Gramm Leach Bliley Act - Explained
What is the Gramm Leach Bliley Act?
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Table of ContentsWhat is the Gramm-Leach-Bliley Act?How Does the Gramm-Leach Bliley Act Work?The Gramm-Leach-Bliley Act and Consumer Privacy
What is the Gramm-Leach-Bliley Act?
The Gramm-Leach-Bliley Act of 1999 (GLBA), also known as Financial Modernization Act of 1999, was passed by Congress on 12 November 1999 under President Bill Clinton. The act was aimed at the modernization of the financial industry and control the ways by which financial institutions deal with the private information of individuals.
How Does the Gramm-Leach Bliley Act Work?
The GLBA is widely known as the repeal of the Glass-Steagall Act of 1933, which separated commercial banking with investment banking. As a par too the Act, commercial banks were prohibited from offering financial services as part of their regular operations due to extraordinary losses by the banking industry during the 1929 Great Depression. The Glass-Steagall Act was originally passed to protect bank deposits from risks associates with investments by the commercial banks. As a result of this Act, the commercial banks were not legally allowed to act as brokers for many years. The GLBA was introduced to allow the commercial banks to offer a wider range of products and services. GLBA was passed upon merger of commercial bank Citicorp with the insurance firm Travelers Group leading to formation of the multidimensional Citigroup, which offered insurance services along with commercial banking and security business. This merger ran afoul of the GlassSteagall Act; however, the merger was permitted by the U.S. Federal Reserve and a waiver was given to the Citigroup. This merger paved the way for GLBA to legalize such mergers moving forward.
The Gramm-Leach-Bliley Act and Consumer Privacy
The Gramm-Leach-Bliley Act consists of three sections: 1. The Financial Privacy Rule, which controls the collection and disclosure of private financial information for the financial institute and the customers. 2. The Safeguards Rule, which mandates the financial institutions to implement adequate security programs to protect customers financial information. 3. The Pretexting provisions, which prohibit the access of customers private information using false methods. The Act also requires financial institutions offering loans, financial or investment advice, and insurance to supply customers with written privacy warnings and information on sharing practices. The institution must also give an option to Opt-out of sharing of their sensitive information, as per their free will. This is aimed at curbing the sharing of critical customer information (like bank balances and account numbers), which were being traded by banks and other financial institutions such as credit card companies.