A new era of smart regulation

For many years, talking about regulation was low down on the public policy agenda. Academics and policy wonks found it fascinating. But their discussions often centered around a stand-off between laissez faire advocates of deregulation and interventionalists who reached for additional regulation as the default policy lever.

Times have changed, and “smart regulation” is now the focus. But what does that mean and how do policymakers and regulators develop pro-growth, innovation-friendly regulation?

This article sets out the current landscape and provides strategic guidance, based on ICF’s global review of good practice.

What is the current state of regulation?

An effective regulatory system helps protect the public from harm, promote competition, and ensure fairness. Citizens rightly expect that the products they use are safe, that they can trust financial institutions, and that businesses have an obligation to protect the environment. Regulators also have a duty to prevent monopoly providers from making excess profits.

At the same time, regulation can sometimes be a blunt tool, creating an excessive administrative burden on business. Consequently, it is often portrayed as an unnecessary brake on economic growth, inhibiting companies from developing new products and services.

However, forward-looking governments are now increasingly recognizing that smart regulation can boost innovation and productivity as well as stimulating competition.

How is the U.K. supporting a smarter approach to regulation?

The regulatory landscape is changing in the U.K. Developing smarter approaches to regulation has risen up the policy agenda.

In the Autumn Statement 2022, the Chancellor highlighted the key role that regulation can play in growth: “Pro-innovation regulation focuses on ensuring that we can safely and ethically accelerate the development, testing, route to market and uptake of new technology products...and ensuring we can realize the economic and social benefits of new technologies as quickly as possible.”

More recently, in May 2023, the U.K. Government published a policy paper that reaffirmed a commitment to introduce “regulatory reforms to reduce the cost of living, deliver choice to consumers, turbocharge science and innovation, and drive infrastructure development. By getting regulation right we will develop world-leading businesses which provide the innovation to solve the challenges of the 21st century.”

The 5 pillars of smarter, pro-innovation regulation

Smarter regulation can stimulate innovation in many ways. It can alter market conditions, set standards and constraints, and establish incentives. Regulation is fundamental to bringing innovations to market that revolutionize our way of life and tackle the challenges we face today, from net zero to healthy aging.

But what does this look like in practice? Through our own analysis, we’ve identified five pillars of pro-innovation regulation that regulators can implement:

1. Adaptability. Adaptable regulatory frameworks encourage and safeguard radical innovations. They allow new products and services to come to market quickly, while ensuring consumer safety. Where regulation doesn’t adapt to new technologies, the absence of regulation can lead to a de facto prohibition of innovations in certain sectors. In other cases, a lack of regulation may not prohibit innovation, but new technologies and/or business models are operating without regulation or appropriate regulation. This risks market failure, which can damage consumer trust in the innovation. Regulation must keep pace with innovation and remain fit-for-purpose. In practice, this requires both strong research—and a way to translate that into policy and regulation.
2. Trust. Regulation can accelerate innovation by being easy to understand and accessible, while giving confidence for long-term investment and increasing consumer assurance. A clear mandate and strong governance mechanisms help build trust in regulators. Outcome-based regulations that are not overly prescriptive provide the right conditions for new products and services.
3. Collaboration. Regulators and businesses don’t operate in silos: innovation and government policy objectives span sectors. Some technologies—most notably digital—enable a range of innovations. Smart regulators collaborate both nationally (to facilitate shared objectives) and internationally (for example, to align digital standards). International collaboration also establishes coherence and sets joint guidelines and practices. This smooths the path for innovators to access additional markets, facilitating both trade and the ability for businesses to work across countries to further develop products and ideas.
4. Experimentation. Novel ideas need to be tested and refined before launch. Innovators and regulators both benefit from the space to jointly explore the risks and benefits of new products, services, and business models. Recently, we’ve seen the emergence of “regulatory sandboxes,” which provide a bounded arena for innovators to trial ideas in a real-world environment where specific regulations are relaxed for a period of time. Sandboxes and testbeds also enable regulators to consider the implications of innovations. Leading regulators use this opportunity to learn, adapt, and create an enabling approach to regulation.
5. Entrepreneurship. This pillar concerns proportionality and avoiding unnecessary bureaucracy for business. Making business’s experience of regulation easier can make a difference to innovation outcomes, especially for sectors that are heavily regulated and/or involve many small and medium-sized enterprises. Leading regulators also provide support to new entrants to enable a dynamic marketplace.

Smart regulation is a driver of greater innovation and growth

High-performing, smart regulatory systems employ a range of levers from across all five of these pillars to create the most fertile conditions for innovation. Some regulations can help to create and grow markets for innovations that wouldn’t otherwise exist. This is particularly the case for environmental regulations, for example helping to catalyze a just transition to net zero. In these cases, market forces alone won’t be enough to move toward more efficient products. And without regulation, businesses may not feel able to justify investment in innovation.

What works depends to some extent on the sector being regulated—and the policy priorities of governments. However, it is clear that we are now in an era where smart regulation is becoming a key tool for driving growth and catalyzing innovation.