It’s time for a federal financial services agency

InvestmentNews argued last week that the entire regulatory system for the financial industry needs to be revamped, after an independent commission has thoroughly reviewed the factors that contributed to the mess.

Federal Reserve Board Chairman Ben Bernanke supported this proposition during his testimony before Congress last week while arguing in support of the Treasury/Federal Reserve plan to stabilize the financial markets and end the crisis.

Regulatory changes are needed, he said, but only after a thorough review of what went wrong and why.

Any commission that is established to examine the causes of the financial meltdown and propose regulatory changes would do well to examine regulatory regimes around the world for ideas.

One place to look would be the United Kingdom, where one entity, the Financial Services Authority, a quasi-judicial body, regulates the nation’s entire financial services industry.

The FSA regulates any company involved in accepting deposits, writing insurance, dealing in investments as principal or agent, managing or advising on investments, advising on or making mortgages, etc.

While the FSA has been criticized for regulating too lightly, and the U.K. has not avoided some of the problems afflicting the U.S. markets, the United States might be able to improve its own regulation by examining the way the FSA combines some of the responsibilities of the Securities and Exchange Commission, the Federal Reserve Board, the Office of the Comptroller of the Currency, state insurance regulators and the Federal Housing Finance Agency.

Perhaps regulation of the various parts of the U.S. financial system would be enhanced by borrowing the concept of the FSA, if not its structure and practices, and by combining under one central agency, with a number of departments, the roles of the several agencies currently regulating the U.S. financial markets.

Let’s call it the Federal Financial Services Administration (FFSA) and have it report to the secretary of the Treasury.

The FFSA would absorb many, if not most of the current regulatory agencies. For example, the Securities and Exchange Commission would become a department of the FFSA, as would the Commodity Futures Trading Commission, the OCC (which charters, regulates and supervises all national banks), the bank regulatory arm of the Federal Reserve, the FHFA, etc.

The heads of these departments would be required to meet at least monthly to exchange reports and compare notes on the functioning of the parts of the financial system they regulate. They also would meet quarterly with the secretary of the Treasury to deliver similar reports.

The FFSA would regulate the markets, national and trust banks, investment banks, national insurance companies, Fannie Mae and Freddie Mac (if they continue to exist as semipublic entities), mortgage lenders, mortgage and securities brokers, and the rating agencies. It would be responsible for setting disclosure standards for all kinds of securities, including derivatives, to ensure investors have enough information to evaluate risk.

It would also be responsible for enforcement actions against those who breach the regulations.

This structure at the very least would improve the exchange of information among the regulators of different market segments. It might also reduce the chances that some new development in the financial markets could fall through the regulatory cracks.

This new structure would not obviate the need for revamping the regulation of all aspects of the financial system. The system still needs better, not necessarily more, regulation.

However, it would make the enforcement of the revamped regulations more effective and more efficient, and perhaps reduce the chances of a repeat of the current meltdown.