Over the last couple of years, there has been a sizeable shift in the way many governments and regulators think about the relationship between regulation and innovation. Where regulation and regulators may have once only been seen as a barrier to innovation, new types of practice and new ways of thinking are helping demonstrate the important role regulators and regulation play in enabling socially, environmentally and economically valuable innovation to flourish. Regulators are starting to explore how business-led innovation can help them achieve their core statutory objectives. But delivering regulatory interventions that actually support or even stimulate innovation, while still protecting consumers or ensuring competition, is no easy task.

Our new report “Regulator approaches to facilitate, support and enable innovation” published by BEIS last week, helps to answer this question. And as the UK leaves the EU and starts to explore a new place in the world, the stakes couldn't be higher to get this right.

At Nesta, we’ve been exploring what we are calling, ‘anticipatory regulation’. We have been doing this both through research and practice, looking around the world to identify best practice, while at the same time co-developing and piloting new approaches with regulators in the UK (e.g. the legal access challenge). As the field is still very young, there are a lot of open questions around the impact and value of these new methods. Even for approaches fairly well-established such as innovation hubs and sandboxes, little robust evidence is available on their impacts or how we might identify best practice (and what there is, is limited to the fintech sector).

Why does this matter? As the UK leaves the EU and starts to explore a new place in the world, the stakes couldn't be higher. Innovation and technological development is high on the geopolitical agenda. Fights over 5G deployment and Huawei, the power struggle over the digital tax and the open question hanging over artificial intelligence regulation in Europe, go to show how prescient these issues are. Historically the UK has always been seen as a regulatory leader but competition is getting fierce. Being able to develop processes that allow regulators to move faster, support or even stimulate 'good' or 'responsible' innovation, while protecting people, is the only way the UK will be able to hold on to that leadership role.

The aims of the research were to better understand who is doing what around the world, describe how different methods are being employed in different contexts and to try to identify- or build- an evidence base on the impact of these initiatives. The kinds of impact we were interested in were around how much a particular approach might have helped new innovations reach the market quicker or increase investment in innovation. We undertook an extensive literature review, identified examples in 30 countries and interviewed regulators, innovators and government agencies in over 15 jurisdictions. We have classified the examples identified into five types of innovation-enabling approaches to regulation:

Unsurprisingly, one of the most common innovation-friendly approaches to regulation being employed around the world is regulatory sandboxes (sometimes called testbeds or living labs- it is worth noting that terms such as sandbox are sometimes loosely applied to other activities too). These initiatives provide regulators and innovators with a controlled and, usually, time-limited opportunity to test ideas under live conditions, often with real customers. Examples can now be found in many different sectors including; fintech, health, energy, mobility and transport, and data (personal data). A few general sandboxes have also appeared, such as the one in Malaysia, that aims to provide a supportive framework for multiple regulators to develop their own testing projects. Many of these examples are further detailed in the report.

The basic concept of a regulatory sandbox - testing innovations in a controlled environment - is very flexible and has been adapted to suit many regulatory, sectoral or country specific contexts. These differences usually manifest themselves in a few key ways. Primarily this is linked to the objective or aims of the sandbox, how it relates to broader policy initiatives and its focus on ‘disruptive’ over ‘incremental’ innovation, as well as more practical things such as who can apply and how innovations are tested.

Both regulators and innovators highlighted several ways in which sandboxes and testbeds can generate value in the ways we were interested in. For innovators one of the top benefits was greater investor confidence and therefore investment, particularly for more 'disruptive' innovations. For a few of the companies we interviewed this was key in being able to bring their products or services to market. Involvement in the sandbox or testbed it also meant quicker access to the market and reduced regulatory uncertainty. For regulators, it was a unique chance to see these innovations first hand and better understand their implications. Regulators see the insights gleaned from these initiatives and the relationships they have built with the innovators as hugely valuable in developing appropriate long-term regulatory policy.

However, this approach also has a number of limitations; it isn't cheap and regulators often underestimate the resource costs, the legitimacy label may not always be a good thing and success beyond the testing phase is not guaranteed. In fact non-regulatory barriers are a very important consideration, non-regulatory factors like the existence of fixed infrastructure or industry/sector culture cannot be fixed through a sandbox or testbed. In sectors like energy, these barriers can have a much more significant impact on the potential for innovation than regulation.

On the whole, these programmes are still fairly young (as are many of the other approaches we explore in the report) and have had relatively few participants, so it may still be too early to properly judge their impact. Most of the evidence that is available comes in the form of reported benefits from regulators or businesses. Where analysis has been done, it is fairly light on data. Like all the areas we explore in the report, there is significant variation in the operational transparency of different initiatives and their results. Very few regulators offer publicly available information on lessons learned from running these programmes, while others offer summary statistics at most. The evidence available primarily relies on proxy information (for example, numbers of companies participating in an initiative) or anecdotal evidence from case studies or interviews with regulators and businesses. We can get a sense of where the greatest impacts are being felt, but with the data currently available, it’s not possible to properly assess how significant these impacts are. This is where regulators really need to up their game and start collecting a lot more data and making it openly available, even in an anonymised form.

I'd like to thank both Imre Bárd and Ebba Engström for all their hard work on the report