What is 'Regulatory Risk'

Regulatory risk is the risk that a change in laws and regulations will materially impact a security, business, sector or market. A change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business, reduce the attractiveness of an investment, or change the competitive landscape.

BREAKING DOWN 'Regulatory Risk'

Financial institutions face regulatory risk with respect to capital requirements, services and products they are allowed to engage in, and disclosure practices. Salient to investors that brokers serve would be a change in the amount of margin that investment accounts are able to possess. If margin requirements are tightened, the impact on the stock market could be material, as this would force investors to either meet the new margin requirements or sell off their margined positions.

Example of Regulatory Risk

For example, the utilities are heavily regulated in the way they operate, including the quality of infrastructure and the amount that can be charged to customers. For this reason, these companies face regulatory risk that can arise from events - such as a change in the rates they can charge - that may make operating the business more difficult.

A plethora of regulatory risk examples exist. One of the best places to directly learn about this type of risk to a particular company is its annual filing (or 10-K). Each 10-K filing contains a section on material risks to company operations. Regulatory risks customarily are mentioned - and sometimes discussed in great detail, as is the case for the drug industry, for example.

RELATED TERMS
  1. Political Risk

    The risk that an investment's returns could suffer as a result ...
  2. Business Risk

    The possibility that a company will have lower than anticipated ...
  3. Country Risk

    A collection of risks associated with investing in a foreign ...
  4. Specific Risk

    Specific risk is a risk that affects a minimal number of assets.
  5. Market Risk

    Market risk is the possibility of an investor experiencing losses ...
  6. Financial Industry Regulatory Authority ...

    A regulatory body created after the merger of the National Association ...
Related Articles
  1. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Insights

    Fintech in the Trump Era: Regulatory Changes to Expect

    Will Trump’s administration try to repeal Dodd-Frank, or simply change financial regulations?
  3. Tech

    What Are the Biggest Risks Associated With Banks Today?

    Evolving mechanisms and techniques of cybercrime have become the most severe risk associated with banks today.
  4. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  5. Investing

    10 Risks That Every Stock Faces

    As an investor, the best thing you can do is to know the risks before you buy in. Find out about 10 common stock risks you should look out for.
  6. Investing

    Read Form 10-K to Help You Pick Better Stocks

    Find out how breaking down Form 10-K can help you pick better stocks. Learn to analyze this valuable source of a company's annual financial information.
  7. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  8. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  9. Insights

    Financial Regulators: Who They Are and What They Do

    Find out how these financial regulators govern the financial markets.
RELATED FAQS
  1. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  2. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
  3. How can companies reduce internal and external business risk?

    Understand the difference between internal business risk and external business risk. Learn how a company can reduce each ... Read Answer >>
  4. What are the risks associated with investing in the banking sector?

    Find out about the risks associated with investing in the banking sector including liquidity, risk management, consumer protection ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center