Changes called bad for patrons; Critics of pending bill say higher fees, loss of privacy could result


As Congress gets ready to vote on overhauling Depression-era banking laws, consumer advocates warn that the new rules would lead to higher fees and privacy invasions.

"Bank customers need to understand this bill provides no real privacy protection. They need to be careful," Frank Torres, legislative counsel for Consumers Union, said yesterday.

In the early morning hours Friday, White House and congressional negotiators hammered out an agreement that would allow banks, insurance companies and securities firms to enter into each other's business. It also would make it easier for these companies to merge and sell each other's products.

The new bill would remove restrictions under the Glass-Steagall Act of 1933, adopted to prevent the kind of banking collapse that occurred during the Great Depression. Advocates have lobbied as long as 20 years for a repeal of the act, saying banking laws need to be updated to reflect changes in the financial services industry.

Congress is expected to pass the legislation when it comes up for vote -- possibly next week. President Clinton is expected to sign it.

While consumers may not see an immediate change, proponents say, over time they will reap the benefits brought about by greater competition among banks, insurers and securities firms.

"More competition leads to more choice, convenience, lower prices and product innovation," said Charlotte Birch, a spokeswoman for the American Bankers Association.

Consumer advocates disagree.

They say the legislation will spur a flurry of mergers, and that means less competition and bigger financial institutions.

"What we have seen is that bigger banks charge higher fees," said Torres of the Consumers Union.

While the bill has some consumer safeguards, consumer advocates worry about weak privacy protections that would allow financial firms and their affiliates to share information about customers. For example, that could lead to a bank denying a loan based on the customer's health information gleaned from an insurance affiliate, consumer advocates said.

The bill requires that consumers receive a copy of an institution's privacy policy when they open an account and every year thereafter, banking officials said.

Customers also can "opt out," or tell their bank or brokerage they don't want their information given to an unaffiliated third party.

"Having a privacy policy is not the same as having privacy protections. My policy could be, 'I share your information with anyone I want,' " Torres said.

The "opt-out" rule also has a loophole that gives financial institutions a lot of leeway on passing along customer information, consumer groups said.

A bank, for instance, could pass customers' data to a third party if it has a partnership or joint marketing agreement with the bank, said Ed Mierzwinski, consumer program director with U.S. Public Interest Research Group in Washington.

Consumer advocates wanted a stronger rule, which would prohibit a bank, for instance, from giving information about a customer to an affiliate or third party unless the customer authorized it.

Those in the insurance and financial industry, however, say that it is in their best interest to protect customers' privacy.

"Nobody wants their privacy invaded," said Herb Perone, media relations director for the American Council of Life Insurance in Washington.

"People who are in business don't want to offend or insult potential clients," he said.

Financial institutions would share information to prevent fraud or to make things more convenient for customers, such as providing them a monthly statement of multiple accounts, the ABA's Birch said.

One aspect of the bill that consumer groups do like is an amendment by Sen. Paul S. Sarbanes, the ranking Democrat on the Banking, Housing and Urban Affairs Committee.

The Maryland senator's amendment would allow stronger state privacy laws to pre-empt weaker federal laws, consumer groups said.

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