Published on: 7 July 2019
Discussions with insurance companies indicate that even where non-compliance with specific legislation has not been subject to legal action by the Government, it is still classified as breaking the law. At worst, the company may not be operating with valid insurance. At best, non-compliance or bare-minimum tick box compliance is viewed by the insurance industry and financial sector as an indicator of Non-Financial Risk (NFR).
Non-financial risk is not to be underestimated. Examples include:
Operational Risk (fraud, misconduct, failure of internal controls/audit systems, natural disasters)
Accounting risk (changes in GAAP/IFRS and comparability issues)
Regulatory risk (non-compliance)
Legal risk (counterparty does not honour a contract)
Tax risk (e.g. incoming implementations of the EU anti-tax avoidance directive)
Political risk (Brexit)
The business case for using non-financial risk data is building rapidly. The collapse of Carillion came as a surprise to some, but key indicators were in plain sight in the non-financials. According to a report written by Deloittes: “High-severity losses derived from isolated and sometimes interconnected NFRs will likely continue. Largely because of that realization, NFRs have become a growing concern to FIs, CROs, CCOs, CEOs, boards and regulators.” And in its 2015 annual risk management survey of major financial institutions, EY found that 89% of banks reported increased board and senior management attention to such risks.
As independent consultant in Risk and Insurance Stephen Sumption points out: ““No insurer will pay a claim for an illegal act, it would be against Public Policy, however the insurer would not be able to refuse the claim on those grounds without proof. However, a systematic failure to comply with the law or to be able to demonstrate that necessary and effective procedures are in place would probably be a material non-disclosure and enable insurers to repudiate the claim or possibly void the policy. In such circumstances Non-Executive Directors would be particularly exposed.”
Says Stuart Gallemore, CTO of TISCreport, “TISCreport started its journey monitoring compliance and non-compliance with the modern slavery act. By monitoring other facets of non-financial risk indicators we can see a strong business case emerging for not just tick-box compliance, but live, evidenced compliance. The beauty of a system containing live data nurtured by machine learning and AI is that every single company user can play their part as a source of their own NFR data. By sharing it, they can benefit from the returns of others sharing their own pieces of the jigsaw puzzle.”
One example from the UK is the 2017 Payment Practice Reporting Regulation, which was launched to tackle late payment to suppliers. But according to TISCreport 8524 out of 14732 companies meeting the thresholds for compliance with PPR have not yet done so and are potentially not compliant. The BASEL II definition of financial distress, 90 days overdue on credit agreement payments, is the operational definition for major lenders. And yet, companies that regularly demand 90 days credit and pay their smallest and most vulnerable suppliers sometimes six to twelve months late are not assessed in the same way. This should be used as part of standard due diligence when being pre-qualified by banks, insurers and of course their customers.
The UK Independent Small Business Commissioner, Paul Uppal said: “Late payment is a huge issue in the business environment and impacts the economic wellbeing and mental health of business owners. I am currently working in collaboration with Lloyds Bank to highlight business payment practices and performances using the Duty to Report data. We have produced a report which will provide a geographical and sector analysis on how many companies are paying suppliers late. As a body we look forward to working collaboratively with stakeholder organisations like TISCreport to ensure Britain becomes an exemplar for business conduct and ethical payment practices”.
Says Jaya Chakrabarti MBE, CEO of TISCreport: “In our mission to drive exploitation and corruption out of supply chains, it is hard to ignore the stark reality facing many suppliers deeper in supply chains. Late payment is sometimes the only thing keeping an inefficient, financially hemorrhaging company in business. Suppliers are then often forced to underpay staff to manage the cashflow crisis that follows. This vicious cycle can and will be stopped with proper use of new sources of NFR data and supply chain transparency data.”
Equally, companies that have not complied with the Supply Chains Transparency reporting requirement of the Modern Slavery Act, or complied to the bare minimum requirements of the law are more likely to be inadvertently facilitating exploitative practices within their supply chains. The rocket science is not in the identification of compliance failures within companies but the nature of those failures and the impact on their buyers and suppliers.
As insurers and financial institutions get to grips with making use of NFR data, concerns have been raised by some that this will only drive 100% ineffective (tick-box) compliance to the detriment of higher levels of good and beyond best practice compliance. However, with new, emerging AI and machine learning compliance assessment tools, buyers will soon be able to assess the risks hidden within non-financial reporting without having to read the reports. Tick-boxers will more than likely be ranked to be higher risk by their buyers than those who have demonstrated genuine efforts to make their compliance impactful.
Jaya adds, “Our bots can now strip out the gloss from non-financial reports to get to the actual tangible actions taken. The days of tickbox compliance are numbered.”
The TISCreport platform enables all ethical buyers across all sectors to quickly check their supply chains for available corporate transparency data. By uploading their suppliers from their systems, buyers can maintain the transparency of their supply chains and simultaneously reduce both their supply chain risks and the risks they present to their own customers.
