Flexible regulation urged to support innovation

Out-Law News | 29 Jan 2020 | 4:12 pm | 3 min. read

UK regulators should consider "more flexible forms of regulation" to ensure innovative businesses are able to enter and disrupt existing markets, the Competition and Markets Authority (CMA) has said.

In a new report, the regulator said there is evidence that regulation which creates barriers to entry and which is too rigid and focused on incumbents has "potentially large impacts on innovation". It said it is "critical" that regulators "understand and take into account how regulatory measures affect new entrants and innovation".

Davis Alan July_2019

Alan Davis

Partner, Head of Competition, EU & Trade

The CMA's recommendations should encourage UK government agencies to more thoroughly assess the potential competitive impact of any contemplated regulation

The CMA said a move away from "a reliance on detailed, prescriptive rules" to a system of principles-based regulation would provide businesses with "flexibility" over how they achieve compliance. It also backed the use of industry codes of conduct to regulate the behaviour of businesses, and further endorsed the use of "participative regulation".

'Participative regulation' is defined in the CMA's report as "regulation in which there is a greater degree of engagement between firms and the regulator in a market, with firms making formal proposals to the regulator". The example given is where businesses put proposals to the regulator in relation to the introduction of new services or products.

"This can be particularly helpful for new entrants wanting to bring products to a market, particularly if the regulator can then forbear from regulating, until there is a better sense of whether intervention is needed / what form that intervention should take," the CMA said in its report.

The further development of regulatory sandboxes was also endorsed by the CMA, reflecting on initiatives the Financial Conduct Authority and UK's energy regulator Ofgem already have in place to enable businesses to "trial new products, services or business models in a live, real-world environment and with real consumers, without some of the usual rules and regulations applying".

According to the CMA, a change in approach to regulation is needed to ensure policymakers and regulators "put innovation and competition at the heart of the process of developing regulation" at a time of significant technological change and innovation. 

The CMA noted that "dynamic [competition] effects around innovation can be more important in aggregate" than price effects and that therefore regulation must not impede the emergence of new services and business models that lead to dynamic competition. It cited Airbnb, Deliveroo, and Uber as examples of new technologies and business models that brought in new customers, expanded markets and stimulated competition.

"Policymakers and regulators should avoid regulation which favours incumbents or firms with specific business models, or that disproportionately harms smaller scale businesses in a sector," the CMA said. "In mature markets regulations which are skewed towards larger incumbents can lead to lower levels of innovation, higher prices and a resulting loss of consumer welfare."

The CMA encouraged policymakers and regulators to explore ways to "accommodate new services and business models". They will need to "adapt the regulatory framework" to do so, it said.

In its report, the CMA called on policymakers and regulators to engage more with "smaller scale firms" so as to "better understand the immediate issues facing" those businesses. It also urged the use of "strategic, forward-looking reviews of regulation" to understand what external factors could impact on markets in future, how markets could be disrupted, and how regulation might need to evolve to accommodate anticipated changes.

The CMA also recommended improved use of regulatory impact assessments (RIAs) and post-implementation reviews (PIRs) by government agencies, to help ensure that impact on competition is properly taken into account before regulations are implemented, and accurately evaluated once regulations have been in force for some time.

The use of 'sunset clauses' by regulators could also support innovation, the CMA said. The effect of sunset clauses is to automatically repeal regulation after a set amount of time has passed, or once certain criteria have been met. The CMA said it has already updated its own guidance to "commit more clearly to considering the use of sunset clauses and to reviewing the continuing need for remedies, with a view to ensuring that remedies do not remain in force where they are no longer necessary to achieve the purposes for which they were imposed".

Alan Davis of Pinsent Masons, the law firm behind Out-Law, said: "A more restrained and nuanced approach to regulatory intervention that could impact competition is to be welcomed. The CMA's recommendations should encourage UK government agencies to more thoroughly assess the potential competitive impact of any contemplated regulation."

"Unsurprisingly, the regulation report focuses on the digital sector where innovation, technological change and new business models are most pronounced; and closely follows publication of the CMA's online platforms and digital advertising market study interim report last December. It provides useful insights into the CMA's current thinking on regulatory intervention models, including endorsement of using binding codes of conduct to regulate behaviour of larger firms. Notably, the CMA's market study interim report considers implementing a code of conduct for online platforms with 'strategic market status'," he said.