Zurich — The sheer volume of regulations and complexity of the international regulatory environment have made the management of regulatory risk one of the most pressing concerns for global businesses, ahead of natural disasters, terrorism and other operating risks, according to a new global survey of senior executives conducted by the London-based Economist Intelligence Unit (EIU) and co-sponsored by The ACE Group of Companies, a global commercial property and casualty insurance and reinsurance organization based in Zurich.
According to ACE, the impact of the worldwide credit crisis is expected to have a further impact with new and more stringent regulation for those organizations in the financial services sectors.
The survey of 320 senior professionals with responsibility for risk reveals a paradoxical view of regulation. While the vast majority of respondents recognize that it is a necessary part of the economic landscape, they also believed that regulation posed serious challenges for their businesses in terms of managing the risks associated with compliance. In view of the growing demands and complexity of regulation, it's perhaps not surprising that more than eight in 10 respondents claimed to have increased their focus on regulatory risk over the past three years, and a similar proportion expected this trend to continue for the next three years.
Respondents to the survey cited concerns about the quality and quantity of regulation being promulgated, as well as the sheer volume of regulations faced by businesses operating internationally. Juggling multiple compliance priorities and areas of overlap or conflict between different regulations make managing regulatory risks difficult and time-consuming. Nearly two-thirds of those questioned said that the complexity of the regulatory environment was the main factor hindering their ability to manage regulatory risk effectively, while just under half (46%) cited the lack of regulatory harmonization between multiple jurisdictions.
Commenting on the challenge of managing multiple regulatory regimes John Keogh, CEO, ACE Overseas General, says: "The survey shows that while regulation to protect the interests of business, the consumer and global economies is fundamental and can have a positive impact on business if managed effectively, the growing burden and complexity of compliance requirements is now a major business issue. More than ever, it is crucial that the global regulatory systems work well and work together, and businesses need to look carefully at the resources and processes they have in place to better manage regulatory compliance."
The level of resources required to manage regulatory risk was a focus for respondents. When asked what categories of regulation were the most resource-intensive, those relating to audit and reporting, such as Sarbanes-Oxley in the United States, the International Financial Reporting Standards, Basel II and Solvency II, topped the list (75% of respondents). Workforce regulation, including European Union (EU) "working time" directives and environmental legislation, such as the WEE (Waste Electrical and Electronic Equipment Regulations) Directive also were shown to be costly to implement and manage.
Keogh says: "Some businesses are more effective than others at streamlining their processes to tackle the myriad of regulatory regimes, but many still face significant and growing challenges with finite resources to manage the impact on their business. While the survey does indicate that lessons can be learned in the way risks are managed, there are messages for the regulators to consider, including greater harmonization of regimes to help meet the needs of multinational businesses."
Respondents in the financial services sector (47%) reveal the full extent of managing regulatory risks in the current global credit crisis. Businesses in this sector made the most sizeable investment in managing regulatory risk with more than half (56%) having allocated significantly greater resources over the past three years, compared with 32% from other industries. Respondents believe a substantive regulatory response to the crisis is inevitable. The vast majority (78%) indicated the most likely intervention will be the imposition of new liquidity standards. Three-quarters expect higher capital ratios to take into account off-balance sheet vehicles and nearly 70% see stricter regulatory controls on the loan origination process being enforced. About half of respondents cited other actions, including closer oversight of ratings agencies (53%) and restructuring of the regulatory system itself (49%), while just 16% expect imposed limits on pay of financial professionals, despite widespread sentiment that incentives have exacerbated the current situation.
Despite the many challenges they face with managing regulatory risk, respondents recognize that they can derive business benefits from their compliance activities, including more efficient business processes, cited by more than half (55%) of respondents; competitive advantage from implementing best practices (48%); and the ability to anticipate future regulatory change (46%).
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