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News November 15, 2004 Issue

GAO Reports on Structure of U.S. Financial Regulation

How many regulators does it take to oversee the U.S. financial services industry? And how should they be organized?

Those big picture questions were recently addressed in a 164-page U.S. Government Accountability Office (GAO) report titled "Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. Regulatory Structure."

The report, prepared in response to a March 2003 request by Senate Banking Chairman Richard Shelby (R-AL), noted that U.S. financial services regulation is sliced and diced among dozens of regulators, including the SEC, CFTC, Federal Reserve, FDIC, OCC, OTS, NCUA, NASD, NFA, other SROs, as well as the various state insurance regulators, securities commissioners, and attorneys general.

In contrast, the United Kingdom, Germany, and Japan each have one financial services regulator. Australia and the Netherlands have two.

While GAO didnít recommend a specific approach for structuring regulation in the U.S., it suggested four options for Congressional consideration:

The functional areas approach. Each of the four functional areas in the U.S. financial services industry ó banking, securities, insurance, and futures ó would have a primary regulator. For banks, supervision could be consolidated under an existing agency (such as the Fed), or a new federal banking agency. In the insurance area, a new federal insurance regulator could be created (an idea that has been circulating for some time, and that has picked up steam following New York attorney general Eliot Spitzerís recently-announced insurance investigations)

The twin peaks approach. This option would involve setting up two overarching regulatory entities ó one focusing on safety and soundness issues and the other on business conduct.

One big regulator. This, which GAO described as the "most radical option," would consolidate all regulation of banking, securities, insurance, and futures into one federal agency, along the lines of the U.K.ís Financial Services Authority.

Of course, as GAO noted, the U.S. market is bigger and more diverse than the markets of the U.K., Germany, and Japan, where this approach has been implemented. A single U.S. regulator, said GAO, may be simply too large and unwieldy to work. The report noted that the U.K. FSA has about 2,300 employees, but that estimates of the number of U.S. financial services regulators range from about 30,000 to 40,000 individuals.

A special regulator for large, complex, or internationally active firms. A new agency could be created, or an existing one be given the responsibility for overseeing these types of firms. "A new entity might consist of a small staff that would rely on the expertise of staff at existing regulatory agencies to accomplish supervisory tasks," said GAO.