The Gramm-Leach-Bliley Act of 1999 allowed financial firms to merge and offer multiple services to customers. It also changed the way consumer information is shared across financial sectors, with provisions in place to protect privacy. Critics argue it contributed to the US economic collapse, but others disagree.
The Gramm-Leach-Bliley Act, sometimes referred to as the GLB and also known as the Financial Services Modernization Act, was enacted by the US Congress in 1999. It allowed several financial firms – banks, insurers and securities firms – to merge with one another so that customers can perform many different transactions within the same financial service. This nullified many of the provisions of the Glass-Steagall Act of 1933, which outlawed such tiered finance companies. The act also put in place new data loss prevention policies and other provisions to ensure that customers’ private information is handled securely and fairly.
The Gramm-Leach-Bliley Act changed the way consumers’ private information is disclosed across all financial firms. Prior to the act, it was strictly illegal for a bank to share private information with a securities company, let alone combine transactions with them. In line with this, financial firms also could not sell private financial information to other financial services. This ensured that consumers’ personal records and data were not used in any way that could allow businesses to unfairly profit at the consumer’s expense.
Under the Gramm-Leach-Bliley Act, however, channels have been created for consumer information to pass lawfully from one financial services department to another. To ensure that there were still consumer protections, provisions were written into the act to regulate the freer flow of consumer information between the financial services that had merged together. The act stipulated that companies must securely store private information, that the consumer must be well informed about how to share their information, and that consumers be given the option to decline sharing impertinent information.
Prior to the Gramm-Leach-Bliley Act, the Glass-Steagall Act also ensured that most of a consumer’s financial life was neatly divided into different financial sectors. This meant that one could not, for example, buy shares and get a mortgage loan from the same bank. This changed in 1999 with the Gramm-Leach-Bliley Act and soon many companies merged financial services. For example, Citicorp, a commercial bank, and Travelers Group, an insurance company, merged to create Citigroup. Companies like Citigroup have begun offering commercial banking, insurance, and securities services to consumers.
Being able to perform multiple financial services at the same firm has theoretical benefits for both the consumer and the firm. For the consumer, it makes the management of a deposit account, investment account and insurance transactions more streamlined and, therefore, easier. For the finance company, it provides broader economic stability; the same business can make a profit in an economy where more people are saving just as it can make a profit in an economy where more people are buying stocks and other investments.
Some critics argue that the Gramm-Leach-Bliley Act was one of the culprits for the US economic collapse of 2007 and 2008. The economic collapse was largely caused by deregulation and easy lending policies, which allowed sell securities and mortgages to people under favorable circumstances. Critics say the act played into that culture of deregulation, making it easier for companies to trade stocks that ultimately hurt the economy. Others, however, argue that such arguments are flimsy and that the practices that led to the economic collapse were the result of dealings not affected by the Gramm-Leach-Bliley Act.
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