Restructuring U.S. federal financial regulation

Contemporary Economic Policy, July, 2007 by Rose M. Kushmeider

As in the single regulator model, the goals-oriented model strives for uniform regulation of firms engaged in the same activities by regulating the entire financial entity. Schooner (1998, p. 443) argued that the goals-oriented model may be more adaptable to innovation and technological advance than functional regulation because it does not focus on a particular product or service. Although the goals-oriented approach may not be as unwieldy as the single regulator model in large financial systems, it may produce a certain amount of duplication and overlap or it could lead to regulatory gaps that the single regulator model could avoid.

The United Kingdom. The most prominent example of the single regulator model is the Financial Services Authority (FSA) in the United Kingdom. Created as an independent agency following passage of legislation in 1997, the FSA is responsible for regulating and supervising all forms of financial services activity; it combines the regulatory and supervisory functions previously carried out by nine bodies. (26)

Within the FSA, supervisory responsibility is broken into divisions. The Complex Groups Division, for example, has become the lead regulator for 40-50 institutions--banks and others, whose scale of operation is significant within the United Kingdom, which have a material international presence, whose products and services span a wide area and are complex or innovative and require advanced risk management techniques. Other institutions are supervised by other divisions within the FSA, such as the Banking Division or the Insurance Division. Thus, within the FSA, there is functional regulation. This realignment of responsibilities is based on a distinction between wholesale and retail businesses and is an attempt to ensure the adequate oversight of a rapidly changing financial services industry. Di Giorgio and Di Noia (2001, p. 11) argued that whether this model will endure will depend largely upon how well its internal organization functions, especially with respect to decision making.

Australia. Australia illustrates a supervisory system that has been consolidated, but which maintains multiple supervisors. Like the United Kingdom, Australia has moved toward regulatory consolidation, but unlike the United Kingdom, Australia has drawn a sharp distinction between "prudential regulation" (safety and soundness regulation) on the one hand and regulation to ensure market integrity and consumer protection, on the other hand. Australia has placed responsibility for the two goals in separate regulators--the goals-oriented approach.

Australia instituted its revised regulatory system in 1998. At that time, responsibility for market integrity and consumer protection was placed with the Australian Securities and Investments Commission (ASIC), while prudential regulation was vested in the Australian Prudential Regulation Authority (APRA). ASIC's jurisdiction extends across institutions and the financial system and covers investment, insurance, and superannuation (pension) products. APRA provides prudential regulation of superannuation, insurance, and deposit-taking institutions. The Reserve Bank of Australia (the central bank) no longer has supervisory responsibilities for individual institutions but retains its responsibilities to protect the payments system and the broader economy from inflation and financial instability.