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Regulation in the Age of Transparency

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Voluntary transparency is a superior self-regulatory mechanism that could substantially enhance consumer protection and prudential oversight.

On a panel called ‘What Keeps Regulators Up at Night’ held at the Money Transmitter Regulators Association conference in Boston last November, three experienced state examiners from Virginia, Wisconsin and Texas laid out in clear terms the key issues they face when vetting money transmitters in their states. Their primary concern: the accuracy and integrity of a license holder’s financial and accounting reports, which are the basis for ascertaining a company’s true financial condition and for ensuring there is sufficient liquidity to meet “transmission obligations.” That’s right, we’re in the second decade of the 21st century, and regulators still rely on after-the-fact, paper-based reporting. Further, regulated financial institutions seem incapable of providing unimpeachable transactional and financial reports to ultimately demonstrate their solvency.

It is a widely known fact that regulation always lags behind technological innovations, especially in the realm of financial service design and delivery. How to bridge that gap is one of my ongoing research interests, and my goal here is to focus on an (up-to-now overlooked, but critical) approach to financial oversight that could address the core purpose of prudential financial regulation.

The Current Oversight Paradigm

The main mission of a financial services prudential regulator is to ensure the safety and soundness of service providers, thus maximizing to the extent possible the protection of consumers’ rights. This includes the right to have their funds delivered to the intended beneficiary in the promised timeframe, or the right for funds to be stored safely. In other words, the primary purpose of regulatory oversight is the protection of consumer funds against loss and mismanagement by financial intermediaries. How do regulators go about accomplishing this goal today? The traditional mechanism whereby regulators execute their mission is licensing, a rigorous due diligence process whose purpose is the “credentialing” of the entities and individuals seeking to engage in a particular financial service activity that has been deemed risky enough to warrant this vetting process. Continue reading

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