In May, Gov. Eliot Spitzer created the New York State Commission to Modernize the Regulation of Financial Services to look at streamlining the state's regulatory structure, perhaps along the lines of the United Kingdom's Financial Services Authority.
New York would not be the first state to move away from having several financial agencies toward a more integrated and efficient regulatory structure. Michigan was the first state to do so, and the lessons learned there can help guide New York.
In April 2000, then-Gov. John Engler created the Michigan Office of Financial and Insurance Services by combining the Financial Institutions Bureau, the Insurance Bureau, and the Securities Division. Thirteen states regulate financial services within a single agency, but Michigan's regulator is the only one with a structure similar to that of the FSA, which focuses on regulatory goals rather than financial sectors. The other 12 states maintain separate divisions for banking, insurance, and securities within their agency.
The OFIS is divided into two offices: the Office of Financial Evaluation, which deals with prudential regulation and supervision, and the Office of Policy, Conduct, and Consumer Assistance, which deals with market-conduct risks and consumer protection. Michigan's experience with creating and operating the OFIS can provide some guidance to New York about the benefits and costs of moving toward an FSA-style structure.
New York would get several benefits if it moved to a single financial regulator.
First, a single regulator is better able to harmonize regulations across sectors, eliminate duplicative regulations, and address gaps than multiple regulators that sometimes fail to communicate effectively with one another and fail to coordinate their efforts.
Second, a single regulator is better situated to address the unique problems posed by financial conglomerates that operate in and across multiple sectors.
Third, a single regulator is more cost-effective than multiple ones. Michigan's regulatory expenses increased initially in 2001 and 2002, when it was reorganizing its regime, but they decreased substantially in 2003. That year the state spent 14% less than it did in 1999 to regulate financial services.
Finally, a single regulator is better for consumers, because it provides a one-stop shop for filing complaints against financial service providers and can provide a more uniform level of consumer protection.
However, there are problems in moving to a single state financial regulator. A single regulator may have difficulty prioritizing issues. As a result, there could be a lack of clarity regarding its mission and goals. The agency may experience delays and disruptions in its operations as it tries to integrate the information technology systems and the infrastructure of merged agencies. And one approach to financial services supervision may come to dominate the others, particularly if one of the agencies being merged has more staff, resources, and facilities than the others.
While moving to a single financial regulator in New York would be beneficial, it would not address the larger hurdles that confront the U.S. financial services industry. One of those hurdles is the enormous costs of overlapping and duplicative regulations and enforcement actions between the federal regulators and the state regulators or among the various state regulators. A financial conglomerate like Citigroup or AIG that wants to offer banking, securities, and insurance products everywhere in the United States has to deal with over 115 federal and state regulators.
The aggregate cost of these regulators makes the U.S. financial regime 12 times more expensive than the FSA, even after accounting for differences in the gross domestic product of the United States and the United Kingdom.
If the United States wants to remain competitive, it needs to overhaul both the federal and state financial regulatory structures.
Reforming New York's structure along the lines of Michigan's would be movement in the right direction.
