A Mandate for Change: Restoring Balance to Financial Regulation

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Sima J. Gandhi is a seasoned tech executive and serial entrepreneur with nearly 20 years of experience launching disruptive products and building category-defining companies within financial services. She is currently the co-founder of CFES, a coalition setting standards for fintechs with bank partnerships, and President of Alton Strategies, where she advises companies that operate at the intersection of tech, business, and policy. She was formerly the CEO of Creative Juice and on the founding team at Plaid, where she led global banking partnerships, public policy, and strategy.

The American financial regulatory system is Big Banking’s best competitive advantage. What began as well-intentioned considerations for stability and consumer protections have evolved into a regulatory framework that creates significant barriers to entry, where compliance costs disproportionately burden smaller institutions and inadvertently limit consumer choices and market innovation.

At the heart of this dysfunction lies a regulatory approach that prioritizes consumer protections and institutional "safety and soundness" – laudable goals, to be sure – to the exclusion of other elements critical to a dynamic and healthy ecosystem. This myopic focus has transformed regulatory bodies into a machine that effectively drives innovators out of business while consolidating financial power in the Big Banks. The numbers tell a stark story: Today, nearly 70% of all banking deposits are concentrated in banks with assets exceeding $100 billion – a threefold increase from just 30 years ago.^[1]

This consolidation is not merely a matter of statistical trends, but represents a critical inflection point for our financial ecosystem. Regulators have adopted a deeply paternalistic stance, essentially banning financial products they deem "inappropriate" under the guise of consumer protection. Rather than trusting consumers to make informed decisions through robust disclosure and transparency, they've unilaterally eliminated choices. This approach creates the worst of both worlds, both over- and under-inclusive: While complex and potentially predatory products like auto-loans remain largely unchecked, innovative financial services face a death by a thousand regulatory cuts.

Without significant intervention, we are rapidly approaching a financial mainstream market that offers minimal consumer options – a landscape neutered by bureaucratic judgment and a fundamentally misguided belief that consumers are incapable of making their own financial decisions. Inertia is powerful, and the absence of decisive action is, in itself, a policy that perpetuates this paternalistic status quo.

To reverse this trajectory and restore market dynamism, three fundamental shifts are necessary:

Reform #1: Implement Dual Mandates

Regulatory agencies have a consistent historical trajectory – what begins as a narrow, well-intentioned mandate inexorably transforms into a self-perpetuating bureaucracy. Time and again, they demonstrate a fundamental bureaucratic tendency to progressively expand their reach^[2], creating increasingly complex barriers that protect existing institutions while inadvertently suffocating the innovative potential of new market entrants. This underscores the critical importance of implementing dual mandates – explicit mechanisms that require regulators to simultaneously consider market competition and innovation alongside their protective functions – as a necessary check against this natural institutional drift toward market ossification.

The Federal Reserve, for instance, was originally created in 1913 with a mandate focused on maintaining financial stability and preventing banking panics. After the Great Depression, the New Deal significantly expanded the Fed's role, introducing more explicit responsibilities for maintaining financial system stability. The Dodd-Frank Act of 2010 further expanded the Fed's regulatory powers, giving it more explicit responsibilities for systemic risk management and emphasizing “safety and soundness.” What once meant preventing bank failures now encompasses a much broader mandate of preventing systemic economic risks. Nowhere in this paternalistic expansion is a counterweight of market dynamism or competition.

The Consumer Financial Protection Bureau (CFPB) represents a critical innovation in financial regulation – a necessary check on financial institutions that had repeatedly demonstrated predatory behavior. Created in 2010 to protect consumers, the agency does in fact have a statutory responsibility for competition^[3], but the lack of a true dual mandate means it too has naturally drifted towards paternalism. Where the CFPB once focused on empowering consumer choice through robust information requirements and understandable disclosures (e.g., TILA), it now uses its authority to categorically challenge innovative financial products, such as earned wage access (EWA). Instead of focusing on more transparent disclosures and allowing consumers to make informed choices, the bureau has defacto shown a willingness to target entire product categories in the name of “consumer protection.”

Our approach to financial regulations paternalistically expands bureaucratic oversight to prevent the recurrence of past crises that are unlikely to repeat themselves. Yet each new consumer harm reinforces their raison d’etre, each new bank issue or failure a justification for more supervision and regulation. Moreover, regulators often deliberately maintain ambiguity, preferring to retain optionality rather than offer clear guidance – a strategy that tacitly favors established firms capable of weathering regulatory uncertainty and potentially acquiring smaller competitors struggling under the regulatory burden. This approach transforms regulatory agencies from protective mechanisms into inadvertent gatekeepers that stifle market dynamism, ensuring that the very institutions meant to prevent systemic risks instead calcify existing power structures.

Economists like Joseph Schumpeter understood the importance of ensuring regulation furthers innovation, arguing that economic progress is driven by "creative destruction" – the process by which innovative new businesses displace older, less efficient ones. Current financial regulation prevents this “creative destruction,” protecting incumbent players at the expense of systemic innovation and true economic growth. A true dual mandate would require regulators to actively consider market competition, innovation, and the potential for new entrants alongside their traditional safety and consumer protection goals, a more realistic and balanced approach. 

Reform #2: Embrace risk management over risk elimination

Agencies approach towards risk has also grown more paternalistic. Where risk management traditionally focused on fostering robust practices and frameworks within the private sector, current outcomes-based regulatory practices judge the effectiveness of risk management by whether any negative consequences occurred.

Seeking to eliminate risk rather than manage it intelligently is a mistake. The most sophisticated risk management strategies cannot guarantee perfect outcomes; they can only create prudent frameworks for decision-making and mitigation. By treating any negative outcome as a failure of risk management, regulators are effectively punishing innovation and prudent risk-taking. What was once seen as an essential element of economic dynamism – the willingness to take calculated risks – is now treated as a liability to be avoided at all costs.

As Greg Baer’s piece in Open Banker points out, flagging risk is a more prudent CYA approach than trying to explain that even sound risk management can result in risk manifestations.^[4] In this world, examiners show strength by identifying nonsensical MRAs like “auto-renewals within partner contracts.” Any decent lawyer will tell you auto-renewals are critical for well-functioning contracts. Yet in today’s bank examination process, whatever examiners say goes, no matter how absurd or unrelated to true risk management.The natural extension is to tag risk everywhere so that if there is a blow up (que Synapse) it’s easier to say, “I told you so” and beg for more supervisory powers than it is to accept that sometimes even regulators mess up.

The result of these extreme positions is a profound transformation of the American economic model. This shift doesn't actually reduce systemic risk, but instead creates a more fragile economic ecosystem that stifles creativity, entrepreneurship, and meaningful progress.

The irony is that this "risk elimination" approach actually introduces systemic risks by:

• Reducing market diversity

• Concentrating financial power in a few large institutions

• Preventing the natural "trial and error" process of market innovation

• Creating false sense of security through over-regulation

Economist Tyler Cowen explains more about how our culture of complacency and stagnation is replacing our  “culture of risk” and growth.^[5] It's essentially a regulatory approach that treats financial markets like a child-proofed room, removing all potential sharp edges rather than teaching responsible navigation.

Agencies must rightly balance capitalistic tendencies with a clear focus on sound risk management and prudent practices. At the same time, risk should be encouraged. If there are no more bank failures or problems, it is because regulators are not doing their jobs.

Reform #3: Foster Private-Public Partnerships

The "revolving door" between government and the private sector is a form of institutional collaboration that has been progressively eroded over time. Throughout the early to mid-20th century, movement between regulatory agencies and financial institutions was viewed as a natural mechanism of knowledge transfer. The Post-Great Depression era epitomized this approach, with New Deal regulators like James Landis and William Douglas, who contributed to the design of the SEC and the New Deal, subsequently moving into financial institutions..

The 1980s and 1990s represented the peak of this collaborative model, characterized by significant deregulation that blurred traditional boundaries between government oversight and private financial operations. The repeal of the Glass-Steagall Act in 1999 symbolized a period where public and private sector expertise were seen as complementary rather than conflicting. Organizations like the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) exemplified a philosophy where private sector expertise was explicitly leveraged to create more efficient regulatory mechanisms.

The 2008 financial crisis fundamentally disrupted this collaborative approach. In its aftermath, a more restrictive and skeptical model emerged, marked by longer "cooling off" periods, complex ethics rules, and increased disclosure requirements. The Dodd-Frank Act transformed what was once a valuable knowledge exchange into a potential conflict of interest.

The technological revolution of the past two decades demands precisely the kind of collaborative approach that has been systematically dismantled. In domains like financial technology and cryptocurrency, the most complex systemic risks cannot be understood through bureaucratic isolation. While conflicts of interest are undeniably real and require vigilant scrutiny, the reflexive assumption that private sector experience or aligned interests automatically compromise professional judgment sets an unreasonably low and counterproductive bar for expertise.  The pace of technological change requires regulators who can speak the language of innovation – who understand not just potential risks, but the transformative potential of emerging technologies.

The current regulatory landscape is one where innovative companies feel constantly under threat, while regulators remain perpetually on guard. And when regulatory authority is applied, it’s exercised superficially, with regulators unable to identify issues commonly known amongst private sector participants (e.g., Synapse). True public-private cooperation would reimagine regulation as a collaborative process that views expertise as a shared resource and technological innovation as a national competitive advantage to be carefully cultivated, not controlled.

This is not a call for unchecked deregulation, but for a more sophisticated model of collaboration. Regulators should be strategic partners whose primary role is to create intelligent guardrails while preserving the innovative spirit that drives economic progress. Rebuilding the channels of expertise – reestablishing the revolving door as a mechanism of institutional learning – is essential to maintaining America's competitive edge in an increasingly complex global economy.

The stakes could not be higher. As technological innovation accelerates, the need for nuanced, collaborative regulatory approaches becomes increasingly critical. The old model of adversarial oversight is obsolete; what we need is a partnership that recognizes expertise as a public good, values cross-sector understanding, and sees regulation not as a punitive mechanism, but as a strategic tool for sustainable innovation.

Conclusion

The future of American financial innovation hinges on our ability to reimagine regulatory frameworks as dynamic, collaborative ecosystems rather than static, punitive systems. Implementing dual mandates, embracing intelligent risk management, and fostering robust public-private collaboration are interconnected strategies for revitalizing our economic potential. These approaches represent a fundamental shift from a risk-elimination mindset to a risk-intelligence approach that recognizes innovation as the lifeblood of economic progress. The alternative is a continued march toward financial consolidation, reduced consumer options, and a stagnant economic landscape that betrays the innovative spirit of American capitalism.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1]  Francisco Covas & Jose Maria Tapia, “How Has the Size Distribution of Banks Evolved Over the Last 30 Years?” BPI (May 31, 2022).

^[2]  The regulators themselves know this, and will tell you so if you dig deep enough into their research papers. See, for example, the amusingly titled “brief” 50-page history of the regulatory perimeter from the Fed’s Finance and Economics Discussion Series:  https://www.federalreserve.gov/econres/feds/files/2021051pap.pdf

^[3] Some of my industry friends will reflexively disagree with this, so let me give you the statutory backup:  “The Bureau is authorized to exercise its authorities under Federal consumer financial law for the purposes of ensuring that, with respect to consumer financial products and services… [f]ederal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition.”

^[4]  Greg Baer, “The Bank Examination Problem, and How to Fix It,” BPI (July 24, 2024).

^[5]  Cowen, Tyler “The Complacent Class: The Self-Defeating Quest for the American Dream” (2017). In his new book, The Complacent Class, Cowen argues America’s restlessness of spirit is giving way to a safety-first society.

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