Measuring the Costs and Benefits of Regulation Has Been Difficult, Complicating Efforts to Reduce Regulatory Burden

Measuring the costs and benefits of financial regulation has posed a  challenge to regulators and the financial services industry. We recently recommended several steps that agencies  should take to ensure they conduct effective and transparent reviews of  regulations, including consideration of whether and how to measure the  performance of regulation during the process of promulgating the  regulation and steps to improve the communication of regulatory reviews  to the public. For instance,  bank capital adequacy regulation provides an example of the inherent  difficulty of assessing the value of regulation. U.S. Regulators Have Reviewed Existing Regulations

U.S. regulatory agencies have undertaken several efforts to lessen  regulatory burden and cost of existing regulations. Another outcome of the EGRPRA  process was the development of proposals that were incorporated into the  Financial Services Regulatory Relief Act of 2006. Others noted  the importance of considering legislation’s contribution to regulatory  burden. Further, increased convergence in product  offerings and increased concentration of assets in large, complex firms  pose a challenge for regulatory agencies to act consistently in responding  to risks that cut across the functional lines that define the regulatory  structure. While the regulatory agencies have taken action to work  collaboratively in response to the industry’s trends, we have noted in the  past that it is difficult to collaborate within the fragmented U.S. regulatory  system and concluded that the structure of the federal regulatory system  should be reexamined. 2.). 3). Recent Legislative Changes Have Affected the Financial Services Industry

The financial services industry and the manner in which it is regulated  have changed in recent decades as a result of legislative action. The  legislation both responded and contributed to the industry trends. In turn,  regulatory competition has prompted changes to modernize the regulatory  structure and allow financial institutions to offer a diverse range of  products and services to meet the needs of their customers. A representative of state banking  authorities was added to this council as a full voting member by the  Financial Services Regulatory Relief Act of 2006. In particular,  the fact that different agencies have jurisdiction over large, complex firms  that offer similar services to their customers creates the potential for  inconsistent and inequitable treatment. Further, despite the changes posed by the  industry’s dynamic environment, clear accountability for addressing issues  that span agencies’ jurisdiction is not clearly assigned in the current  system. These issues have led us to suggest that modernizing the federal  financial regulatory system is a key challenge facing the United States in  the 21st century. Forum participants and others have suggested that some lessons  could be learned from the principles-based approach to regulation of the  United Kingdom’s Financial Services Authority (FSA). Defining clear and consistent goals for regulatory agencies would be a  significant step toward modernizing the regulatory structure. Each of these options would provide potential improvements, as well as  some risks and costs. A number of participants in the Forum believed that lessons can be  learned from the FSA’s single regulator model. Clear, Consistent Regulatory Goals Are Important Steps to Improve Regulatory Effectiveness

In addition to suggesting options to modernize the federal financial  regulatory structure, our prior work also has identified the importance of  clear and consistent goals for financial regulation. Enhanced efficiency and reduced regulatory burden. Commitment to consumer and investor protection. We are sending copies of this report to other interested congressional  committees and to the Secretary of the Treasury, the Chairman of the  Board of Governors of the Federal Reserve System, the Chairman of the  Federal Deposit Insurance Corporation, the Comptroller of the Currency,  the Chairman of the Securities Exchange Commission, the Chairman of  the Commodities and Futures Trading Commission, the Director of the  Office of Thrift Supervision, and the Chairman of the National Credit  Union Administration.
Why GAO Did This Study

As the financial services industry has become increasingly concentrated in a number of large, internationally active firms offering an array of products and services, the adequacy of the U.S. financial regulatory system has been questioned. GAO has identified the need to modernize the financial regulatory system as a challenge to be addressed in the 21st century. This report, mandated by the Financial Services Regulatory Relief Act of 2006, discusses (1) measurements of regulatory costs and benefits and efforts to avoid excessive regulatory burden, (2) the challenges posed to financial regulators by trends in the industry, and (3) options to enhance the efficiency and effectiveness of the federal financial regulatory structure. GAO convened a Comptroller General's Forum (Forum) with supervisors and leading industry experts, reviewed regulatory agency policies, and summarized prior reports to meet these objectives.

What GAO Found

The inherent problems of measuring the costs and benefits of regulation make it difficult to assess the extent to which regulations may be unduly burdensome to U.S. financial services firms, particularly in comparison to firms in other countries. Additionally, it is difficult to separate the costs of complying with regulation from other costs and thus determine regulatory burden. Regulatory agencies, however, have undertaken several initiatives to reduce regulatory burden; these efforts contributed to the Financial Services Regulatory Relief Act of 2006. While noting that regulation contributes to confidence in financial institutions and markets, participants in the Forum agreed regulators have opportunities to further reduce regulatory burden and suggested regulators better measure the results of implemented regulations. GAO also recently recommended regulatory agencies consider whether and how to measure the performance of regulation during the process of promulgating the regulation and improving the communication of regulatory reviews to the public. The current regulatory structure, with multiple agencies that oversee segments of the financial services industry, is challenged by a number of industry trends. The development of large, complex, internationally active firms whose product offerings span the jurisdiction of several agencies creates the potential for inconsistent regulatory treatment of similar products, gaps in consumer and investor protection, or duplication among regulators. Regulatory agencies have made efforts to collaborate in responding to these trends and avoid inconsistencies, gaps, and duplication. However, challenges remain; until recently, the Office of Thrift Supervision and the Securities and Exchange Commission, for instance, had not sought to resolve potentially duplicative and inconsistent regulation of several financial services conglomerates for which both agencies have jurisdiction. Finally, despite the challenges posed by the industry's dynamic environment, accountability for addressing issues that span agencies' jurisdiction is not clearly assigned. These issues have led GAO to suggest in prior work that the federal regulatory structure should be modernized. GAO and others have recommended several options to accomplish modernization of the federal financial regulatory structure; these include consolidating certain regulatory functions as well as having a single regulator for large, complex firms. There also are potential lessons that can be learned from the experience of other nations that have restructured their financial regulators. Several Forum participants, for instance, suggested that one important lesson the United States could learn from the United Kingdom's Financial Services Authority was the value of setting principles or goals for regulators. The Department of the Treasury's recently announced plan to propose a restructured regulatory system provides an opportunity to take the first step toward modernization by providing clear and consistent goals for the regulatory agencies.