From size to risk: rethinking regulation to prioritise impact

By Olivier Boutellis-Taft, Accountancy Europe CEO

Regulation is often considered as a burden, but it is the bedrock of a safe society. Striking the right balance is key.

Policymakers currently rely on simple metrics (quantitative criteria) such as turnover, balance sheets, number of employees to categorise and define enterprises. This determines how EU law applies to them. But in today’s world of climate urgency, multiple tensions and disruptive innovations, these metrics fall short.

Most European businesses fall under the small and medium-sized enterprises (SME) category according to these metrics. However, these don’t always reflect the complexity of their models, or their societal and environmental impacts. Even small companies can operate across borders, on new markets, in risky regions, and have a business model that significantly impacts the environment and stakeholders.

Quantitative criteria also vary across EU legislation. They can be confusing, costly to administer and challenging for entities subject to multiple sets of regulation. They can also result in over-regulation of simple, low-risk, less complex entities purely due to their size. Furthermore, quantitative criteria can be manipulated, leaving opportunities for entities to artificially avoid regulatory requirements.

It may be time for a paradigm shift in how we categorise entities for regulatory purposes when it comes to company law, corporate governance and anti-money laundering. Regulators should focus more on the entity’s risks and impacts, in areas such as economy, society, fraud, corruption, environment and technology. Size matters, but impact and risks matter more. Accountancy Europe explored this idea in its 2020 thought-leadership paper From risks to regulation. These insights remain pertinent as we reconsider SME categorisation and thresholds today.

A risk-centric assessment would enable policymakers to better understand entities’ impact on their surrounding markets and society, and to align these to policy objectives. This would lead to regulations that are simpler and more effective in serving the public interest and mitigating negative impacts on society, economy and environment.

This redefined approach would also be beneficial for businesses. They would be subject to more targeted and relevant legislation that fits their specific characteristics. This would translate into more proportionate and meaningful regulatory requirements, and therefore substantial reduction in administrative burdens.

Quantitative thresholds undeniably offer simplicity, but as Einstein noted, “make things as simple as possible, but not simpler”. I urge EU policymakers to reduce regulatory burdens on businesses while enhancing relevance, effectiveness and purpose.