The introduction of disruptive technologies or new business models into our society poses a new challenge to regulators: what consequences do they bring, and how should they be tackled.

This was already a challenge pre-COVID, but with COVID’s rapid acceleration of digital transformation, how will regulation and regulators cope in the ‘new normal’?

This is more than a ‘catch up’ challenge. It would be naïve to think that disruptive technologies, both existing and emerging, will not disrupt our traditional approaches to regulation and the regulators themselves.

In its 2019 report, the UK’s National Endowment for Science, Technology and the Arts (Nesta) had already been thinking pre-COVID to a new relationship between technology and regulation, which it calls ‘anticipatory regulation’.

Is our current approach to regulation ‘a neo-liberal trope’?

While not quite out cast in those terms, Nesta comments that regulation has long been perceived as antithesis to innovation, creating barriers for entry and reinforcing incumbent power. This ‘red tape’ model of regulation encourages regulators to create barriers to innovation, especially when faced with ‘negative innovation’ such as the misuse of personal data. This narrative of regulation requires there to be a market failure to justify intervention. It is usually implemented with powerful investigatory powers and large fines (the ‘big stick’).

There is some truth to this ‘neo-liberal trope’. Where regulators only engage in ex post regulation, or punishment, significant uncertainty is created, shrinking the incentive to innovate.

Challenges to the traditional model

Nesta identifies a number of challenges to the traditional ‘red tape’ regulatory model:

  • Cross-sectoral – New business models, methods of data capture and processing, AI and other technologies are cross-sectoral and do not fall neatly within the remit of any one regulator. Netflix is simultaneously a broadcaster and a production house. Facebook is a social media platform, a repository of personal information, an advertiser and (though controversial) a publisher.
  • Too little, too late – ‘Permission-less innovations’ that do not require any regulatory approval or are not subject to existing regulation can scale at an unprecedented speed and regulators are not ready to match the pace of this development or build an understanding of these technologies and their implications.
  • Consumer sovereignty – The complexity of new technologies limits consumer sovereignty and puts vulnerable consumers at risk e.g. targeted advertising driven by data collection on a large scale.
  • Private firms performing public functions – By necessity, multinational technology companies are increasingly tasked with public functions e.g. video-sharing platforms play a vital role in censoring hate speech, violence and explicit content.

A ‘snap-back’ to the old regulation model?

Nesta argues that having witnessed the consequences of allowing technologies and business models to innovate in ways that are not always in the public interest the public is now demanding regulators broaden their role beyond responding to market failures. The response of regulators has been to shift the litmus test for intervention from ‘market failure’ to standards such as ‘fairness’, but otherwise to press ahead with the same ex post posture and tools inherent in the ‘red tape’ regulatory model.

But doubling down on the old regulatory model coupled now with even vaguer standards only compounds uncertainty for innovators.

Nesta proposes an alternative: anticipatory regulation. This model has 6 elements:

  1. Inclusion and collaboration –Regulators should engage with the public and a diverse range of stakeholders (e.g. the public, companies, innovators, NGOs, city authorities, local government and other regulators) in respect of new technologies and the ethical issues they raise.
  2. Future-facing – Regulators should develop resilient, adaptive strategies to be able to keep pace with rapidly changing markets.
  3. Proactive – Regulators should engage with innovators and innovation early and often to both understand new business models and technologies and provide predictability while allowing for timely and proportionate intervention. For example, Denmark’s Digital Growth Strategy includes agile regulation for new business models with a cross-ministerial 'point of entry' through which companies receive coordinated answers from relevant authorities within three months.
  4. Iterative – Taking a test-and-evolve approach over a solve-and-leave approach to new problems with no regulatory roadmap.
  5. Outcomes-based – Regulators should focus on validating companies’ efforts to achieve defined goals rather than setting rules and incentivising support of regulatory objectives.
  6. Experimental – Regulators should facilitate ways to test new innovations or regulatory interventions to build knowledge around possible impacts and collaboratively review regulation and innovation with the public and stakeholders. This could be done by way of a ‘sandbox’ such as the UK Financial Conduct Authority’s Regulatory Sandbox which allows businesses to test new products and services in a controlled environment.

Nesta’s model envisions regulators’ role as advisory, ensuring that new products and services comply with existing regulations; as adaptive, supporting new innovations and adapting existing regulatory frameworks; and ultimately as anticipatory. All of which would involve a drastic rethinking of regulation, but these are unprecedented times.

Read the report: Renewing Regulation: ‘anticipatory regulation’ in an age of disruption