Financial regulation fixes urgently needed: GAO

By John Poirier

WASHINGTON (Reuters) - Financial authorities have failed to limit systemic risks, and weaknesses in regulation need to be urgently fixed, according to a congressional report on Thursday.

"Significant reforms to the U.S. regulatory system are critically and urgently needed," the Government Accountability Office said in a report recommending accountability and the flexibility to adapt to market innovations.

"The current system has important weaknesses that, if not addressed, will continue to expose the nation's financial system to serious risks," the report said.

The GAO made several broad recommendations in a framework for Congress, controlled by Democrats, to use as lawmakers craft landmark legislation aimed at addressing the patchwork of banking, securities and futures regulation among federal and state entities.

Overhauling the U.S. regulatory system amid the biggest financial crisis since the Great Depression will be a top priority for Democrat President-elect Barack Obama, who plans to unveil reforms by April to address failures exposed by the subprime mortgage debacle.

Among its recommendations, the GAO said that regulators should be held accountable, rules should cover all activities that pose risks and a system should be flexible so that officials can easily adapt to market changes and new products without hindering innovation.

The report also called for eliminating overlapping federal regulatory missions and enhancing consumer and investor protections.

A major debate among policymakers, Congress and the markets is just how far to take some recommendations made last year by the U.S. Treasury Department to consolidate federal agencies.