SEPTEMBER 2004

Privacy and Sharing of Information by Affiliates

Last year's passage of the Fair and Accurate Credit Transactions Act (FACT Act) was supposed to have resolved the issue of limits on the sharing of a customer's personal information across affiliates of a financial services firm. Specifically, the FACT Act preempted states from placing limits on such "affiliate sharing" and created a uniform federal standard that would, at once, promote customer privacy and allow companies (and their customers) to benefit from the coordinated use of customer information across affiliates. But, this preemption has been upended by a recent California federal court decision that upheld a state law that explicitly limits the sharing of information across affiliates by requiring that companies give customers the right to prohibit such sharing. The U.S. District Court for the Eastern District of California ruled on June 30, 2004 that the federal FACT Act does not preempt the affiliate-sharing provisions of California's new financial privacy law (SB 1) which took effect on July 1, 2004.

Banking trade associations have appealed the decision. Their efforts were substantially bolstered in mid-August when six federal regulatory agencies jointly filed an amicus curiae brief to the Ninth Circuit Court of Appeals in support of the trade associations' appeal. The agencies noted that in the FCRA, and as "reaffirmed by the FACT Act, Congress deliberately and expressly preempted state law in order to establish a scheme of uniform requirements regulating the sharing and use of consumer information among affiliates." The appeals court is scheduled to rule later this year. Meanwhile, financial services firms are scrambling to comply with the new California statute, which they were unprepared to do given the belief that it had been trumped by the preemption provision in the FACT Act.

In a recent editorial, privacy law experts Richard Fischer and Oliver I. Ireland offered this commentary on the current situation: "It is hard to recall another situation where Congress made its intent to preempt a state law so clear, only to have a court ignore that intent. In time, the court's decision should be overturned. In the interim, however, the financial services industry will experience the very disruptions the FACT Act was designed to avoid. The consumer protection policies of a single state will disrupt the economies of scope and scale that have efficiently provided consumers throughout the country with more competitive prices and terms for financial services. In some cases the disruptions may be limited to California. In other cases, nationwide changes may be required where it is impractical to limit changes to California. In either case, because of limitations of cost accounting systems and competitive pressures, the costs of these disruptions will be imposed on consumers throughout the country."

The American Financial Services Association (AFSA) is hosting seminars throughout the country for the financial services industry as it gets up to speed on the many new compliance requirements for creditors under the Fair and Accurate Credit Transactions (FACT) Act. The seminars will take place between November 9 and November 19, 2004 in 12 cities: Boston; Seattle, San Francisco, Philadelphia, Los Angeles, Minneapolis, Charlotte, Chicago, Dallas, Columbus, Orlando and Washington, DC.

For more information and to register, click here.