The Gramm-Leach-Bliley Financial Modernization Act

Christen Adams Melanie Bleakley Mike Engel

Introduction On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Financial Modernization Act into law, creating “powerful, one-stop financial supermarkets” (U.S. PIRG, 2003). The Gramm-Leach-Bliley Act (GLBA) succeeded in breaking down barriers outlined in the Glass-Steagall Act that prohibited the affiliation of banks, securities firms, and insurance companies. With the approval of the GLBA, these companies may now be associated through a new financial holding company structure.

How the Gramm-Leach-Bliley Financial Modernization Act Affects Consumers There are many theories as to how the Gramm-Leach-Bliley Financial Modernization Act affects consumers. A major issue of concern is the right to privacy. Merging companies are selling and/or sharing consumers’ personal information with affiliates, partners, and other related companies. By allowing financial institutions to merge and share information among themselves and third parties, supporters of the GLBA claim that they can achieve lower interest rates, more available credit, and lower consumer-credit costs (Blackmon). Under the GLBA, merging companies are able to offer their customers more service choices that can fit their lifestyle needs. However, some experts believe that too many different financial services in one company may potentially lead to companies working in a field that they know little about. The conglomeration of financial services, to form financial holding companies, will give rise to an increase in competition among the financial sectors. In theory, the enhanced competition within the overall insurance market will allow an aggregate reduction in insurance costs among insurance consumers. One potential negative effect the GLBA will have on the financial consumer is the possibility of increased insurance costs due to the reduced number of insurance companies in the aggregate market. Financial holding companies may have the power to set market prices from reduced aggregate market insurance competition. A positive issue that is often referred to when speaking of the GLBA is convenience. Consumers will be able to obtain many different financial products and services from one financial holding company. This may potentially aid in the increase of investments. The GLBA also increases the amount and types of products offered to the insurance consumer. Because the Gramm-Leach-Bliley Act allows banks, security firms and insurance companies to affiliate to form financial holding companies, any losses suffered by the insurance company will be spread out over the entire financial holding company. As a result, the stability of the insurance company is increased.

Conclusion There is controversy regarding how the Gramm-Leach-Bliley Act of 1999 will affect the financial service industry. Many of the regulations that were brought about as a result of the Act have yet to be finalized. Therefore, there is no definite way to measure the effects that the Act will have on consumers and financial industries. It may take several years before the true effects can be measured and properly analyzed.