Nine out of ten executives expect the business costs of regulation to rise over the next three years, according to a new global survey of senior risk managers by the Economist Intelligence Unit.
Regulation has had unforeseen consequences for business . Over a third of executives in the survey say that regulation has stifled innovation in their companies. Roughly the same proportion fear their firms will become less competitive compared with rivals operating in less regulated countries. Executives acknowledge the need for regulation, but the majority believe the benefits of recent regulations are outweighed by the problems.
To pay for the extra costs, businesses say customers will foot the bill for rising regulatory costs. Nearly 90% of companies believe that the cost of regulation will rise over the next three years; 36% of them believe it will rise substantially. The cost of compliance is ultimately passed on to customers, according to two-thirds of executives.
Better yet, executives provide strategies to stay ahead of regulators. The two best strategies for pre-empting regulatory change are to adopt best practice before it is mandated, and to maintain regular communications with domestic and international regulators, according to the survey. Direct lobbying of governments is deemed far less effective.
“Regulation is having a major – and sometimes unforeseen – impact on companies’ global operations,” says Daniel Franklin, editorial director of the Economist Intelligence Unit. “Anticipating how regulatory rules may be interpreted, changed and augmented has become a critical task for risk managers.”
Companies are struggling to get to grips with international regulation. Increased complexity in the regulatory environment is one of the biggest challenges facing companies, with regulations in one country having an increased impact on firms’ global operations. Only 17% of companies are very confident that they are compliant with regulations in their overseas markets, compared with 40% that believe they are compliant with regulations in their home markets. Only one in five companies have high confidence that they are compliant with international regulations such as Basel II and International Accounting Standards.
Not surprisingly, regulation is a significant deterrent to overseas investment. Fully 57% of executives in the survey say that their perception of a country’s regulatory burden has an important or very important impact on decisions to invest, compared with only 4% who believe it is of low importance. Over a third of companies have been deterred from investing in a new market because of regulatory issues. These findings have particular implications for the US, which is seen by executives as the country where regulatory burdens are increasing most significantly.
The survey, which captures the views of CEOs, CFOs, Chief Risk Officers and other executives responsible for managing risk, indicates that companies now see regulatory risk as the most significant threat to business, and a greater source of concern than country risk, market and credit risk, terrorism and natural disasters.
The survey results are published today in Regulatory risk: Trends and strategies for the CRO, a report by the Economist Intelligence Unit sponsored by ACE Insurance, Cisco Systems, Deutsche Bank, KPMG and IBM. The findings, which shed light on the business risks and problems posed by changes in the regulatory environment, are based on a survey of 230 risk managers. Just under 40% of executives are from the financial services sector, with the rest drawn from a cross-section of industries.