In today's business world, complying with regulations is essential for any organisation. Failing to do so can result in hefty fines, legal battles, loss of reputation, and even a ban on operations.
Managing regulatory compliance risks can be daunting, but it is necessary to ensure the long-term success of your business. In this article, we’ll discuss how to keep in line with regulatory demands and mitigate threats.
What Is the Difference Between Compliance and Risk Management?
In this article, we cover several important areas of business.
The first and broadest subject is risk management. It comprises all the steps that organisations take to identify and address risks promptly.
In comparison, regulatory risk management and compliance are considerably narrower concepts.
Regulatory risks are one of the many kinds of risks that a firm may face in its operations and that it seeks to control. They arise when a company faces financial or legal difficulties due to changes in legislation and regulations.
Accordingly, regulatory risk management is a procedure that helps to reduce these negative impacts and achieve business objectives.
Compliance refers to adherence to the rules.
- By definition, this procedure does not cover any other tasks other than following mandatory requirements for a particular jurisdiction and internal company policies.
- Compliance does not address strategic goals and does not analyse the potential risks that a company may face due to non-compliance. Rather, this step should provide a simple yes or no answer to whether your business is following the letter of the law.
- The scope of the tasks is limited to the information and documents that already exist. That is, it does not include potential legislative changes and scenarios for them.
To summarise this section, although the concepts of risk management and regulatory compliance are used interchangeably, they pursue different goals. However, one cannot exist without the other, i.e. a company can hardly be said to be effectively managing risks if it violates the requirements of the law.
Types of Business Regulatory Risks
Every business relies on clear regulatory guidelines to operate. However, for some industries, the rules change as often as the weather.
Changes in the law can completely disrupt the profits and the reality in which your firm, or even an entire business industry, operates. And that is what is meant by the notion of regulatory risk.
Here are common types of risks that you should be aware of in your business:
Changes in tax legislation
Companies' profits are directly related to commercial tax rates. The market is sensitive to even minor changes, let alone major tax reforms that significantly alter the existing system.
Changes in labour legislation
Changes to the minimum wage, retirement age, and rules for calculating holiday or maternity benefits have a financial impact on employers. This is especially true for businesses with large teams.
Changes in customs legislation
The contemporary commercial world is highly interconnected. Thus, changes in export and import regulations from certain countries can have a major impact on entire industries and the global economy.
Changes in regulatory requirements for specific sectors
As new services are introduced to the market, the laws governing the provision of such services are added. The IT industry is a case in point. For example, we can analyse the impact of GDPR policies on industry giants such as Meta or Google. And this year, lawmakers are looking for ways to regulate the operations of the latest AI services that have emerged on the back of ChatGPT.
Regulatory risks are one of the biggest concerns for modern enterprises. In a recent survey of risk officers, the category of compliance and regulatory risks was named as the one requiring the most attention. It was mentioned by 35% of respondents.
Amazon and the Largest GDPR Fine to Date
Fines for regulatory violations can be extremely high. One example is tech giant Amazon, which received a €746 million fine for non-compliance with the provisions of the GDPR.
The penalty was issued in 2021 by the Luxembourg National Commission for Data Protection (CNDP). This is to date the record fine for GDPR violations.
And this story is not unique to the IT market, as every year European governments make stricter rules to ensure privacy rights. And while the Big Five companies can withstand high penalties, for a small startup or local business, a violation can lead to bankruptcy.
How To Identify and Manage Regulatory Risks
So which steps will help your company achieve effective risk management and regulatory compliance? Your action plan will, of course, vary depending on your organisation's size, jurisdiction, and industry.
But here's where to start:
- Analyse the applicable rules.
Find the entire set of documents that applies to your organisation and industry. This includes all the laws, regulations, and guidelines from state and local authorities.
- Understand the penalties for violations.
Research what kind of action is taken against the company for breaking the rules. Take into account any fines or legal action you may face.
- Assess your company's compliance.
Determine how well your organisation complies with legal requirements. There may be potential risk areas where your staff is not sufficiently knowledgeable and where updates have not been made for a long time.
- Develop internal policies and procedures.
An open and clear plan of action within the firm makes compliance easier and reduces human error and risk along the way. Your internal process can include regular training for your staff, measures to monitor legislative updates, etc.
- Monitor legislative changes.
International, national and municipal legislation never stands still. But it may not be efficient for your team to monitor changes manually. To simplify the task, the RegTech market offers automatic monitoring solutions.
- Conduct regular audits and introduce changes.
Check how well your compliance programme is meeting current business needs. If it's no longer delivering the desired results, you should investigate the reasons and make adjustments.
By following these steps, you can prevent potential business threats, such as fines, administrative or criminal liability, or reputational damage.
LIGA UNITED for Regulatory Compliance Risk Management
If you want to bring your risk compliance and regulatory management to the next level, it's time to check out LIGA UNITED.
This system combines key information flows and automates routine tasks for compliance and risk management professionals.
As for regulatory tasks, the Legal search features will come in handy. Here you can find the main UK regulations along with search, filtering and text editing capabilities.
- Use the convenient search. You can select documents by specific phrases or paragraphs, by reference number or type, by year of publication, or by a primary/secondary legislation attribute.
- Easily process a lengthy collection of materials with smart filters. Our filters allow you to sort legislative documents by date or relevance, open previews or switch to full-screen mode in one click.
- Evaluate the convenience of working with texts, as each file contains hyperlinks to the mentioned legislative acts, the document's content and structure, a list of previous editions with the possibility to switch to them, as well as the "search in the text" and " document information" features.
Fill out the contact form and our managers will gladly walk you through all the system's features.
The Bottom Line
Regulatory compliance and risk management are important elements of any firm seeking to comply with legislation and regulatory requirements.
These processes help businesses avoid potential fines, lawsuits, and other issues.
Use automated systems to develop effective corporate procedures and streamline the workflow for your team. For instance, UK companies can find and analyse relevant legislation on the LIGA UNITED platform.
Violating the law can result in hefty fines, legal battles, loss of reputation, and even bankruptcy. In addition, it can lead to loss of trust among customers and damage the company's brand.
Internal policies and procedures should be reviewed regularly, at least once a year or when legislative amendments are introduced. This ensures documents are up-to-date and that the firm is meeting all the requirements.
Senior management plays a critical role in compliance risk management. They are in charge of establishing the tone at the top, ensuring that compliance rules and processes are in place, and allocating company resources. They also need to be aware of potential risks and ensure that risk management plans and policies are in place to mitigate them.