Wide reaching

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The new EU regulations relating to the manufacture and use of chemicals may well present massive implications for companies inside and outside the EU. But Christopher Bryce explains that evidencing effective risk management could equally secure competitive advantages

On 1 June, A new regulation known as Reach - the Registration, Evaluation and Authorisation of Chemicals - came into force within the European Union. Some readers, perhaps many, may not yet have heard of Reach and will be questioning the significance of another piece of regulation introduced by Brussels. However, over the 11-year period that Reach will be implemented, it will have a significant impact upon business, the environment and, ultimately, our own lives and prosperity.

Reach is designed to close the knowledge gaps relating to the health and safety risks posed by 'existing' chemicals (those placed onto the market before 1981). It will require the testing and assessment of approximately 30,000 pre-1981 chemical substances either manufactured or imported into the EU in a volume greater than one tonne per year, as well as all new chemicals from the 1 June - the date Reach came into force. The objective will be to identify those chemical substances, which are harmful to human health, safety and the environment and restrict their use within the EU.

Chemical reaction

Reach will apply to all manufacturers of chemicals within the EU, all users of chemicals within the EU to the extent that their suppliers do not comply with regulation and, finally, all importers or exporters of chemicals to the EU. In reality, the regulations will have a global effect, as large parts of the chemical industry are located outside the EU. Simply put, if a chemical substance is to be used in the EU, but is supplied from outside, then that chemical substance will have to comply.

While the primary objective of improving health, safety and the environment within the EU can be readily admired and supported, as with much legislation and regulation the devil is in the detail. Potential concerns exist about Reach's impact upon risk and insurance, but there are also competitive advantages that can be secured if these risks are managed effectively.

The regulation imposes a duty of care, to be owed both to customers to whom a chemical substance is supplied, as well as to those who work with those chemical substances. In the absence of how duty of care is to be defined - there being no reference to negligence in the regulation - it remains open to debate how any failure in compliance with this duty of care will be interpreted. But it can be anticipated that the legal system will provide that clarity when required. Reach also remains silent on whether the regulation applies retroactively; if a chemical substance is not approved for use on safety grounds, what is the position if that chemical substance has been in widespread use for many years within the EU?

The risk ramifications are obvious; Reach will require transparency and control of the supply chain. For users of chemicals, it will be necessary to identify the source of all substances used as consumables within the manufacturing process. Also, users of that chemical substance must ensure that they can discharge the duty of care that they will hold towards other users and customers.

Secondly, businesses must plan for the impact that a chemical substance becoming unavailable would have on their operations - either as a result of failure during the evaluation process or economic withdrawal by the manufacturer. After all, Reach will be an expensive process and some manufacturers may remove certain chemicals on economic grounds. However, there is the opportunity to secure a commercial advantage by being able to evidence transparency and control of the supply chain to customers. This will be particularly important if the legal liability positions under Reach remain unclear.

For manufacturers, there will be a requirement to ensure that the information they are supplying to their customers is clear and appropriate to allow them to discharge their duty of care. A competitive advantage can be secured here too if good supply chain risk management is evidenced.

As non-compliance with Reach is not a viable option, firms will have to be able to demonstrate that there is a process in place to manage the risks that could arise outside the supply chain. Unpleasant surprises may well be a feature of Reach as it is implemented. For example, a chemical substance may have to be recalled, so recall procedures and crisis management will be additional areas of risk management that will have to be examined.

A lack of clarity

The legal liability position is likely to remain unclear in the short term. The process of evaluation will take some time and how the insurance market responds will depend on what, if any, bad news emerges on specific chemical substances that have to be withdrawn on safety grounds.

The legal liability insurance cover that would exist in such circumstances would be wording-dependent. Some wordings already contain restrictive policy language that applies in the event of a change in underwriting terms or conditions. Whether these wordings would operate in the event that a chemical substance is not approved on safety grounds - therefore having to be removed from the market, but without there being an event to trigger the policy language - is one of the great unanswered questions. Those involved with chemical substances should be thinking about these types of scenarios and studying the language of legal liability insurance contracts before such events occur.

However, what is clear is that Reach is one of the most important and complex pieces of regulation to be introduced by the EU in the past 10 years. The risks arising from it are many and varied and its effect will be strategic, operational and financial, depending upon whether a firm is a manufacturer, importer or downstream user.

Yet, by carefully evaluating their risks and positively embracing the regulation, global chemical suppliers and users alike can quickly turn the challenges posed by Reach into a competitive advantage.

Christopher Bryce is the industry practice leader, for chemicals and life sciences EMEA, at Marsh.

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