What Is Regulatory Risk?

There are various risks that surround any company. Some of these may come from external factors, while others may relate to internal operations. For external risks, there are five areas that may affect the risks faced by a company. These include political, economic, social, technological, environmental, and legal matters. Among the risks that come because of political and legal factors is regulatory risk.

What is Regulatory Risk?

Regulatory risk refers to any risk that comes due to changes in regulations or legislation. However, these risks are only worth protecting against if they affect a company or security adversely. Regulatory risks may impact a specific company or an industry as a whole. Following and satisfying all regulations is crucial in business success. Therefore, regulatory risks can result in an adverse change in a company.

Regulatory changes come due to changes in laws or regulations. These changes usually come from a regulatory body. For example, for publicly-listed companies, the regulatory risk may come from changes in the stock market regulations. However, regulations may also relate to the government. Therefore, the policies of the jurisdictions in which a company operates are also relevant to regulatory risk.

How does Regulatory Risk work?

Companies and businesses need to abide by various rules and regulations to operate properly. These rules and regulations exist to direct them on how to function. In some cases, these may also exist to protect a company's stakeholders. For example, stock exchange rules and regulations help provide shareholders with security against fraudulent activities.

For most regulations, not abiding by them is not an option. In case companies do not meet the specific requirements for each regulation, they may face penalties and legal action. Similarly, failing to satisfy them may also come with reputational risks. For example, customers may not be willing to transact with companies that do not follow environmental regulations.

Overall, keeping track of regulations and meeting the requirements is crucial for companies. However, these regulations may also change from time to time. For example, governments may alter their policies, which can result in a change in regulations. Therefore, companies must ensure that they are aware of any regulatory changes that may affect them adversely.

Companies usually have a risk management department that overlooks all these matters. This department follows all regulatory changes and ensures proper regulatory compliance. Similarly, the internal audit department may also track regulations and ensure the management complies with them. Although regulatory risks are not as common as others, they are still crucial and can impact a company's operations.

Where does Regulatory Risk exist?

Regulatory risks relate to changes in regulations that impact business activities. Usually, these risks are common for companies that follow a high number of regulations. For example, the regulatory risk may exist in the stock market due to the stock market regulations. Similarly, it is common for financial institutions to deal with these risks more than others.

Regulatory risks can come from various sources. For example, changes in tax policy reforms each year can bring about regulatory risks with them. Similarly, changes in laws such as minimum wage laws can impact a business.

Conclusion

Regulatory risk is the risk that changes in regulations may adversely impact a company’s operations. For every company, identifying and complying with all regulations is crucial. However, these regulations may change with time and accompany adverse impacts. Regulatory risk is most common for companies that operate in a highly-regulated environment.

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