Regulation - A small misunderstanding

Many small to medium-sized firms are unaware of new regulations that may leave them exposed to unforeseen dangers. To address this, brokers and insurers are well placed to provide bespoke business solutions to keep SMEs alert to legislative changes, writes Jason Eatock

While no one can say with any certainty how the economic downturn is likely to take effect, the financial impact is already being felt in many areas - not least of all in the small to medium-sized enterprise end of the corporate spectrum.

The latest Confederation of British Industry survey showed more than half of SME manufacturing firms saw their unit costs rise in the first three months of 2008; it estimates this is the biggest price rise in 20 years. Around one in five SMEs admitted they had already raised prices this year and the same number expected to repeat this over the coming months because of a decline in business.

With 95% of all SME businesses employing less than 20 employees and 73% of UK businesses operating as sole traders (3.2 million), the increased pressure on their bottom line will mean businesses will be looking to reduce the cost of their overheads more than ever before. Cutbacks in all important but somewhat labour-intensive activities such as compliance and legislation could well be among the first areas that smaller firms will look to economise. However, this can be a dangerously short-term economy.

On 6 April the government implemented 82 statutes and regulations that could potentially impact SMEs. The Corporate Manslaughter Act, an extension of the occupational pensions schemes regulation, provisions for employment agencies to protect the rights of agency workers and amendments to the Sex Discrimination Act were all introduced during just one day. The volume of legal and regulatory knowledge requirements placed upon firms has grown disproportionately, creating a backlog of work and exposing them to unprecedented risks that are only likely to be 'realised' in the future.

The British Chamber of Commerce says the government's system for testing the impact these new regulations will have on businesses in terms of cost and resources ignores the effect on smaller firms - with only 1% of regulatory assessments by government departments quantifying the impact on smaller companies.

So what does this mean for SMEs? In principle, increased regulation is not only positive and constructive for good business practice, it also protects employees and customers and - consequently - bottom line growth. In reality there is a lack of awareness of government regulation, which means some SMEs face a greater chance of falling foul of the law rather than being protected by it.

Lack of knowledge

Independent research commissioned by Zurich shows that 81% of UK small firms have no idea that there are only two days a year when new regulation is introduced, so they are not even aware of when they should be looking out for new legislation and many still do not know some of the regulations that came into force in April 2007.

In a survey of more than 1000 small businesses across the UK, 18% said they were not aware of the change in parental leave rules that affected new parents more a year ago. Somewhat surprisingly, 41% also expressed concerns that they had no understanding regarding the laws of discrimination. The research also revealed some misunderstanding about the protection afforded by the standard employers' and public liability policies, with almost a third admitting they were unaware their employers' liability and public liability cover would not protect them from being personally prosecuted for such actions.

It is vital that small businesses are aware of their responsibilities and are alert to new regulations. If SMEs are not even aware of when new regulations begin, they will be unable to know when to look out for them or how to put measures in place to keep abreast of such issues. SMEs need to be able to know how to protect themselves against breaking the law and prevent the risk of unnecessary, and often expensive, employment claims in the future.

SMEs must proactively seek out this advice from the relevant sources and work needs to be conducted to get that message across. More than a third (37%) of SMEs said they have never received any information from government agencies about their responsibilities as a business and 69% had never used the services on offer from information sources the Small Business Service or Business Link (

In order to satisfy the broad needs of the market, leading insurers need to be prepared to offer products tailored to suit each type of business model and even solutions that are flexible enough to grow along with it. It is not simply about providing cover but about understanding the real needs of the business and offering the relevant risk management advice to help protect that business, in addition to a range of suitable products. This is the type of expertise and added value that will differentiate SME insurers and provide important support to the broker in meeting their customer's ever-evolving needs.

- Jason Eatock is the head of SME at the broker division in Zurich.

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