Copley News Service

SACRAMENTO — Pressured by a key federal court ruling and under the threat of a tougher initiative, banks and insurers Thursday abandoned a four-year-old blockade of legislation that would give consumers more control over how their personal financial information is used.

The change sets the stage for an intense 48 hours in the Legislature starting Monday. Lawmakers have been told to either pass the landmark compromise by Tuesday or consumer groups will file finished petitions to qualify a more-stringent initiative for the March ballot.

“If the Legislature fails to do the right thing we’ll be compelled to take our ballot measure directly to the voters so that they can settle this issue once and for all,” said Beth Givens, director of the San Diego-based Privacy Rights Clearinghouse.

The proposed legislation, SB 1, would require companies to obtain permission from customers first before buying or trading information with outside businesses, a process called “opt-in.”

A second part of the bill would allow businesses to exchange data within the so-called corporate family, such as affiliates and subsidiaries, unless customers take the trouble to explicitly deny permission, a process called “opt-out.”

Two financial institutions jointly offering a service or product would still be able to exchange information without permission.

Businesses also would have to send customers clearly worded privacy notices detailing their rights and giving them an opportunity to safeguard the information from being bought or sold.

The restrictions would go into effect July 1.

Consumer advocates and lobbyists for the financial services industry jointly announced the compromise Thursday.

“Business groups realized that protecting privacy is good business and they’re calling off the dogs,” said Sen. Jackie Speier, a Daly City Democrat who has carried similar versions for four years.

Gov. Gray Davis pledged to sign the measure if it reaches his desk, saying financial information “should not be bought and sold like baseball cards.”

Consumer activists described the measure as containing the toughest financial privacy protections in the nation. They want to see similar restrictions spread across the country.

“It will set the gold standard,” said Betsy Imholz of Consumers Union.

But not all privacy advocates are happy. Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights said the governor and supporters “took a watered down version” of the initiative and “watered it down even more.”

Business-friendly lawmakers in the Assembly have repeatedly stalled measures that would impose restrictions on how the financial services industry and insurers use data, such as account balances, shopping habits, names and phone numbers.

Businesses argued that legislation limiting the ability to exchange information would harm consumers by preventing them from being pitched special deals on car loans, insurance rates or home mortgages.

But two recent developments – a court case and the emergence of a popular initiative – apparently convinced the financial services industry to reverse course. Sen. Speier described the developments as a “double-whammy” on the industry.

Stymied in the state Capitol, privacy advocates used a $1 million investment from an Internet loan pioneer to gather more than 600,000 signatures of registered voters – more than enough to qualify for the March ballot.

E-Loan chairman Chris Larsen has given lawmakers and the financial services industry until midnight Tuesday to pass meaningful protections or he will turn the signatures into the Secretary of State Wednesday. Once the petitions are in, there’s no turning back, no more delays, he said.

“They were the power,” Larsen said of the public.

A recent court ruling in response to an industry lawsuit ratified the authority of local governments and the state to impose limited restrictions on sharing financial data. However, the judge also ruled that in some cases local standards violated federal dictates.

Appearing with Sen. Speier at a Capitol press conference, insurers and bankers said the re-crafted measure represented a “workable and reasonable” compromise.

Banking interests said a uniform statewide guide is superior to a patchwork of laws enacted at the city and county levels. They reiterated, however, that banks prefer a national policy.

Diane Colburn, a vice president of an insurers’ coalition, said, “the more thoughtful legislative process is always a preferable … approach for addressing complex issues than the take-it, or leave-it nature of the initiative process.”

However, on a national level, the financial services industry continues to pressure Congress to pre-empt California’s pending law as part of privacy-related legislation being debated in Washington.