Last week, the US Government Accountability Office reported that US oversight of financial services entities and products has not meaningfully improved since its issuance of a comprehensive study more than seven years ago that warned that the US financial regulatory system “appears to be ill-suited to meet the nation’s needs in the 21st century” because of its high level of complexity and overlap.
In its latest study, GAO said that the US financial regulatory system continues to be “complex, with responsibilities fragmented among multiple agencies that have overlapping authorities.”(Click here to access GAO’s 2009 study.)
GAO noted that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act introduced a number of reforms to improve coordination among financial regulators. These included the establishment of the Financial Industry Oversight Council and the Office of Financial Research. However, said GAO, “collaborative efforts have not been sufficient, and FSOC’s authorities are limited and unclear.” According to GAO, this has caused “inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protections afforded to consumers.”
GAO identified inconsistencies in the examination of depository institutions by different regulators, the lack of uniformity in insurance regulation and the sometimes duplicative and inconsistent regulation of securities and derivatives market participants by different regulators as prime examples of problematic oversight.
As a specific evidence of its observations, GAO noted that the Commodity Futures Trading Commission and the Securities and Exchange Commission both were given oversight over elements of swaps trading under Dodd-Frank. In response, each agency has endeavored to coordinate with the other to develop applicable regulation, as required under law. However, there have been subtle but important differences in approaches to regulation (e.g., the definition of a US person under CFTC and SEC cross-border provisions), and delays by the SEC in finalizing rules that market participants fear “could lead to operational challenges …, as well as uncertainty and regulatory inefficiencies and burden.”
GAO also observed that the complexity of the US financial regulatory system complicates coordination on some issues with international regulators because there is no unified US view.
In response, GAO posited that Congress “should consider whether additional changes to the financial regulatory structure are needed to reduce or better manage fragmentation and overlap,” including whether a “number of federal agencies” should be consolidated. GAO also suggested that Congress should consider whether “legislative changes are necessary to align FSOC’s authorities with its mission to respond to systemic risk.”
GAO is an independent, non-partisan federal agency that supports Congress in ensuring that US government funds are spent “efficiently and effectively.” In 2010, GAO issued a study identifying overlaps and inefficiencies in the regulation of financial markets by the SEC and CFTC. (Click here to a copy of this study.)
My View: Just like GAO’s recommendations mostly fell on deaf ears during the height of the financial crisis in 2009, its current recommendations are likely to be similarly ignored in the highly partisan environment of Washington, DC, today. This is a shame. The US financial regulatory system is broken and inefficient, and clearly needs fixing. As GAO observed in 2009, “[m]uch of [today’s] structure has developed as the result of statutory and regulatory changes that were often implemented in response to financial crises or significant developments in the financial services sector.” The US financial regulatory system has not benefited from a holistic examination of what makes most sense today, let alone what might make most sense tomorrow. Oversight of financial regulators is also spread among too many congressional committees, and this impedes thoughtfulness and rationalization. But it is critical in order for the United States to be competitive internationally in financial services for such a reflection to occur and oversight to be rationalized. Maybe next year. We can only hope.