New Regulation Will Drive Trends in the Financial Services Industry-Again

Article excerpt

  Humpty Dumpty sat on a wall
 Humpty Dumpty had a great fall
  And all the King's horses
   And all the King's men
       Could not put
 Humpty Dumpty together again

Since the mid 1970s trends in the financial services industry have been driven by the efforts of the companies in the industry to reform the Glass Steagall Act of 1933 that prohibited them from conducting banking, investment and insurance activities in the same corporate entity. Those efforts culminated in 1999 with the passage of the Gramm Leach Bliley Act, allowing for the creation of bank or financial services holding companies that could conduct those activities under a single corporate structure. This resulted in the recent dominant trend in the industry: the efforts of companies to integrate the manufacturing and delivery of financial services to consumers and businesses. Citigroup, the amalgamation of Citibank, Salomon Smith Barney and Travelers Insurance, epitomized this new financial services model. When Citigroup had difficulty making the model work, supporters of the concept maintained that the model was right, Citi was just doing it wrong.

Then came the subprime mortgage mess, the implosion of Bear Stearns, the failure of Lehman Brothers, AIG and the credit crisis, etc. The entire financial services industry has had a great fall, and the whole idea of the financial services holding company has come under question. It has also become clear that Gramm Leach Bliley failed to allow for the regulation of the new hybrid products these entities could now create, own, package and sell, products like black box CDO's and credit default swaps that fell between the cracks of functional regulation.

The result of recent events is that there is a clamor for new regulation to replace Gramm Leach Bliley, and once again the specter of new regulation will be the driving force of trends in the financial services industry. While it is obviously difficult to predict what the new regulation will bring, a review of the proposals that are being made by the Treasury, Congress and the industry leads me to the following conclusions. There will be sweeping, new financial services regulation--let's call it the Frank-Schumer Financial Services Act of 2010--that will create regulatory structure modeled after the Financial Services Authority (FSA) in the United Kingdom, which integrated nine regulators in 1998.

The FSA in the U.K. is a single, self-regulatory body that regulates the entire financial services industry in that country. It is accountable to Her Majesty's Treasury and through it to Parliament. The FSA's responsibilities are separated into three sectors: Retail Markets, Wholesale and Institutional Markets and Regulatory Services. There are sector leaders for Auditing and Accounting, Asset Management, Capital Markets, Financial Stability, Banking, Insurance, Retail Intermediaries and Mortgages, all under one regulatory umbrella.

Given the current political environment in the United States and the recent real and perceived abuses in our financial system, it is highly unlikely that new financial services regulation here will be self-regulatory in nature. However, I believe that the Frank-Schumer Act will create a single regulator for all banking, insurance and investment activities in the U.S. It will be responsible to the Treasury and through it, to the Congress. Its governance will consist of a Board of Overseers, a Chairman and Vice Chairman for Banking, Insurance, Investments and Consumer Protection, and such departments that are necessary to carry out its responsibilities.

The Banking Division will assume the regulatory responsibilities and powers that the Treasury, Federal Reserve, and Comptroller of the Currency now have concerning banking activities, and will coordinate its efforts with those agencies. The SEC, with some modifications and expanded powers, budgets and staff, will be responsible for the investment activities of the industry. …