GAO Criticizes Complexity and Fragmentation of Financial Regulatory Structure
Commentary by Steven Lofchie
The Government Accountability Office ("GAO") urged Congress to consider changes in the structure of financial regulation after reviewing the effects of fragmentation and overlap on regulators' oversight activities. In a Report titled "Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness", the GAO recommended improving: (i) the efficiency and effectiveness of regulatory oversight, (ii) the consistency of protections for consumers and investors, and (iii) the consistency of financial oversight across similar institutions, products, risks and services. GAO also asked Congress to examine legislative changes that could help align the Office of Financial Research ("OFR") monitoring and assessment functions with the mission and operations of the Financial Stability Oversight Council ("FSOC") in order to address systemic risk.
GAO's survey covered the following broad areas of the U.S. regulatory structure: (i) the regulation of banking entities of all charter types, (ii) consumer protection, (iii) the regulation of swaps and security-based swaps, and (iv) the regulation of insurance groups. GAO concluded that fragmentation and overlap in these areas have created inefficiencies in regulatory processes, inconsistencies in oversight, differences in the levels of protection afforded consumers, and regulation that is duplicative in some cases and inconsistent in others. These problems are not new, GAO reported, citing similar findings over a period of more than twenty years.
Commentary
The GAO Report contains few, if any, surprises. A financial regulatory structure that proved incoherent even before Dodd-Frank has emerged from that legislation with more absurd complexities than before. To cite an example: the fact that five regulatory agencies are required to issue an interpretation of the Volcker Rule means that obtaining any uniform interpretation is nearly impossible. Another example: the overlap of the SEC and the CFTC in the regulation of swaps on securities – and in the regulation of advisors – is duplicative and wasteful. Although the Report is explicit in its emphasis on injuries to regulatory efficiency, it also demonstrates implicitly that costs are imposed on market participants by duplicative requirements. For example, the report cites numerous instances of regulators requiring the same information in multiple formats.
Given the politicization of many aspects of financial regulation (why exactly is central clearing a partisan issue?), it seems impossible that the financial regulatory system can be reformed in any meaningfully beneficial way. But the legislators and regulators might want to proceed by (i) choosing some aspect of financial regulation (such as recordkeeping and reporting) that is currently a morass of overlapping, inconsistent and nonsensical requirements, and (ii) trying to clean it up, or at least study how it was made and how it might be cleaned up. Perhaps focusing on one thing might allow movement toward establishing a consensus on an achievable improvement.