How exposed are businesses in the current regulatory landscape?
How exposed are businesses in the current regulatory landscape? | Insurance Business America
Risk Management News
How exposed are businesses in the current regulatory landscape?
Remaining ahead of the curve will require a lot of work
Risk Management News
By
Kenneth Araullo
Professional services firms are increasingly facing regulatory scrutiny, with exposure levels now rivalling or surpassing those associated with civil claims. According to James Roberts, a partner at Clyde & Co, this trend has been observed across multiple jurisdictions, highlighting the growing complexity of the global regulatory landscape.
Clyde & Co’s professional services firms risk heatmap for 2024 indicates that in 11 out of 13 jurisdictions surveyed, regulatory scrutiny and enforcement are at least a medium risk. In key regions such as England and Wales, China, Singapore, South Africa, and India, the risk level is considered high. Factors contributing to these assessments include the robustness of regulatory frameworks, the proactivity of regulators, and the severity of sanctions.
Roberts notes that regulators are becoming more international in their approach, increasingly active, and better resourced, with expectations of cooperation rising alongside escalating fines. Even in jurisdictions where professional regulatory frameworks are relatively new, like the Middle East, the trend is towards greater exposure.
A significant theme emerging across the global regulatory environment is the increasing globalisation of investigations. Notable cases, such as the LIBOR and forex-fixing scandals, saw multiple regulators from different jurisdictions imposing fines on a single firm.
This trend underscores a growing level of cooperation among international regulators, especially in areas like bribery and corruption enforcement.
For example, in 2017, the US, Brazil, and Switzerland collaborated on investigations into Brazil’s largest construction firm, Odebrecht. The global sharing of information and resources facilitated these efforts. However, regulatory and legal conflicts, such as those related to document access, pose challenges.
Roberts highlights issues like the French “blocking statute,” which can prevent the transfer of audit working papers outside China without approval from PRC authorities. Similar restrictions are present in the Middle East, where jurisdictions like Bahrain criminalise the sharing of certain corporate information abroad.
Whistleblowing in the regulatory landscape
Whistleblowers play a critical role in exposing wrongdoing, with various jurisdictions enhancing protections. The EU’s whistleblowers directive and similar measures in the UK, US, France, Italy, and Germany aim to safeguard whistleblowers. Roberts explains that in regions where regulatory enforcement is perceived as weak, whistleblowing often brings issues to light.
For instance, in the Middle East, new regimes have been established in offshore jurisdictions like the DIFC and ADGM to combat fraud, although a cultural reluctance to whistleblow remains, compounded by criminal defamation laws.
There have been cases where professional firms faced sanctions for attempts by individuals to cover up mistakes or mislead regulators. Such instances serve as a caution against actions that could exacerbate issues, with Roberts noting the potential for severe sanctions.
The firm’s response, including self-reporting and cooperation with investigations, can mitigate consequences. The disparity in fines for similar misconduct—ranging from under $1 million to $100 million—often reflects the perceived extent of the cover-up and the firm’s cooperation with regulatory processes.
The politicisation of regulation
The increasing politicisation of regulation is another trend affecting professional services firms. This can be seen in various countries, where political dynamics influence regulatory actions. An example is the dispute between Chinese, US, and Hong Kong authorities over access to audit information, impacting accountancy firms. Additionally, political scrutiny, such as parliamentary inquiries, can lead to unpredictable processes with significant reputational risks.
Roberts points to instances in the UK where accountants and lawyers were summoned to testify before parliament regarding the BHS and Carillion cases. Similar political scrutiny has occurred in Spain, the Netherlands, and South Africa. In the UK, concerns about Russian oligarchs using the English courts and SLAPP tactics (strategic litigation against public participation) have spurred regulatory focus, with the Solicitors Regulation Authority (SRA) investigating related cases.
The public perception of professionals as facilitators of poor corporate behaviour has heightened, particularly in tax planning debates. This is evidenced by global reactions to scandals like the Panama and Paradise Papers. Regulatory focus on tax advisor misconduct and involvement in corruption has been prominent in Australia and South Africa, respectively.
The UK’s Economic Crime and Corporate Transparency Act 2023 expands the SRA’s powers, including the authority to issue unlimited fines in specific cases.
Recent years have also seen a blurring of the line between professional and personal conduct, with implications for misconduct evaluations. This trend suggests a potential overreach by regulators into personal matters, raising concerns about the boundaries of professional accountability.
The growing complexity of regulatory risks presents significant challenges for professional services firms. Regulatory actions can lead to financial penalties, reputational damage, and complicate related civil claims. For example, after the collapse of Wirecard, its auditors faced regulatory scrutiny from Germany’s auditor oversight body, APAS, along with numerous civil suits from shareholders.
Roberts highlights the increasing “weaponisation” of regulatory complaints, where claimants use these complaints to gather information for civil litigation. This tactic, while not new, is becoming more prevalent in professional disputes.
“The increased globalisation of regulatory investigations coupled with the more prominent role of whistleblowers, the danger associated with cover ups, increased political scrutiny and a sometimes-negative public perception of some professions linked to poor corporate behaviour, all point to the need for professional services firms to remain acutely aware of the increasingly complex terrain of regulatory risk and to carefully prepare to remain ahead of the curve,” Roberts said.
What are your thoughts on this story? Please feel free to share your comments below.
Keep up with the latest news and events
Join our mailing list, it’s free!
