Risks are faced by every organization. The risks faced are of different types. The impact of the various risks also varies. One such risk is regulatory risk. Regulatory risks are the uncertainties associated with regulatory or policy changes. A sudden change in any fiscal or economic policy may require for certain changes which may affect the expected profit from the business.
Possible impact of regulatory risks
- The operating costs in that sector may increase.
- The costs of compliance to the amended law may increase.
- The industry might as a whole lose its viability.
- The competition scenario might change a lot.(like permit for entry of foreign players or private players in a sector)
- Some activities may require new license or permission. Costs need to be incurred to procure and then to retain it.
- Modifications in tax laws can potentially decrease the “Net profit after tax” component.
- Even changes that will be retrospective in nature can eat away a major chunk of a company’s profit and adversely affect the liquidity and daily operations of that company.
Ways to reduce the risk:
- Ensure compliance of enforced laws and regulations
- Maintain transparency in daily operations and accounting
- Monitor the trends of changes in various regulatory policies.
I am familiar with many regulatory risks in business due to my previous employment in the medical device industry. Regulatory risks and laws surrounding them apply to almost every single business. Especially when you are delivering a commercial product for sale. Reducing your risk can also reduce your insurance policies and increase safety for your customer.