At a glance
- The financial crisis has seen all businesses face an enhanced regulatory environment. SMEs have felt this particularly keenly
- Brokers need to be mindful of the changing customer risk profile relating to regulatory reform
- Although complying with regulations can actually make businesses more stable and resilient
Complying with regulation places a disproportionate burden on small and medium-sized businesses in terms of cost, time and resources, according to the Confederation of British Industry (CBI).
And while the European Union and UK governments have committed to reducing red tape, in December last year, the CBI warned that Britain’s economic growth faced being held back because of “tens of millions of pounds of extra business red tape”.
Its research showed that the net added cost of regulation on UK business rose by £177.7m, based on policies created in 2011 alone. Despite the UK’s ‘one-in, one-out’ rule, which has been revised recently to ‘one-in, two-out’, developed to ensure the volume and cost of regulation is limited, the World Bank’s ‘Ease of Doing Business’ report, based on regulatory indices, moved the UK down one place to seventh, between 2011 and 2012.
A survey of 4,800 members of the Forum of Private Business revealed that the average cost of compliance amounted to £14,200 per business in 2011. Around 84% of small business owners also reported that they were spending more time on legislation than in 2009, the last time the organisation measured the burden of red tape on small firms, while 67% of the owner-managers said they were spending more money on consultants to help them avoid regulatory pitfalls.
For SMEs, the range of regulation – including an enhanced health and safety regime, fire safety, environmental damage, product safety, anti-bribery legislation and new data protection laws to name but a few – has presented challenges.
But businesses should not necessarily always view regulation as a millstone around their necks and this is where insurers and brokers can help.
“We are experts in managing risk, and there are some areas where the burden of complying with regulations actually leads to a more stable and resilient business, which, from an insurer’s viewpoint, represents a better risk,” said Russell Corbould-Warren, Head of SME Underwriting at Zurich
“When I think of how new regulations sit on top of the existing financial reporting requirements, we realise what a burden they can be. Obviously, as insurers, we are not there to ensure compliance, but we can – through sharing our insight with brokers – make SMEs aware of some of the unanticipated pitfalls and that good guidance is out there.
“With the UK Bribery Act (2010), for example, a lot of businesses are unaware of how strict it can be. Hospitality that is ‘unreasonable or disproportionate’ can be considered a bribe and have profound implications.
“Similarly, with the current Data Protection Act and International Sanctions regulations, many SMEs who are starting to explore the world of online sales and marketing are unaware of the core requirements needed to be compliant and the severe penalties if, for example, your security or controls are deemed inadequate.”
Reacting to new legislation
However, regulatory change is not always bad news for business. For instance, recent changes to Health & Safety legislation help businesses more easily comply with the law by simplifying reporting of workplace injuries and by making greater flexibility around managing the provision of first aid training.
In contrast, a change that does introduce some more onerous requirements is the proposed reform of the EU’s Data Protection regulation, which is set to come into force some time next year, and businesses should be implementing changes now to protect their businesses.
These changes are designed to unify data protection practices across the EU and the penalties, if a breach should occur, are substantial. Fines can reach up to €1 million for breaching these rules, without counting the reputational cost to a business.
Regulations aim to protect people, secure privacy and promote growth in a fair trading environment. As we see them come through, we see where customers could be exposed and advise brokers accordingly
Russell Corbould-Warren, Head of SME Underwriting at Zurich
Russell highlighted another positive regulatory change that brokers could pass to customers.
“Under the Enterprise and Regulatory Reform Act 2013 [which aims to cut the costs of doing business in Britain], there is a change to how injured employees can bring a claim against their employer,” he said. “Under the new legislation, which came into force on October 1, employees may now need to prove common law negligence which is a welcome re-balancing from the previous strict ‘no fault’ liability basis of the past.
“For most regulations, good housekeeping and compliance come hand in hand – as well as making your staff aware of the policies and procedures in place this ultimately reduces the risk of non-compliance and can also help prevent claims arising in the first place.
With the above reform, the need for documented training, risk assessments and maintenance plans is ever more important and provides a base for mounting a potential defence of a claim.”
Russell added: “Changes in regulations like this are positive. They aim to protect people, secure privacy and promote growth in a fair trading environment. As we see them come through, we see where customers could be exposed and look to advise brokers accordingly.”
He concluded on a further positive note. “Anecdotally, it’s long been known that by complying with UK regulation, which is one of the most stringent in the world, you can be reasonably confident that you are benefitting from the received wisdom of many years’ legislative experience,” he said. “I think it’s fair to say that compliance with UK regulatory requirements makes your business more robust and viable internationally.”