Before the ink was dry on the Gramm-Leach-Bliley Act, with its extensive privacy provisions, the forces driving the so-called privacy debate were lining up for the next round.
Members of Congress promise bills with even greater privacy protections. Regulators sharpen their pens to add comprehensive regulations. State legislators throughout the country attempt to outdo each other with tough privacy proposals.
Privacy is now a highly charged issue. Fed by media frenzy, limelight-seeking politicians, and the trial lawyers, it stirs the emotions of Americans. Because of the ill-defined nature of privacy, much of the debate has been fueled by hyperbole, self-serving righteousness, and poorly considered attempts to regulate the flow of information in a rapidly developing technological society.
The fact is, questions about privacy turn largely on how the issues are posed.
When, for example, the American public is asked whether the government should use all tools in its arsenal to combat drug traffickers, the answer is an unambiguous "yes." Yet when the same public learned that the government, in the name of combating those very drug traffickers, had demanded that banks spy on the financial transactions of every American and report anything that seemed "suspicious" to the government, the uproar was deafening. The so-called "Know Your Customer" rules were hastily withdrawn.
In spite of this temporary setback, the government continues to insist that information gathered by banks should be generally available to further its ill-defined objectives of fighting drugs and - with the Bank of New York/Russian deposit matter upon us - money laundering.
"Privacy be damned" seems to be the rule of the day on these issues. And since the media frenzy is focused on "money laundering" and the trial lawyers don't stand to benefit much from this privacy issue, the government seems to have little to fear from using banks as agents of the police.
The reality is that in a society that relies on technology to process financial transactions, each transaction will leave a trail of technological data that can be used to reconstruct individual preferences, needs, and behavior patterns. This information can be captured by all sorts of organizations and individuals. Obviously, banks are in a unique position to gather and use such information. Once harnessed, this information can be used to target the person whose data is captured for everything from further financial services to hairspray.
The issue we then confront is what limitations should or can effectively be put on the use of this information. (Emphasis must placed on "effectively," because at the rate that technology is advancing we can assume that the ability to capture and use this information is proceeding much more rapidly than the ability of politicians and regulators to control the situation.)
Lost in the slew of negative publicity and lawsuits is the fact that the use of financial information gathered by banks has worked remarkably to the advantage of most bank customers throughout the country.
For instance, during the early 1990s, when banks first started actively selling mutual funds through affiliated and third-party brokers, the Dow Jones average was less than 5,000. Had bank customers not been target-marketed for the sale of mutual funds, many of those customers would have continued to hold their funds in low paying CDs as the market cruised to 11,000.
Try to tell those customers that the government is doing them a favor by attempting to restrain the use of so-called "private" information by banks. Yet, in the current environment, the bank sharing information about maturing CDs with third-party brokers would be characterized as "selling private financial data" and targeted for litigation by the trial lawyers.
Certainly there were bank customers who resented the use of their private information to target the sale of mutual funds. My own father went into a bank to withdraw funds from a maturing CD, and before he got home a broker had called him to suggest a use for those funds in brokerage investments. My father thereupon closed all his accounts at the bank and called the manager to tell her why.
In my view this is how the free market should work, and why the free market can be an effective force in the control of privacy abuse. Banks that abuse customer information will lose their customers. What better incentive is there for banks to make intelligent use of customer information, and what greater protection do customers need, than the ability to withdraw their patronage from an abusive financial institution?
I believe that there is only one regulation that would be helpful: If private financial information is to be used for purposes beyond that for which its has been provided or generated, the customer has a right to know; if unaffiliated third parties are to be provided with that information, the third party should be required to divulge the source when it is used.
I can assure you that a call from a stockbroker hawking mutual funds when a CD matures would be very carefully controlled if the bank that provided the information were identified. And banks certainly would be careful about providing my telephone number to telemarketers if one hawking some irresistible product interrupted me at dinner and revealed that my bank was the source of the interruption.
Beyond this I believe that regulation will not be successful - and may be counterproductive, depriving bank customers of new services and products that could improve their lives.
Lawsuits that promise no reasonable benefit to the ordinary citizen are a plague. A pox on the trial lawyers and the grandstanding attorneys-general who are preying on the legitimate concerns of the American public about their private information being abused by banks!
Politicians and regulators must stand back for a reasonable period to let the marketplace have its say. This debate must be focused on the times and current technological circumstances, and should not attempt to limit the advantages that technology affords us. Mr. Rockett represents financial services clients as a partner in the San Francisco office of the McCutchen Doyle Brown & Enersen law firm.