A federal government watchdog report citing the urgent need for U.S. financial regulation reform details a framework it says should help lawmakers evaluate proposals to overhaul the current system.

As a result of significant market developments in recent decades that have “outpaced a fragmented and outdated regulatory structure,” the Government Accountability Office says significant reforms to the U.S. regulatory system are “critically and urgently needed.”

The current system has important weaknesses that, if not addressed, will continue to expose the nation’s financial system to serious risks, according to a 107-page report released Jan. 8.

“As the nation finds itself in the midst of one of the worst financial crises ever, the regulatory system increasingly appears to be ill-suited to meet the nation’s needs in the 21st century,” the GAO report states.

Among other things, the GAO says regulators “struggled, and often failed,” to mitigate the systemic risks posed by large and inter-connected financial conglomerates and to ensure they adequately manage their risks. Regulators also failed to adequately oversee the sale of mortgage products that posed risks to consumers and the stability of the financial system. Moreover, the current fragmented U.S. regulatory structure has complicated some efforts to coordinate internationally with other regulators, the watchdog agency noted.

The report offers a framework for policymakers to consider as they evaluate or craft proposals for financial regulatory reform, including nine characteristics that should be reflected in any new regulatory system:•Clearly defined regulatory goals so that regulators can effectively conduct activities to implement their missions.•Appropriately comprehensive to ensure that financial institutions and activities are regulated in a way that ensures regulatory goals are fully met. Activities that pose risks to consumer protection, financial stability, or other goals should be comprehensively regulated.•System-wide focus, including a mechanism for identifying, monitoring, and managing risks to the financial system regardless of the source of the risk or the institutions in which it is created.•Flexible and adaptable so regulators can readily adapt to market innovations and changes and include a mechanism for evaluating potential new risks to the system.•Efficient and effective oversight of financial services by eliminating overlapping federal regulatory missions, where appropriate, and minimizing regulatory burden while effectively achieving the goals of regulation.•Consistent consumer and investor protection as part of the regulatory mission to ensure that market participants receive consistent, useful information, as well as legal protections for similar financial products and services, including disclosures, sales practice standards, and suitability requirements.•Regulators provided with independence, prominence, authority, and accountability to ensure that regulators have independence from inappropriate influence; have sufficient resources, clout, and authority to carry out and enforce statutory missions; and are clearly accountable for meeting regulatory goals.•Consistent financial oversight to ensure that similar institutions, products, risks, and services are subject to consistent regulation, oversight, and transparency, which should help minimize negative competitive outcomes while harmonizing oversight, both within the United States and internationally.•Minimal taxpayer exposure. A regulatory system should have adequate safeguards that allow financial institution failures to occur while limiting taxpayers’ exposure to financial risk.

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