Regulation is often regarded as a threat to innovation and growth in our economy. However, the tides of opinion are changing. Nous has identified a disruptive new interpretation – regulators as drivers of growth and facilitators of innovation.
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 sees businesses bringing products or services to market that fall outside the existing regulatory frameworks. Regulators, caught off guard, sometimes lack the agility to grapple with these emerging business models. This has driven perceptions that regulators stifle growth and innovation.
Current thinking among leading regulatory experts, and regulatory agency heads, is that regulation can be an enabler of economic growth rather than an impediment to it. Good economic outcomes are not delivered if inflexible regulators cause opportunities for growth to be lost. This tends to occur when regulators are inflexible in how they view their role, or apply their discretion.
Regulators must always respond to areas of risk. However, a lack of alignment between new market behaviour and existing legislation or regulatory approaches does not automatically connote risk. If regulators are to promote economic growth through innovation, they must remain contemporary and change their practices to meet evolving circumstances in the market. Nous’ work and analysis has identified two key ways this can occur:
As the economy changes, and regulatory frameworks fall out of step with the activities of new businesses, regulators should use their discretion to appropriately manage the risks presented by new businesses, products and services. In this way, they can act as ‘circuit breakers’. Assessing a new venture to gauge whether it actually puts the community at risk and intervening only when necessary, not just because their current approach mandates it.
Regulators should use their discretion to enforce the law to act as a ‘circuit breakers’ and create space for innovation. Under this approach, 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 ensure community safety, and prevent absurd applications of the law. This allows the community to be protected without unduly discouraging or stifling innovation.
Regulating as a ‘circuit breaker’ 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. If a regulator doesn’t appreciate the nature or merits of a new innovation, it will be less likely to give it space to operate. The responsibility to engage and share knowledge rests on both the regulator and innovative players in the market.
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 is a first step. It should be supported by deep engagement with regulated parties and relevant stakeholders on an ongoing basis. External advice as to the implications of a risk may also be required.
By following these steps, and by acting responsibly, regulators can continue to protect the public while also fostering innovation and economic growth.
Get in touch to find out how you can apply modern regulatory thinking and tools to foster growth and innovation.