Prior to 1999, financial institutions such as commercial banking, insurance companies, and investment banking were managed by regulations that dated back to the Great Depression. These regulations kept the various financial industries separate by preventing them from merging. This changed, however, in the late 90s when the Financial Modernization Act of 1999 was passed by Congress. It is commonly referred to as the Gramm-Leach-Bliley Act (GLBA), and would not only deregulate banking, but would also pass laws that were meant to protect the privacy of consumers.
These laws primarily affect financial institutions, but many forms of businesses that collect financial information from their customers and/or employees are also affected.
Glass-Steagall Act of 1933
The Glass-Steagall Act of 1933 dates back to the Roosevelt Administration and Roosevelt’s New Deal. Originally called the Banking Act of 1933, it was enacted in June 1933 in efforts to regulate and save the banking industry. As a result of its implementation, there were several notable accomplishments, including establishing the Federal Deposit Insurance Corporation, or FDIC, and restricting any affiliation or merging of commercial and investment banking.
It was also meant to discourage speculation, which was one of the factors that led to the stock market crash of 1929. Under the Glass-Steagall Act, banks were also prohibited from investing in securities using bank assets. It was this Act and the development of the FDIC which helped put an end to banking failures that plagued the Great Depression.
Despite the positive effect that the Banking Act of 1933 had in saving the banking industry, banks called for the repeal of the Act or at minimum a revision of it. Although changes had continuously been made to change the Act, major revisions were not made until 1999 amidst pressure from the financial industry, which resulted in the Gramm-Leach-Bliley Act (GLBA).
GLBA Changes the Game
Under GLBA, commercial, merchant, and investment banks are able to merge with each other, and also merge with insurance companies. You can read more about the effects here.
It also created a new form of organization known as financial holding companies. The financial holding companies are able to own banks, securities and insurance underwriters and can conduct any financial or complementary activity. Financial subsidiaries that are able to perform activities that banks cannot engage in are also allowed, and are authorized for banks that have a federal charter.
Banks and insurance companies are not the only businesses that are affected by The Gramm-Leach-Bliley Act. There are numerous businesses that were impacted by changes that were wrought by its passing. These are businesses that engage in a significant amount of financial activity and include, but are not limited to:
- mortgage brokers
- debt collection agencies
- real estate settlement firms
- income tax preparers
Universities, colleges, and other institutions that have self-financing plans are also included under the umbrella of GLBA.
Customer Privacy Becomes A Priority
Although certain regulations dissolved under GLBA, new regulations regarding customer privacy developed. These regulations require affected businesses to secure customer information that is both public and non-public in nature. This information naturally includes social security numbers, bank and credit card numbers, and income history.
Other information that businesses must protect includes phone numbers and addresses unless they are publicly listed or a part of public record; however, consumers and customers must be allowed to opt out of having their information released.
Protecting this data involves storing records in a safe and secure method, encrypting electronic records of sensitive information and ensuring that all third-parties who come in contact with protected information are held to a confidentiality agreement. Businesses and institutions must also make customers aware of their privacy policies on an annual basis, develop information security policies, and continuously identify any potential security risks.
Although the passing of the Gramm-Leach-Bliley Act of 1999 did not repeal the Banking Act of 1933, it made many significant changes. These revisions were enough to alter the financial industry by allowing the merger of various financial institutions.
These changes have benefited both the institutions themselves and the customers that they serve. Customers receive heightened privacy of their financial and personal records, while finance and other related businesses are able to expand the number of services they can offer.