Avoiding modern slavery demands better supply chain management

This article first appeared in Insurance Day, December 2020

This article was co-authored by Abigail Hague, Legal Apprentice, Manchester.

Modern slavery has become a growing concern for businesses across all sectors, becoming an issue insurers are taking seriously.

In 2015 the UK became the first country in the world to require businesses to report on modern slavery by introducing the Modern Slavery Act 2015. However, this proved insufficient and in 2018 the Home Office wrote to 17,000 businesses and pushed them for increased disclosure and (in essence) to take responsibility for conditions in their supply chains.

The impact of the act came under scrutiny more recently when the Home Office conducted a consultation into transparency in supply chains. In its response published in September, the government committed to extending the reporting requirement to public bodies to leverage public procurement and address risks in public sector supply chains.

It has confirmed it will also mandate the specific topics statements must cover when reporting, set a single deadline for reporting and require organisations to publish directly to the new government reporting service, to empower investors, consumers and civil society to scrutinise the action taken across both the private and public sector. There is also consideration being given to introducing civil penalties for non-compliance.

It may not be in the interest of a supplier to disclose information relating to modern slavery and many smaller businesses have struggled to fully appreciate or understand their obligations.

BooHoo is one firm highlighted in the media for the poor management of its supply chain. Reports surfaced of poor working conditions, workers being put at risk of COVID-19 infections and pay as low as £3.50 per hour in the Leicester factory that supplies the majority of BooHoo’s UK garments.

Alison Levitt QC was brought in to investigate and, although she found “no evidence” BooHoo committed criminal offences, she did caution BooHoo had not felt any real sense of responsibility for the factory workers in Leicester.

BooHoo’s share price was significantly affected and there are concerns as to the long-term damage caused to the BooHoo brand. One of BooHoo’s main investors, Standard Life Aberdeen, sold its shares and BooHoo’s auditor, PwC, also recently resigned after seven years, wiping £775 million off its market value on October 19, 2020 – a 20% drop.

As can be seen, in today’s globalised world supply chains are becoming ever more complex. The number and form of investment vehicles, new markets, territories and outsourcing create challenges in reporting and producing statements. It may not be in the interest of a supplier to disclose information relating to modern slavery and many smaller businesses have struggled to fully appreciate or understand their obligations.

There will continue to be a trickle-down effect as businesses seek information about their partners leading to smaller businesses incurring considerable costs to keep up with the rising bar. Additional compliance demands and tensions between those insured and the insurer could lead to refusals to insure.

New clauses

In light of these issues, brokers and insurers are introducing clauses into policies requiring insureds to comply with their obligations under such anti-slavery legislation. However, as mere conditions of the policy, it will be necessary for the insurers to establish they have suffered a loss from the breach.

Yet, it will be difficult for insurers to demonstrate they have suffered a quantifiable loss from an insured failing to comply with its statutory requirements or that such practices have an effect on the contract of insurance. If insurers try to enforce such clauses using conditions precedent or warranties, they will have to overcome the requirements of the Insurance Act 2015, in particular s.11.

It will be difficult for an insurer to either prove the requirement denes the risk itself or a breach of the requirements had any causative impact on a loss covered by the policy.  That being the case, s.11 of the Insurance Act may prevent insurers from taking any steps to enforce such requirements, no matter how noble the cause.

Nevertheless, the Modern Slavery Act can be seen as an opportunity to review again their procurement and risk management processes, not just in terms of modern slavery but also other legal, commercial and reputational risks in operations and supply chains.

The reporting requirements enable the public, consumers and investors to make more informed decisions as to which organisations they do business with but there is still a long way to go.

Insurers should suggest businesses re-evaluate their procurement policies, analyse purchasing decisions, investor expectations and procedures relating to social risks arising through business relationships and if in doubt, they should ensure they speak to their insurer. The damage to business reputation and competitive disadvantage for failing to take the issue seriously could be significant.

Read other items in London Market Brief - February 2021