page document calls for simplifying the privacy notices and outlines the arguments for and against preempting states from setting their own privacy rules. But it does not take a position on preemption.
"We came to the conclusion that we really don't have as much of a track record to make a decision on, as we had" last year when the administration supported reauthorizing national standards for credit-related data sharing in the Fair Credit Reporting Act, Mr. Abernathy said.
"We made a pretty strong argument with regard to FCRA that national rules will benefit consumers," he said. "That is something we're testing. It may prove to be the case that national standards actually benefit consumers by giving one standard consumers understand wherever they are across the country. But that's just a hypothesis."
The administration may be forced into the debate if regulators throw up their hands.
One way to resolve the uncertainty would be to create two notices: an easy-to-understand version and another that spells out the law's requirements. The simple notice could be given to customers when they open an account and sent to them annually; the detailed one would be made available to customers upon request.
"I believe the agencies can do that because they would have complied with the fulsome requirements of the statute and made it available to consumers upon request and free of charge, but have the short-form disclosure as the one provided initially and annually," Mr. Fischer said. "The problem is that does take a step, and I think regulators view it as a leap. I think they wouldn't be comfortable making that particular leap."
