Privacy Issues in the Financial Services Industry

Executive Summary

In testimony before the Subcommittee on Financial Institutions and Consumer Credit, U.S. House Committee on Banking and Financial Services, Robert Litan applauds the inclusion of privacy protections in H.R. 10. Litan recognizes that even on the Internet there can be market failures that call for government intervention, assuming the intervention itself does not create more problems than it cures. Privacy is one area where the market appears to have failed. H.R. 10 balances the benefits of privacy protection against the costs of providing it. These provisions require financial institutions to notify customers of an institution’s privacy policies and afford them an opportunity to “opt out” of having their sensitive financial data shared with third parties, subject to certain exceptions.

Litan urges Congress to extend these protections to affiliates of financial institutions and consider similar protections for all retailers involved in interstate commerce. At the same time, he argues that, except in the case of sensitive medical data, the costs of a requirement on financial institutions, which would allow transfers of information only if explicitly approved by consumers, outweighed the benefits.