REGULATORY RAPPORT: New initiatives to promote engagement and collaboration with regulators can help businesses address compliance challenges more effectively.

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Author: Neil Hodge
Date: June 2021
From: Risk Management(Vol. 68, Issue 6)
Publisher: Sabinet Online
Document Type: Article
Length: 1,959 words
Lexile Measure: 1520L

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MORE OFTEN THAN NOT, when companies clash with a regulator, the regulator comes out on top. Even without any action taken, the knowledge that a company and its activities are on a regulator's radar is enough to make most think twice about what they are doing and how they are doing it.

Regulatory fines can be massive and the subsequent costs to remediate damage and compensate customers can be even more punitive. For example, BP's $20.8 billion settlement with the U.S. Department of Justice over the Deepwater Horizon oil spill in the Gulf of Mexico remains the biggest corporate fine to date. However, the company has paid more than three times that amount in compensation and remediation.

Failure to heed a watchdog's warnings or to fully disclose key details to a supervisory authority can also prove a costly mistake. In June 2020, cryptocurrency firm Telegram Group agreed to return $1.2 billion to investors and pay an $18.5 million civil penalty after the U.S. Securities and Exchange Commission (SEC) charged it with pursuing a digital token coin offering to raise cash from investors despite being barred from doing so. The regulator took the position that initial coin offerings (ICOs) are, in effect, securities offerings and therefore subject to SEC offering rules, requiring companies to file registration and disclosure documents. As Telegram did not do this, its ICO was disallowed. According to the SEC, had Telegram worked with the agency instead of launching the token offering without any oversight, the outcome might have been different.

"Whether you are the regulator or the regulated, a good relationship is fundamental to good governance and can save a whole world of pain," said Phillippa Ellis, head of the business crime and investigations practice at Capital Law. "And key to a successful relationship is to remember that regulators do not like surprises. They would far rather a company engage in a conversation before running afoul of their rules or guidance, and for companies to self-report when they do."


Over the past few years, regulators in several countries have made a concerted effort to forge working relationships with companies. This is particularly common in fast-moving industries where regulation is often slower than innovation. Agencies have surmised that cooperation may lead all parties to a greater understanding of what companies are trying to develop, what a regulator's concerns may be, and how a workable solution can be achieved without imposing rules first or taking enforcement action later.

Indeed, regulators in a wide range of industries have taken steps to encourage companies to approach them first before going to market with a product or service that may cause harm. In some sectors, regulators have set up "sandboxes" where companies can road-test products in a safe environment prior to launch. While there is no guaranteed assurance, this arrangement allows companies to gain input and direction from the regulator as to whether the product or service complies...

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