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Is your bottom line geared to handle regulatory and legislative changes?

Regulations, originally designed to help businesses mitigate risks, are now perceived by organisations around the world as a key business risk. The cost and influence of regulations on businesses are such that even marginally incremental regulatory changes could add tremendous cost to a business entity, creating uncertainty in hiring and restricting expansion.

This is according to Aon’s 2015 Global Risk Management Survey, which cites regulatory and legislative changes as a top risk (#3) that can impact a company’s bottom line. Banks, healthcare, pharmaceuticals and biotechnology, telecommunications and broadcasting, and utilities, all of which are traditionally subject to heavy regulation, see regulatory/legislative changes as a #1 or #2 risk on the list of top 10 risks to business.

Aon Risk Solutions, the global risk management business of Aon plc (NYSE: AON), unveiled the key risks as identified by its clients across the globe in its 2015 Global Risk Management Survey. The 1400 survey respondents to the Aon Global Risk Management Survey included CEOs, CFOs and Risk Managers providing comparative insight into different perceptions of risk.

South Africa has not been precluded from facing a heftier regulatory environment, especially after the 2008/9 economic crisis. Although SA fared better than many countries through the crisis due to strong fiscal policy, numerous mandates soon followed aimed at ensuring greater transparency and reducing overall market risk. Our financial sector is just one example with no less than 10 new, amended and proposed regulations such as Solvency Assessment & Management (SAM), Treating Customers Fairly (TCF), amendments to the Credit Act, Retirement Reform, the Retail Distribution Review (RDR), revised Binder Regulations and Twin Peaks to name a couple. In emerging markets such as ours, legal and regulatory environments have become noticeably tougher and more volatile, and all of this has a marked impact on costs of compliance and the bottom line.

In Aon’s survey, the reported readiness of companies for regulatory/legislative changes is cited by 53 per cent of respondents, largely unchanged from 2013’s 54 per cent. However, only 28 per cent of surveyed companies have reported a loss of income in the last 12 months from this risk, a dramatic decrease from 54 per cent in 2013.

The change in perception of this risk may indicate that organisations are gradually adjusting to a spate of robust regulatory and legislative changes introduced in the immediate aftermath of the financial meltdown. Many have also embraced the changing regulatory environment as an opportunity to create a competitive advantage over peers that do not manage this process effectively. As laws and regulations are becoming ever more detailed and the consequences of non-compliance more severe, there has been heightened awareness of this risk and we’re seeing concerted efforts by business leadership to engage more with regulators and government officials.

Another challenge is that regulations often exceed the confines of a specific geographic jurisdiction. Aon recommends an integrated global compliance infrastructure, responsive to the different enforcement environments in various jurisdictions. The compliance team should be involved in the product development and design stage to ensure compliance with the most stringent regulatory standards in the different markets in which a business operates. At the same time, it is also imperative to enhance the capability to manage an ever larger number of regulators and respond to multiple simultaneous, parallel enforcement actions in different countries. As a risk solutions provider, Aon works with clients to help manage a diversity of risks through consulting and analysis, risk transfer, insurance and crisis management. These capabilities are carried out by experts with a deep understanding of the challenges facing clients in diverse industry sectors.

Beware the domino effect – risks to business are often interlinked

It is imperative that senior executives and the board of directors communicate with risk managers, taking an active role in assessing and covering the company’s risk exposure to ensure it is in line with the strategic goals of the business. For example, compliance is traditionally overlooked by corporate leadership, who see it as a burden: a risk without a reward according to Aon’s survey findings. As the world’s political map and the regulatory landscape are evolving, compliance is becoming more crucial to a company’s bottom line. Senior leadership has to stay involved in all aspects of risk management and align with risk managers in the decision-making process. As in the prior survey, Aon’s study highlights the interdependency among many of the top risks, as well as risks that rank lower.

The top 10 risks identified are:

Damage to reputation/brandEconomic slowdown/slow recovery

Regulatory/legislative changesIncreasing competitionFailure to attract or retain top talentFailure to innovate/meet customer needsBusiness interruptionThird party liability Cyber risk (computer crime/hacking/ viruses/malicious codes)Property damage

To illustrate, the proliferation of mobile devices is creating a rapidly expanding network of new connections between individuals, groups, and things. The combination of accelerated connectivity, accelerated data accumulation, accelerated computer power, and accelerated accessibility is a great leap forward, but also a great expansion of risks. High levels of connectivity have added to risk complexity: when the dominos start to fall, they fall fast. Non-compliance with market regulation for example, could damage a company’s reputation. A company with a damaged reputation might find it hard to be competitive and attract top talent. The lack of talent will result in failure to innovate and meet customer needs. The list goes on. This interdependency between risks illustrates that organisations can no longer evaluate risks in isolation but must consider their interconnectedness.

Aon’s 2015 Global Risk Management Survey is one of the most comprehensive and insightful surveys available on risk mitigation and reveals a number of different challenges driven by today’s globally inter-dependent environment. The interconnected nature of these risks reinforces the importance of strategic risk management in every organisation.

Terence Williams, CEO of Aon South Africa

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