March 29, 2004

Public Interest Comment on Alternative Forms of Privacy Notices

Key materials
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Agencies: Treasury, Federal Reserve, et. al.

Rulemaking: Interagency Proposal to Consider Alternative Forms of Privacy Notices Under the Gramm-Leach-Bliley Act 

Stated Purpose: Several regulators of financial institutions are jointly considering amendments to the regulations that would "allow or require financial institutions to provide alternative types of privacy notices, such as a short notice, that would be easier for consumers to understand."

Summary of RSP Comment:

Several regulators of financial institutions (including, among others, the U.S Treasury, the Federal Reserve, and the SEC) are jointly considering amendments to the regulations that would "allow or require financial institutions to provide alternative types of privacy notices, such as a short notice, that would be easier for consumers to understand." (see Federal Register, December 30, 2003: pp. 75164-75174). The proposed short notices appear aimed at protecting those who place a high value on privacy, while offering little or no value to those consumers who are indifferent or who positively value the gains from information sharing.

On the benefit side, standardized, government-approved short notices may help financial institutions by obviating the need to develop firm-specific notices. The offset to such enforced standardization is a likely reduction in innovation along the privacy dimension. If privacy is as important a good as its advocates and the agencies claim, then standardized notices that lock in a static approach are likely to foreclose the future ability of market participants to find voluntary ways of addressing privacy in relation to all the other goods consumers want.

Moreover, if privacy holds a preferred status among a wide cross-section of consumers, then it should be fairly simple to produce supporting evidence using tradeoffs that consumers have actually made--rather than simply relying on consumers' stated, but unconstrained, preferences. Indeed, the limited evidence the agencies did provide suggests that the market is working properly. It is well to recall that financial institutions have a vested interest in serving their customers along all dimensions that are important to them and for which those customers have demonstrated a willingness and ability to pay. The agencies have not provided any evidence that financial institutions are failing their customers along the privacy dimension--beyond a vague and unsupported claim of "broad-based concern" about privacy notices. Until the agencies can convincingly do so, they should not proceed with this change in regulations.