Regulating for disruption

Regulation is often decried as a threat to innovation and growth in our economy. However, the tides of opinion are changing. A disruptive new interpretation is emerging with regulation and regulators as growth drivers and innovation facilitators.

At a recent regulators forum hosted by Nous Group, four of Victoria’s leading regulatory experts came out strongly in favour of effective regulation as an enabler of economic growth, rather than an impediment to it.

Economies can and do change very fast. Advances in technology are rapid and the goal of many ‘start-up’ businesses is the ‘disruption’ of existing approaches to commerce. This results in businesses bringing products or services to market which fall outside of the existing regulatory frameworks. Regulators, caught off balance, sometimes lack the specific tools to fully grapple with emerging issues. At Nous’ forum there was a strong rhetoric around ‘lost opportunities’ for the economy where poorly-aligned regulation has stifled some new market entrants’ business activities. Uber was cited as a pertinent example.

So if laws often change slower than markets, and this impedes innovative firms’ operations, how can we prevent economic development from being stifled?

Regulators as ‘circuit breakers’

As the economy changes, and the regulatory framework becomes out of step with the activities of new businesses, regulators can (and do) use their discretion to appropriately manage the risks presented by new businesses, products and services. In this way, they act as ‘circuit breakers’ by assessing a new venture to gauge whether it actually puts the community at risk. Activities which are safe may then be tolerated (or even sanctioned) despite representing technical violations of the law. When this discretion is used appropriately it is able to both ensure community safety, and prevent absurd applications of the law that have the potential to discourage or stifle innovation.

Modern thinking and modern tools

This kind of regulation requires modern thinking and modern tools. Regulators must have the right kind of practices and approaches in place to properly assess a situation and exercise their discretion in a way that promotes growth. This must include effective business intelligence systems and staff with a clear understanding of the limits (and flexibility) of the legislation they administer. Regulators must also be willing to take a risk. This requires strong, independent leaders in regulatory agencies, who are willing to accept that progress and growth are never entirely risk-free.

Businesses and regulators often exist in silos. This model of regulation requires deeper and more regular interactions between regulators and the business community. An ongoing dialogue must be in place to ensure both sides understand each other.

The key take-away from Nous’ Melbourne regulators forum was that innovation and regulation are not diametrically opposed. Where new business approaches and regulation are properly managed, disruption and economic growth can occur without unacceptable risk. However, it is often difficult for regulators to work out where the balance in this equation lies. Flexible, evidence-based, discretionary regulation and deep engagement with relevant stakeholders are not simple so regulators are constantly seeking to improve their capabilities in these respects. Increasingly, external advice is sought to understand the most appropriate regulatory responses to foster innovation and economic growth.

Nous hosted a group of Melbourne based regulators to explore the disjuncture between policy and practice in current regulation. This article synthesises the outputs of this discussion. Insights are those of the group at large, and do not reflect the views of the forum’s individual participants, sponsor or host.