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Regulatory Risk: What is it and how to mitigate it efficiently


The only constant in life is change, as the saying goes. Laws and regulations aren’t static; they fluctuate constantly, usually becoming more complex and intricate with each change. Regulatory risk mitigation is the ongoing task of monitoring for changes in the legal landscape, predicting potential compliance issues, and adapting policies and practices accordingly.

No industry is immune from regulatory risk. New and updated laws and regulations don’t just affect financial institutions or healthcare organizations—they change the way that corporations in every industry must operate. Still, some industries get hit harder than others.

For example, on the heels of the 2008 financial crisis, the United States passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Dodd-Frank Act”), followed by a host of related regulations. One study estimated that those new requirements increased US banks’ collective noninterest expenses by an average of over $50 billion per year.

In this post, we’ll define regulatory risks and explain how it differs from compliance risks. We’ll then take a look at the business risks of failing to anticipate and mitigate regulatory risk and outline a few examples of best practices to maintain regulatory compliance. Finally, we’ll discuss five ways organizations can mitigate regulatory risk and leverage technology to maximize their profits.

What is regulatory risk?

Regulatory risk describes the risk that new laws, rules, or regulations—or changes to existing laws, rules, and regulations—will cause organizations to no longer be in compliance with their requirements, thereby incurring costs, reducing profits, losing business, or otherwise damaging their operations, their reputation or their bottom line.

How can organizations avoid regulatory risk? The first step is to stay apprised of changes to applicable laws, rules, and regulations and monitor legislative and regulatory activity. With that information, organizations can proactively evaluate how new developments may create new risks or require changes in their policies or practices. Ultimately, organizations may adopt measures to mitigate those risks, keep costs down, and ensure their continued compliance.

Regulatory risk is a close relative of compliance risk, but it concerns itself with legal requirements in a slightly different way.

What is the difference between regulatory risk and compliance risk?

Regulatory risk flows from changes in legal requirements, whereas compliance risk involves the possibility that an organization is violating existing laws or regulations. The key difference between compliance and regulatory risk is that regulatory risk revolves around monitoring for and adapting to new developments while compliance risk is about maintaining and abiding by existing standards.

Regulatory risk can arise quite suddenly based on the decisions of lawmakers and regulatory agencies. As such, avoiding regulatory risk requires staying up to date with new laws and rules and continually reevaluating existing systems and approaches to ensure that they are still adequate.

For example, corporations have collected individuals’ personal data for decades, but data privacy laws are relatively new. According to the United Nations Conference on Trade and Development (UNCTAD), 137 out of 194 countries (71%) have established data privacy laws, and an additional 9% of countries have drafted legislation concerning data privacy. As more countries make data privacy a priority, those new data privacy laws will create regulatory risk for organizations that do business in those countries.

Compliance risk, by contrast, can exist at any time due to a failure to understand or accurately relay existing requirements, operational errors, a lack of oversight, inadequate controls, or other organizational deficits.

Let’s look at another example. An organization may be aware of an Occupational Safety and Health Administration (OSHA) regulation that requires certain employees to wear safety goggles. Avoiding compliance risk requires that the organization provide an adequate number of goggles and discipline employees who fail to wear them when necessary. Avoiding regulatory risk requires noticing when the regulation changes to require a different type of safety goggles and updating the supply of goggles to conform to that new standard.

When organizations focus only on maintaining compliance with existing regulatory requirements, and overlook the responsibility of monitoring for changes to head off regulatory risk, they put themselves in unnecessary danger.

The risks of regulatory noncompliance

Just because a law or regulation is new doesn’t mean it won’t be enforced. On the contrary, regulatory agencies may be even more zealous about enforcing new provisions because they want to make an early example out of organizations that fail to toe the line.

Staying on top of regulatory risk is imperative to an organization’s overall business strategy. Failure to mitigate such risks can result in:

·       time-consuming and disruptive regulatory investigations,

·       operational interruptions and loss of revenue,

·       litigation costs,

·       monetary penalties,

·       reputational damage, and

·       increased government oversight.

So, how do you detect regulatory risk and prevent it from harming your organization?

How to identify regulatory risk in your organization

You can identify potential regulatory risk by performing periodic regulatory risk assessments. A regulatory risk assessment involves a review of new and amended laws and regulations that are relevant to your organization, an evaluation of the risks posed by any new requirements, and a determination of the best course of action to take to mitigate those risks.

When performing a regulatory risk assessment, you should ask:  

1.     What new laws or regulations should your organization be aware of?

2.     Do any newly adopted provisions apply to your organization?

3.     What do those provisions require?

4.     Do your organization’s current practices already satisfy those provisions?

5.     Is your organization likely to continue complying with those provisions?

6.     What are the potential consequences of noncompliance (including legal, operational risk financial, and reputational impacts)?

7.     If your current practices aren’t sufficient, what does your organization need to do differently to comply with the new provisions?

If all that sounds like a lot, we understand. Let’s explore a few ways organizations can decrease the burden of anticipating and mitigating regulatory risk.

5 ways to efficiently mitigate regulatory risk

Evaluating and mitigating regulatory risk can be costly and time-consuming, especially where large volumes of data are involved. But fortunately, there are effective strategies that can improve the way you investigate and respond to potential risks. Here are five measures your organization can take to efficiently manage regulatory risk.

1.     Periodically perform broad regulatory risk assessments.

When it comes to regulatory risk management and mitigation, more is more. By performing regulatory risk assessments on a broad range of issues at regular intervals, you can spot potential issues early and address them before they turn into bigger problems. That way, you can avoid the negative consequences of regulatory noncompliance, and fulfill all the required regulatory obligations.

Performing routine regulatory risk assessments can also keep the task from becoming overwhelming; the more often you do it, the fewer issues you’ll have to tackle each time.

2.     Assemble project-based regulatory risk assessment teams.

 Most new projects and business ventures carry inherent risks. In addition to routine regulatory risk assessments, you can assign a team to perform a more specific risk assessment for each new endeavor your organization plans to undertake.

Ask the team to identify, evaluate, and brainstorm how to prevent potential risks before your organization commits to a course of action. Their assessment could include a review of pending bills or rule amendments regarding a particular subject area or an analysis of the legal requirements your organization would subject itself to by expanding into a new market.

3.     Perform cost-benefit analyses

Generally speaking, it costs organizations more to deal with the consequences of noncompliance than it does to ensure compliance in the first place. A study by the Ponemon Institute found that the average cost of complying with data protection regulations was $5.47 million while the average cost for an organization that was found not to be in compliance was $14.82 million.

But risk mitigation isn’t the only option, and the mere existence of a risk doesn’t necessarily mean that your organization must move mountains to mitigate that risk. Inherent risk is the potential that an organization will suffer negative consequences if a risk is allowed to exist without mitigation. Perform a cost-benefit analysis on any regulatory risk to weigh the inherent risks involved against the cost of mitigation measures. If a risk is unlikely to materialize or unlikely to cause serious consequences—and if compliance is likely to be substantially burdensome—the cost of mitigation may not be justified.

4.     Set deadlines for updating policies and procedures.

If your organization does decide to take action to mitigate regulatory risk, you may not have to spring into action immediately. Laws and regulations often take effect well after the date of their adoption to give affected parties time to respond. The important thing is that you’re mindful of those effective dates and update any relevant policies and procedures in advance. Streamline this process by setting quarterly or biannual deadlines to ensure you’re prepared on time without constantly worrying about when a new practice must be implemented.

5.     Leverage technology.

A thorough regulatory risk assessment will almost certainly involve data, whether it’s financial records, healthcare data, or environmental compliance reports. No matter what subject area is involved, you can’t—and shouldn’t—rely on manual searches and reviews to evaluate that data. Work smarter instead of harder by investing in technology that can do the most difficult part of regulatory risk assessment for you.

Be proactive about regulatory risk mitigation with ZyLAB ONE

Modern technology can simplify and streamline the regulatory risk mitigation process, protecting your organization from scrutiny and making it more profitable as a result.

ZyLAB designs solutions and services that enable proactive risk mitigation for organizations across every industry, from healthcare to finance to business. For example, ZyLAB ONE is an eDiscovery platform that can help with far more than just discovery. It allows users to search, review, and analyze data in place, helping them find the information they need much faster than they could with manual review, even when that information is scattered across multiple sources.

ZyLAB ONE also allows users to easily categorize and organize data sets and securely share data with others. The platform can process large volumes and different types of data simply and easily, revealing valuable insights and saving your organization time and money.

To learn more about ZyLAB and ZyLAB ONE, schedule a meeting or arrange for a demonstration.