Wednesday, March 30, 2016

GAO Finds U.S. Financial Regulatory Structure Fragmented and Inefficient

Recommends Action by Congress on Overlapping Regulations and the FSOC

Author: David Schwartz J.D. CPA

In a report released March 28, 2016, the GAO concluded that fragmented and overlapping oversight has created inefficiency in the U.S. financial market regulatory structure. The GAO recommended that Congress should consider taking steps to reduce or better manage fragmentation and overlap, and also determine whether legislative changes are needed to align Financial Stability Oversight Council's (FSOC) authorities with its mission to respond to systemic risks.


As part of the agency’s mandate, GAO was asked to examine the structure of the financial regulatory system and identify the effects of fragmentation and overlap on regulators’ oversight activities. In order to gather necessary data for the report, GAO reviewed relevant laws and agency documents on their oversight responsibilities; held discussion groups with former regulators, industry representatives, and experts; and interviewed agency officials.  Based on these inputs, the GAO concluded that the existing regulatory structure does not always ensure (1) efficient and effective oversight, (2) consistent financial oversight, and (3) consistent consumer protections. As a result, negative effects of fragmented and overlapping authorities persist throughout the system in many forms, including certain entities and transactions being subject to multiple regulatory schemes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.


While the GAO acknowledges that reforms under Dodd-Frank have improved the safety of the financial system, it is easy to imply from the report’s conclusions (perhaps intentionally so) that Dodd-Frank did little to streamline the overlapping organizational chart of financial regulation and has only added to the resulting regulatory inefficiency.  In particular, the the report notes that the Dodd-Frank Act tried to address gaps in systemic risk oversight highlighted by the financial crisis by placing this responsibility on a collective group of financial regulators and other entities through the creation of the FSOC and the Office of Financial Research (OFR). However, OFR finds that collaborative efforts between the FSOC, OFR, and the Board of Governors of the Fed have not been sufficient, and the FSOC's authorities are limited and unclear.


The report recommends, among other things, that Congress should:

  1. work to streamline collaboration between the Financial Stability Oversight Council, the Treasury Department’s Office of Financial Research and the Federal Reserve with respect to the monitoring of systemic risk;
  2. consider legislative changes that would better align FSOC’s authorities with its mission; and
  3. ensure that the Fed and OFR jointly articulate individual and common goals for their systemic risk monitoring activities; engage in collaborative practices in support of these goals; and share tools, assessments and results with the FSOC’s Systemic Risk Committee.