Privacy at issue with new financial services reform

Consumers should be aware of information-sharing policies among financial institutions

The signing into law of the Gramm-Leach-Bliley Financial Services Act last November allowed banks and financial services companies to affiliate. As a result, it is now more important than ever for consumers to know their privacy rights, according to a release from rating agency Weiss Ratings Inc.

"The new legislation contains consumer protection provisions that are supposed to protect the legitimate privacy concerns of the individual.passage and implementation of the specific consumer protection rules will take time, and enforcement is uncertain. Therefore, once your bank, insurer, or broker has your name and account information, the potential for abuse will be great," said Weiss Ratings Chairman Martin D. Weiss, PhD, in the release.

The Gramm-Leach-Bliley Act essentially eliminates the barriers that once prohibited banks from being affiliated with other types of financial companies such as insurers or brokerage firms.

As such, "it represents a tacit government endorsement of the wave of financial mergers that has already been under way for many years," Weiss added.

Although this new freedom for the financial services companies may result in new benefits and product offerings for consumers, Weiss recommends consumers take the following precautions:

Know your privacy rights. Financial institutions will be legally required to disclose their privacy policies clearly and conspicuously, in writing or electronic form, whenever a customer sets up an account, and annually thereafter. Make sure your banker, broker, or insurance agent provides you with this information and that you understand the company's policy.

Weigh the pros and cons of letting the institution sell your private information to others. Unless you take the initiative to request privacy, the institution will most likely proceed to sell your personal data to both affiliated and nonaffiliated companies under "information sharing agreements."

If you want to protect your privacy, request a form that lets you "opt out" of these information sharing agreements by checking off the appropriate boxes. If privacy is not a concern to you, or if you want to receive product offerings from other companies, you need take no further action, Weiss Ratings states.

Two caveats: First, these forms may not be available at many institutions for many months. If this is the case, send your banker, broker or insurer a letter stating, "To protect my privacy, I wish to opt out of all present or future information-sharing agreements your institution may have with affiliates or nonaffiliates."

Second, even after you opt out, the institution will still have the right to pass along account information to a third party that performs routine and needed services, such as transaction processing.

If you receive solicitations from your company's affiliate, don't assume that doing all your business with the same group of companies is the best or most convenient plan of action. Banking companies are now permitted to underwrite and sell securities, sponsor and distribute mutual funds, as well as underwrite and sell insurance. Brokers are already in the banking and insurance businesses, and insurers are also branching out.

However, you should review the merits of each product offering in its own right, based on the financial stability of the institution, as well as the quality and price of the product.

Shop around. You may find a nonaffiliated company that is safer and offers a better deal.

Don't feel pressured to give your business to an insurer that is related to your bank. In order to get your insurance business, your bank may try to give you the impression that your existing or pending loan could be affected by your purchase of insurance from its affiliate. In reality, your bank cannot legally deny your loan or alter its terms if you choose to go elsewhere for insurance.

Clearly distinguish between those bank products that carry FDIC insurance and those that don't. Your bank may already be promoting mutual funds, annuities and a host of other financial products. But just because it's a bank, don't assume that these new products carry FDIC insurance. If you are not sure which products are covered by the FDIC, be sure to ask.

Always deal with a financially secure bank, broker, or insurer. If your financial services company falls into financial difficulties, the quality of service can decline. If it fails, your access to funds could be delayed, your assets could be frozen or, in some cases, you could suffer outright losses. Therefore, be sure to seriously consider the company's financial safety rating before purchasing a financial product or making additional deposits.

Don't assume a parent company with deep pockets will rescue a failing subsidiary. Although an institution may be affiliated to a strong parent and carry a very similar name as the parent, each individual company has its own risks.

For example, a large bank may decide to inject additional funds into an insurance subsidiary that's in financial difficulties, or it may decide not to "throw good money after bad," and let it fail.

No matter what, with so many strong institutions to choose from, it doesn't make sense to take unnecessary chances with a weak company. So, always consider the rating of the individual affiliate you are doing business with.

Weiss Ratings Inc. issues safety ratings on more than 16,000 financial institutions, including banks, securities brokers, insurance companies, and HMOs, taking into consideration the ratings of affiliated companies.

Weiss also rates the risk-adjusted performance of more than 10,000 mutual funds. It receives no compensation from the companies it rates, and revenues are derived strictly from its product sales to consumers, businesses and libraries.