When the regulator knocks, will you be ready? - Nabarro

When the regulator knocks, will you be ready Survey 2008
REPORT
When the regulator knocks,
will you be ready
Survey 2008

Executive summary
More than half of the respondents to our survey were not aware that
their businesses were regulated by the Environment Agency, the Office
of Fair Trading or the Pensions Regulator, despite the fact that all of these
watchdogs have jurisdiction over every company operating in the UK.
Furthermore, a significant proportion of those surveyed did not realise that
the European Commission and the Health and Safety Executive had powers
over their activities.
Despite this apparent ignorance, 87% of the individuals we questioned agreed
that the level of regulation and scrutiny facing their companies had increased
over the last five years, often resulting in heightened workloads and a greater
administrative burden because of tighter controls on internal procedures.
The responsibility for dealing with the reputational risks posed by the
regulators falls to the main board at 67% of the companies in our poll, and
in the vast majority of cases, those responsibilities are never shared with
other members of the business through training sessions. In all 70% of those
interviewed said that they had never run a training programme for their staff
on diversity matters – despite the fact that employment tribunals have powers
to hand out unlimited fines for discrimination cases – and 69% had never
trained employees on environmental regulations.
Therefore, whilst there is a general appreciation of the increasing impact
of regulatory bodies, it is clear that in most companies there is a limited
understanding of compliance obligations, and staff across the wider
organisation are rarely kept abreast of regulatory responsibilities.
This survey was carried out in 2007. A total of 70 telephone interviews were
conducted with senior professionals in a range of listed companies, private
firms and financial institutions operating in the UK.

When the regulator knocks, will you be ready Survey 2008
“Our experience has shown that the rapid increase in
regulation - and consequent increase in the exposure to
reputational and regulatory risk - is one of the biggest
worries for our clients. Maximising awareness and
minimising risk is therefore paramount.”
Jonathan Warne, Head of Dispute Resolution
1
What is your role
Corporate finance director 14%
Head of legal/general counsel
13%
Managing director
10%
Director
Manager
7%
7%
Corporate finance executive
CEO
Compliance manager/director
6%
6%
6%
Fund manager
Legal adviser
4%
4%
CFO
Company secretary
Partner
3%
3%
3%
Other
14%
5% 10% 15%
2
Do you think the level of regulation
and scrutiny has increased over the
last five years
Yes
No
9%
87%
Don’t know
4%
20% 40% 60% 80% 100%
The vast majority of our respondents – 87% – believe that regulation and
scrutiny has increased for their businesses in the last five years. When asked to
go into more detail about how this shift impacts their daily pressures, 15 of
those that we surveyed said that their workloads have increased as a result,
particularly in terms of administrative demands.
Others pointed to changes that included the greater monetary cost of
compliance, the need for tighter controls of internal procedures, additional
administrative costs and more bureaucracy across the board.

3
Which of the following regulatory
authorities is your business subject to
Health and Safety Executive
76%
Financial Services Authority
62%
European Commission
The Pensions Regulator
The Environment Agency
Office of Fair Trading
The Takeover Panel
51%
49%
44%
39%
37%
Sector regulator eg. OFCOM
7%
10%
20%
30%
40%
50%
60%
70%
80%
This table shows the percentage of our respondents who believed that their
businesses were subject to regulation by each of the watchdogs mentioned.
In fact, most of the companies interviewed, and the majority of companies
operating in this country, are subject to scrutiny from all of the bodies
identified, with the exception of the Financial Services Authority, which only
regulates providers of financial services and other sector-specific regulators.
“Our clients are aware that regulators exist and that
they are important, but it is impossible for any one
person to understand the full range of the regulators
and their powers.”
Rob Moulton, Financial Services Partner

When the regulator knocks, will you be ready Survey 2008
Who are the regulators
The Health and Safety
Executive
The Health and Safety Commission is
responsible for health and safety
regulation in Great Britain. The
Health and Safety Executive (HSE)
and local government are enforcing
authorities who work in support of
the Commission.
The HSE’s mission is to protect
people’s health and safety by
ensuring risks in the workplace are
properly controlled. It looks after
health and safety in nuclear
installations and mines, factories,
farms, hospitals and schools, offshore
gas and oil installations, the safety of
the gas grid and the movement of
dangerous goods and substances and
many other aspects of the protection
of both workers and the public. Local
authorities are responsible to HSC for
enforcement in offices, shops and
other parts of the service sector.
The Financial Services
Authority
The FSA is an independent
organisation responsible for
regulating financial services in the UK.
It was set up by government, and the
government is responsible for the
overall scope of the FSA’s regulatory
activities and for its powers.
The FSA regulates most financial
services markets, exchanges and
firms. It sets the standards that they
must meet and can take action
against firms if they fail to comply.
The European Commission
The European Commission is the
executive branch of the European
Union. It is a cabinet of 27
Commissioners who are responsible
for proposing legislation,
implementing decisions, upholding
the EU’s treaties and the general dayto-day
running of the EU. It is the
only European body capable of
initiating new laws, and once
legislation is passed, it is the
Commission’s responsibility to ensure
it is implemented.
The Pensions Regulator
The Pensions Regulator is the UK
regulator of work-based pensions
schemes, with the specific objectives
of protecting the benefits of
members of these schemes;
promoting good administration of
work-based pensions schemes; and
reducing the risk of situations arising
that may lead to claims for
compensation from the Pension
Protection Fund.
The regulator oversees schemes
rather than employers, but its
coverage includes most employers
with at least five employees. Workbased
pension schemes include any
scheme that an employer makes
available to employees, including
occupational schemes, any personal
pension schemes where employees
have direct payment arrangements,
and any stakeholder schemes.
The Environment Agency
The Environment Agency is the public
body responsible for protecting and
improving the environment in
England and Wales. Its job is to make
sure that air, land and water are
looked after by everyone, and every
year it brings hundreds of cases
against companies and individuals
that don’t take their environmental
responsibilities seriously.
The Office of Fair Trading
The OFT is the UK’s consumer and
competition authority, responsible
for making sure markets work well for
consumers. It does this by
encouraging businesses to comply
with competition and consumer law,
and to improve their trading practices
through self regulation; acting
decisively to stop hardcore or flagrant
offenders; studying markets and
recommending action where
required; and empowering consumers
with the knowledge to make
informed choices.
The Takeover Panel
The Panel is an independent body set
up to administer the City Code on
Takeovers and Mergers, and to
supervise and regulate takeovers and
other matters to which the Code
applies. Its central objective is to
ensure fair treatment of all
shareholders in takeover bids.
The Code applies to all offers for
companies that have their registered
offices – and their securities
admitted to trading on a regulated
market – in the UK, the Channel
Islands or the Isle of Man.
It also applies to private companies in
certain circumstances, such as if any
of their securities have been admitted
to the Official List at any time in the
ten years prior to the offer; or if
dealings in their securities have been
published on a regular basis in the
preceding decade.
The Code covers companies with
registered offices in the UK and
securities trading on regulated
markets in one or more European
member states; companies with
registered offices in another member
state whose securities are admitted
to trading only in the UK and, in
certain cases, to companies with
registered offices in other member
states whose securities are traded on
exchanges in more than one member
state, but not on a regulated market
in the member state where they have
a registered office.
Sector regulators
These include the communications
regulator OFCOM, the water
regulator OFWAT, The Office of Gas
and Electricity Markets (OfGEM),
The Office for Standards in
Education (OFSTED), and the Office
of Rail Regulation (ORR). Each has
statutory powers to regulate
participants in the industries for
which it takes responsibility.

4
Have you undertaken training in the
following areas
70%
60%
50%
40%
30%
20%
10%
10% 11%11% 68%
10% 10% 10%
70%
69%
32% 31%
22%
11% 15%
9% 11%
In the last 6 months
In the last year
More than a year ago
Never
43%
13%
10%
34%
60%
18%
10% 12%
Competition
Diversity
Environment
Health & Safety
Money laundering
Pensions
Aside from the areas of health and safety and money laundering, in all other
cases over 60% of our respondents had never trained their staff about
compliance with regulatory responsibilities. This is despite potentially ruinous
penalties and reputational risks posed by failure to comply with the watchdogs.
To illustrate the penalties of non-compliance - and therefore the importance
of getting it right - on the opposite page are a few examples of recent
enforcement actions.

When the regulator knocks, will you be ready Survey 2008
ENFORCEMENT ACTION
Competition
The potential penalties for non-compliance with UK and EU competition laws
include fines of up to 10% of annual group turnover; invalidity of agreements;
damages claims; personal fines and imprisonment for individuals involved in
cartels, in some cases; and company directors can be disqualified.
Diversity
If an employer loses an unfair dismissal case at an employment tribunal, an
order can be made for re-instatement of the claimant, re-engagement on
similar terms or financial compensation. Financial compensation is by far the
most common, and there are no limits on the amounts that tribunals can
award in cases of discrimination. Employers have been advised to strengthen
anti-discrimination and equality policies following large awards.
Environment
The courts are taking environmental damage more seriously. In their 2006
environmental performance review the Environment Agency reported that
successful prosecutions against companies totalled over £3.5 million in fines
(with an average of £11,800) compared to £2.7 million in 2005 (with an
average of £8,600). The biggest offender was Thames Water, which was fined
£191,600 for 15 events.
In all, 380 individuals were prosecuted, including 29 company directors. Six
directors were fined £5,000 or more and five received other penalties, including
two custodial sentences totalling 14 months.
Pensions
The Pensions Regulator has the power to investigate schemes, require
remedial steps to be taken and act against employers who seek to sidestep
their pension obligations. The watchdog has the power to take action, on
behalf of a scheme, to recover unpaid contributions from the employer, freeze
or wind-up a scheme, prohibit trustees from acting where considered unfit,
impose fines, and prosecute certain offences in criminal courts.
In particular, if the regulator believes an employer is deliberately trying to avoid its
pensions obligations, it can issue Contribution notices, requiring a specified amount
to be paid into the scheme; Financial support directions, which require financial
support to be put in place for an underfunded scheme; or Restoration orders, which
mean that if there has been a transaction at an undervalue involving the scheme’s
assets, the regulator can take action to have assets restored to the scheme.

“Many regulators have a broad armoury of powers to search premises and
take away documents. In some cases, it is a criminal offence to fail to cooperate
with an investigation. Companies are therefore well advised to develop
proper internal procedures to ensure that staff are aware of their rights and
obligations in these situations.”
Cyrus Mehta, EU/Competition Partner
5
Who within your business has
primary responsibility for managing
reputational risks posed by
regulators
70%
60%
50%
40%
30%
67%
20%
10%
The main
board
16%
10%
Head of
legal
Dedicated
board director
4% 2% 1%
CEO
Managing
director
Other
6
Do you have internal procedures for
regulatory crisis management
90%
80%
70%
86%
60%
50%
40%
30%
20%
10%
9%
5%
Yes No Don’t know
Whilst many of the companies we surveyed did not have training
programmes in place, the vast majority – 86% – do have policies set up to
deal with regulatory crisis management. The management responsibilities
for dealing with the reputational risks inherent in dealings with the regulator
generally sit at board level, which is a reflection of the importance attached
to such matters.

When the regulator knocks, will you be ready Survey 2008
Case study
Corus fined £1.3m by
the Health and Safety
Executive
In December 2006, the steelmaker Corus was fined £1.3m and ordered to
pay costs of £1.7m by the HSE following the deaths of three workers in 2001
from a blast furnace explosion at the company’s Port Talbot site.
Corus pleaded guilty before Swansea Crown Court to two charges of failing
to ensure the safety of its employees and others, brought by the HSE under
the Health and Safety at Work Act 1974.
Case study
Financial Services
Authority
The Financial Services Authority has regularly used its disciplinary powers to “name
and shame” well-known players in the UK financial services sector. FSA investigations
take up a significant amount of management time, and can cause serious
reputational damage. FSA has recently made it clear that it intends to make increased
use of its criminal powers, as well as its administrative ones. In October 2007,
Margaret Cole, Director of Enforcement, said “We recognise that effective deterrence
involves ensuring both people fear being caught and that they fear the consequences
of being caught, with the risk of custodial sentences playing a real part”.
Case study
ThyssenKrupp fined
€479m by the European
Commission
In February 2007, the German conglomerate ThyssenKrupp was fined over €479m
for its role in a price fixing scandal, which saw the Commission hand down fines
worth a total of €992m to companies involved. The cartel operated between
1995 and 2004. In this time members rigged tender prices, shared markets and
exchanged confidential information .
ThyssenKrupp was found to be a repeat offender, and its fine was increased by 50%.
The fines are the largest ever fines imposed by the Commission for cartel violations.
Case study
Argos fined £15m by the
Office of Fair Trading
In October 2006, the Court of Appeal upheld an OFT decision relating
to price fixing in the toys and games market. Argos and Littlewoods were
both found guilty in 2003 of entering into agreements to fix the prices of
Hasbro toys and games between 1999 and 2001; Argos was fined £15m and
Littlewoods ordered to pay £4.5m.
Hasbro was granted full leniency because it provided the evidence that initiated
the investigation, and therefore had its potential £15.6m penalty waived.

7
Have you been investigated by a
regulator (apart from routine visits) in
the last 12 months
90%
80%
70%
60%
50%
40%
30%
86%
20%
10%
4%
10%
Yes No Don’t know
Only 4% of our respondents had been investigated by a regulator in the last
12 months and those investigations had been conducted by the European
Commission, the Financial Services Authority or Ofcom. However, despite
the fact that the majority of respondents have not yet had a personal
experience of a formal investigation, they are increasingly exposed to risk of
significant penalties. With regulators such as the FSA adopting a principlesbased
approach to their policing of the industry, the penalties for noncompliance
are growing.
The Health and Safety Executive reports that the average penalty imposed
by the courts following work-related fatalities has increased from £17,000 in
1999/2000 to £30,000 in the year 2004/05, as the enforcement activities
of the regulator has become more robust.

When the regulator knocks, will you be ready Survey 2008
Conclusion
Companies operating in the UK are subject to increasing regulation and must
deal with an ever-growing number of regulatory bodies. Although recognising
the significant increase in the power of watchdogs, the professionals that we
surveyed were largely unaware of the number of bodies that oversee their
activities, and as a result were unprepared for the range of potential scrutiny.
Most of the companies surveyed have in place internal procedures to deal with
regulatory crisis management, which suggests an awareness of the risks of getting
things wrong. But ensuring compliance requires an understanding across the
business of what has to be done to stay within the rules and our survey found that
very few companies are training their staff on a regular basis in important areas.
Over 60% of the respondents to our survey had never given their staff any
training on pension regulations (60%), environmental obligations (69%),
diversity rules (70%) or competition issues (68%). The consequences of mistakes
in these areas are severe, and often the lapses come from employees below
board level. A case in point is the investigation by the Office of Fair Trading
and the US Department of Justice into British Airways. The airline has given its
commercial director, Martin George, and head of communications, Iain Burns, a
“leave of absence” during a probe into its ticket prices and fuel charges and the
OFT has said it is targeting individuals, without identifying those concerned.
The penalties for regulatory breaches are growing, with the Health and Safety
Executive witnessing a doubling of the amounts fined to individuals involved
in cases concerning fatalities in the workplace between 2000 and 2005. With
the approval in July of the Corporate Manslaughter and Corporate Homicide
Act by Parliament, companies will also now face prosecution for manslaughter
where their gross negligence leads to the death of individuals.
At employment tribunals, the maximum compensation awarded for a race
discrimination case in 2006 was £984,000, compared to a previous high
of £635,000 in 2004. For unfair dismissal, the highest fine in 2006 was
£478,000, compared to just £75,000 in 2005.
In the face of this growing regulatory risk, all businesses in the UK need a
thorough understanding of the organisations they are governed by and need
policies in place to deal with responsibility for compliance across the company.
Given the variety of regulators, businesses need a unified approach to handling
regulatory issues. It is unlikely that any one person within a business will be an
expert in all the different regulations, but they will nonetheless need to be able
to coordinate a response no matter which regulator comes knocking.

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