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By Andy McCue, 29 July 2005 12:25

NEWS Regulatory red tape is a bigger risk headache for businesses than a stock market collapse, terrorism or natural disasters, according to new research by the Economist Intelligence Unit (EIU).

A quarter of chief executives, finance directors and chief risk officers cited regulatory risk as their greatest source of concern when assessing business risk.

Nine out of 10 of the 230 executives questioned for the report, Regulatory risk: Trends and strategies, said they expect the business costs of regulation and red tape to rise over the next three years - more than a third (36 per cent) believe it will rise "substantially" - and claimed the benefits of recent regulations are outweighed by the problems.

But it is customers who are likely to bear the brunt of these extra compliance costs, according to two-thirds of executives.

The increasing complexity of the global regulatory environment is also posing major compliance problems for businesses and only one in five companies is confident they are compliant with international regulations such as Basel II and International Accounting Standards.

IT network risk was the second biggest area of concern for executives in terms of potential threats to the business. It also ranked ahead of country and political risk, market risk, terrorism and natural disasters.

Maintaining regular communications with domestic and international regulators is viewed as a better strategy for dealing with regulatory change than the direct lobbying of governments, according to the research.

Daniel Franklin, editorial director of the EIU, said in the report: "Regulation is having a major - and sometimes unforeseen - impact on companies' global operations. Anticipating how regulatory rules may be interpreted, changed and augmented has become a critical task for risk managers."

The EIU report was sponsored by ACE Insurance, Cisco Systems, Deutsche Bank, KPMG and IBM.