In recent years, both the United Kingdom and the United States passed landmark legislation transforming the regulation of financial markets and institutions in those countries. The United Kingdom enacted the Financial Services and Markets Act 2000 (FSMA),1 and the United States passed the Gramm-Leach-Bliley Act of 1999 (GLB).2 These laws respond to some common challenges faced in twenty-first century financial regulation: far-reaching globalization, advanced industry consolidation, persistent competition, and incessant technological advances.
Recent trends in financial services challenge the regulatory constructs devised in the last century. Traditionally, regulatory structures have been institution based with separate regulators for banking, securities, and insurance. This structure was premised on the existence of relatively clear distinctions between each business line. The products offered by each industrial sector were relatively easy to categorize, for example, in terms of the distinction between debt, equity, and insurance contracts.3 Similarly, institutions were easily distinguished and categorized into those that took deposits (commercial banks), sold securities (investment banks), and offered insurance (insurance companies). Accordingly, the businesses of banking, securities, and insurance were regulated as if they were separate industries, subject to separate statutes, and administered by separate regulatory agencies. The fading of such distinctions has forced policy makers to reevaluate the structure of regulation given this evolution. Moreover, these trends have resulted in significant changes to the nature and distribution of risk in the financial system: Banks have acquired market risks that were once exclusively borne by securities firms, while securities firms have been exposed to bank-type risk through their acquisition of securitized bank assets. These developments demand a policy response that we call "regulatory modernization."
Regulatory modernization must be understood in its relationship to and distinctiveness from the often discussed "financial modernization." Financial modernization is represented by legislation that removes previous structural restrictions on financial intermediaries. The quest for financial modernization has received extensive legislative attention, particularly in the United States. We believe, however, that regulatory modernization is a far more compelling policy issue. Regulatory modernization is the process of reforming the organization and practices of financial regulation to mirror the economic realities of today's financial services sector. Debate regarding regulatory modernization assumes the implementation of financial modernization policies-which are essentially deregulatory-and deconstructs the remaining regulatory framework to determine if it suits the new financial landscape. The FSMA, which creates a single regulator for all financial services firms, exemplifies an attempt to address regulatory modernization.4
This article will examine whether new legislation in the United Kingdom and the United States is successful in addressing the policies associated with regulatory modernization. Part II provides a brief context and background to the policy goals of financial modernization versus regulatory modernization and argues for concentration on regulatory modernization in the reform of finance laws. Part III and Part IV examine the extent to which the policies of regulatory modernization are met under the GLB and the FSMA respectively. We will show that the GLB and FSMA take quite different approaches to these issues. The divergence is not surprising given the long-standing differences in character of financial regulation in Britain versus the United States,5 but they also point to a much deeper philosophical difference between the two pieces of legislation. In Part V, we conclude with a broader comparative analysis in which the legislative approaches in the two countries are contrasted with trends in other leading industrialized countries. …