All competing proposals for financial services modernization are premised on the concept of functional regulation. In fact, functional regulation, another name for industry regulation, is unworkable because technology is rapidly erasing traditional distinctions among financial products and providers.

Genuine financial services modernization cannot occur until Congress enacts goals-oriented regulation.

Technology is destroying functional regulation in four ways. First, it fosters financial products that combine attributes associated with traditional banking, insurance, and securities products. Annuities, for example, incorporate elements of insurance and banking and, in the case of variable annuities, a security.

Customer accounts at financial institutions increasingly combine brokerage, checking, and investment features. Banks and securities firms now promote to corporate clients "one-stop shopping," which includes lending, advisory services, and securities underwriting. Auto financing could easily include insurance while a contract to buy a home could include its financing and insurance.

Second, product melding inevitably produces institutional melding. For example, what do we call an entity offering products representing myriad combinations of banking, insurance, and securities features? Universal bank and bancassurance seem closest.

Financial services firms also are building data bases that let them market a variety of traditional banking, insurance, and securities products. Again, what do we call such a company?

Third, technology increasingly empowers the principals in financial transactions (buyers and sellers, payers and payees, borrowers and funders) to deal directly with each other. It is much more difficult to regulate millions of users of a financial system than thousands of financial firms. Further, there is less rationale for government to protect people from their own actions than there is to protect them from financial intermediaries' misconduct.

Fourth, technology increasingly eases the production and delivery of financial services across national borders. The Internet is accelerating the internationalization of financial services, which traditionally have been regulated country-by-country, raising such questions as: Where is a financial product produced? Where is it delivered? Where can its contractual terms be enforced? Who regulates a particular transaction? Who regulates a particular firm?

Functional regulation cannot answer these questions satisfactorily.

Functional regulation addresses many legitimate public policy goals; technology has simply made obsolete this industry-by-industry approach. Instead, these goals must now be addressed across the entire financial services spectrum.

Hence, industry regulation must be replaced by goals-oriented regulation applied uniformly to all financial services providers.

All financial services regulatory goals fit into two broad categories or buckets: solvency-systemic stability and consumer protection.

Solvency and stability concerns are unique to financial services and can largely be resolved through market forces. Consumer protection concerns, however, parallel concerns in other sectors of the economy; they must be addressed primarily by using government's police power.

These characteristics suggest just one regulatory agency for each regulatory bucket. In effect, the present vertical structure of financial services regulation (one regulator or more for each industry or function) should be replaced by a horizontal regulatory structure in which one agency addresses one type of regulatory concern regardless of where it originates.

Solvency-systemic stability concerns include deposit insurance, protection of insureds, payment system reliability, and systemic liquidity. The solvency of individual financial services providers is the core issue because insolvency creates two problems: losses for depositors, insureds, and other creditors and the threat of systemic instability caused by illiquidity in insolvent or possibly insolvent firms.

Market-driven mechanisms can best ensure that financial services providers, even multinational firms, stay solvent. These mechanisms must be accompanied, though, by a product warranty that protects depositors, insureds, and other funding sources against any insolvency loss. Any such loss must be paid by those who assumed responsibility for preventing insolvencies. One small government agency can ensure that these market mechanisms work properly.

Consumer protection concerns fall into three categories.

First, fair dealing with customers, which is the financial market's equivalent of fair-weights-and-measures laws. This includes fraud protection and accurate disclosure of interest rates charged and paid, loan terms and conditions, obligations of insurers, and the financial condition of stock and bond issuers.

Second, fair trading in the financial markets. That is, buyers and sellers of stocks, bonds, and other financial instruments are protected against unfair marketplace manipulations by traders, brokers, or other investors.

Third, maintenance of competitive financial markets, which includes antitrust enforcement and the elimination of regulatory bars on market entry and product offerings.

One federal agency, but not the agency overseeing solvency-systemic stability concerns, should enforce all consumer protection laws and regulations. Possibly, though, the Justice Department or the Federal Trade Commission should handle antitrust enforcement.

This proposed revamping of financial services regulation may seem revolutionary, yet it merely matches the technological revolution that has made functional regulation nonfunctional. Genuine financial services modernization cannot occur without such a revamping.

Mr. Ely, the principal in Ely & Co., is a financial institutions and monetary policy consultant in Alexandria, Va.

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