WASHINGTON--The Government Accountability Office today released a study highly critical of the current financial services regulatory structure and said proposals for updating regulation should focus on accountability of regulators and cover all activities which pose risks or are otherwise important to meeting regulatory goals.

Its report outlined a framework to provide increased oversight and revise a "fragmented and complex" regulatory system for financial services.

Reacting to prodding from the American Council of Life Insurers, which criticized an earlier draft for failing to discuss insurance reform, the GAO mentioned that its report, "noted that harmonizing insurance regulation across states has been difficult, and that Congress could consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity."

ACLI has been a strong advocate for optional federal charter legislation.

In recommending a new system to provide "consistent consumer and investor protection" the GAO noted that interconnected financial conglomerates crossing financial sectors of banking, securities and insurance have "increased significantly in recent years."

The GAO called for regulations that are comprehensive and cohesive covering all activities that pose risk, noting that some activities may require less regulation than others.

Needed, the agency said, is a system that allows regulators to adapt to market innovations and changes in a timely manner.

It found that oversight is required that will eliminate overlapping federal regulatory missions without sacrificing effective oversight.

The agency said that lawmakers in making revisions should look for opportunities to consolidate rival agencies and streamline consumer protection activity.

Regulators, it said, should have independence from inappropriate influence, as well as prominence and authority to carry out their mission.

Similar institutions products risks and services, GAO said, should be subject to consistent regulation oversight and transparency.

A new system, the agency recommended, should foster financial markets that are resilient enough to absorb failures and thus limit the need for federal intervention and limit taxpayers' exposure to financial risk.

The GAO report said that one issue that should be considered is the appropriate role "of the states in a financial regulatory system and how federal and state roles can be better harmonized."

It suggests that one way of dealing with it is to "consider the potential benefits might result in some cases from having multiple regulators overseeing an institution."

Specifically, the report said, "Some types of concurrent jurisdiction, such as enforcement authority, may be less burdensome to institutions than others, such as ongoing supervision and examination."

The report notes that consumer groups argue "that states may move more quickly and more flexibly to respond to activities causing harm to consumers," i.e., consumer protection.

The focus of the report was covered in comments made to CNBC Wednesday night by president-elect Barack Obama.

He said that by April 1--working with congressional officials led by Senate Banking Committee chairman Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee--the incoming administration will present a proposal for "substantial overhaul" of the current regulatory system.

The effort, he said will involve international coordination. "We're going to have better enforcement, better oversight, better disclosure, increased transparency" and, "We're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively,"

As in the comments by president-elect Obama, the GAO report said that "responsibilities for overseeing the financial services industry are shared among almost a dozen federal banking, securities, futures, and other regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies."

The GAO report added that, "The portion of firms operating as conglomerates that cross financial sectors of banking, securities, and insurance increased significantly in recent years, but none of the regulators is tasked with assessing the risks posed across the entire financial system."

President-elect Obama's comments in his interview were consistent with the GAO report.

"We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible," he said.

"And there are systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits," he added. "So we've got to update the whole system to meet the needs of the 21st century," he concluded.

In its report, the GAO said that a new regulatory system must be "flexible and forward-looking" and allow regulators to adapt to market innovations and changes.

The GAO report comes as the nation's largest insurance conglomerate, American International Group, has been reeling from its losses from exposure to subprime mortgages and derivatives that have forced it to obtain billions in loans from the federal government.

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