Why innovative regulation is a must for UK tech
Regulation and the role of regulators has always been key for the tech sector, however, the growing focus on competition in digital markets through the creation of the Digital Markets Unit, the selection of Ofcom as the regulator in the Online Safety Bill and the creation of the cross regulator Digital Regulation Cooperation Forum (DRCF) has seen the role of regulators increase, becoming more central to the UK’s digital economy than ever before.
This is particularly important for the UK as our digital economy is dominated by digital services. Of the UK’s digitally intensive industries, 96 percent of output and 81 percent of exports is in services. For these digital service providers, the regulatory framework surrounding the research, development, marketisation and compliance requirements for digital service products is central to determining whether the UK is seen as a competitive economy within which to invest and grow the business.
In the last few years the UK has comfortably established itself as a competitive and innovative place for tech. This has helped the UK attract international investment as well as supporting the growth of home-grown champions, with the UK now home to over 80 tech unicorns, more than any other country with the exception of the US and China. Good innovation enabling regulatory principals have helped facilitate this, with the Financial Conduct Authority’s (FCA) Regulatory Sandbox being seen as a global leader.
The approach taken by the FCA shows a hugely valuable role for regulators, not only as bodies which prevent harm in the market, but also helping produce better consumer outcomes and choice by seeking to facilitate innovation. The growth in fintech, supported by the FCA, is a perfect example and has helped create new services and increase consumer choice.
With the UK now outside the EU Single Market and Customs Union the Government is looking at how it can set a more tailored UK approach to regulation. For the tech sector success here means building a regulatory approach which takes a holistic approach, that is coordinated and views supporting and enabling innovation as a key part of creating better outcomes for consumers.
techUK and our members have engaged with Government in these discussions and believe there are some core principles to realise the benefits of innovation enabling regulation:
- Ensure regulators coordinate: improving coordination between regulators, particularly in the digital economy where so many issues have cross sector effects will be vital. For example, while the Information Commissioner’s Office (ICO) regulates data protection, regulators like the Health Research Agency will also be making decisions about how health data is used for research and innovation. The creation of the DRCF is a great first step to bring regulators together and share information. The DRCF’s first year of operations should be reviewed for its successes as well as where improvements could be made.
- Expand sandboxing: sandboxes such as the FCA and ICO sandboxes have shown to be enormously popular. However, the limited numbers of companies per cohort means that the benefits are being accrued by a small number of firms. techUK members have reported that sandboxes help decrease development costs as well as helping to attract investment. Increasing resourcing for existing sandboxes as well creating new sandboxes could create more opportunities for firms to invest in innovative new products. Something that will be particularly vital for the recovery from COVID-19.
- Develop a deep understanding of markets: increasing expertise and the depth of engagements with the market among regulators is vital to ensuring that regulators have the most up to date understanding of their markets as well as preventing an asymmetry of information between the regulator and the regulated. Regulators should therefore be encouraged and supported to recruit and retain expert staff. The Competition Markets Authority (CMA) has identified this as a core need.
- Proportionate regulation: regulation is ultimately about preventing harm to consumers, however regulation which is overly broad can give companies pause for thought when developing new services, even where the regulator probably would not consider the product in development a risk. Ensuring an open dialogue with businesses, engaging in deep market studies and offering clear guidance is vital to creating a shared understanding of the specific harms regulators are seeking to prevent as well telling companies where action needs to taken. The CMA’s market study on Online Platforms and Digital Advertising has been highlighted as a good case study of this.
- An innovation principle or ‘anticipatory regulation’: to get the right balance between acting on existing harms versus reducing these and enabling future consumer benefits through new innovation the Government should encourage the development of ‘anticipatory regulation’ or an ‘Innovation Principle’. The principle should aim to ensure that ahead of interventions regulators have a framework to consider the impacts any action would have on how future innovation and products could instead address the harm identified as well as boosting consumer welfare in the round. This would help create a more defined system to weigh up the impact on consumer welfare of immediate regulatory action versus challenging the market to address the harms identified. The creation of such a principle will have to be done carefully and should engage the widest range of stakeholders.
Acting on the above principles as well as creating sector specific strategies will help the UK outside the EU craft a more tailored UK approach to regulation with the aim of ensuring consumers continue to have access to and the confidence to use the latest digital services. This will not only have benefits for consumers, but help the UK maintain its competitive edge and give the UK a strong voice in the global conversation on regulation for digital markets.
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.