News – Blog
28 March 2022
The COVID-19 pandemic helped highlight the interconnectedness of innovation and regulation and the positive role that regulation can play in the innovation process. As the pandemic began, the most optimistic predictions put a safe, effective, widely distributed vaccine years into the future, in part based on the historical process for regulatory approval of new vaccines, yet, regulatory approval for a first COVID vaccine was achieved in the UK by December 2020.
This extraordinary achievement was not, of course, attributable only or even mainly to regulatory dynamism. It built on decades of scientific research, valuable experience from earlier pandemics and, no doubt, a good deal of luck. That said, it is an example of the critical role of regulators in relation to innovation and raises the question – what could be possible as we look to tackle other massive climate, health and financial crises?
Against the context of emerging and maturing technologies and these significant global challenges, there has been increasing focus on what is regulated, the practice of regulation and the connection between regulation and innovation. Regulators in widespread jurisdictions have been adopting more proactive and iterative approaches to regulation. The approaches taken vary depending on the particular problems faced by the regulator and their specific industry, and many of the approaches are themselves still developing. Nesta and Challenge Works have explored the concept of “regulatory innovation” through:
Each of these projects had different objectives, required working with different stakeholders and gave slightly different meaning to the words “regulatory innovation”. As it’s become clear regulators can play varied roles related to regulation and innovation, our team developed the following framework: regulator as Innovator, regulator as Steward and regulator as Catalyst. In defining these three roles, we hope regulators and stakeholders can adopt a common language and more easily evaluate the skills, culture and tools required to achieve their innovation objectives.
In this role, the regulator is innovating how it regulates – adopting new ways of regulating or new approaches. Examples of regulators taking on the Innovator role include shifting to outcomes-based regulation, implementing a new regulatory process, providing regulatory advice in a new way, adopting innovative uses of data or implementing RegTech solutions. In our work with the Centre for Regulatory Innovation in Canada, one regulator is playing the Innovator role by exploring new approaches to co-design, co-development and public engagement.
These new kinds of practice can help regulators meet their objectives better or more efficiently. Common reasons regulators might want or need to be an Innovator include:
Unlike the Steward and Catalyst roles, actions taken in the Innovator role may be unrelated to marketplace innovation – they can be focused on achieving the existing objectives in the existing setting, but at a lower cost or risk.
In this role, the regulator is responding or adapting to (marketplace) innovation, for example, by developing new standards and guidance for emerging and developing technologies. This role aims to smooth the path of innovation into the market and might include reforming existing regulations or creating new regulations, allowing restricted experimentation or providing case-by-case restricted licences or special charters.
In our work with the Centre for Regulatory Innovation in Canada, one regulator is testing new AI management system certification approaches, while another is evaluating the opportunity to allow newer, more advanced aircrafts to be used in flight training. Another example is the development of guidance or rules on the provision of automated advice in regulated activities such as legal advice and financial advice.
This role can help to achieve regulatory objectives in a changing innovation environment and regulators’ motivation for adopting this role may be to identify appropriate regulatory responses to specific marketplace innovations. Regulators’ responses may depend on: trajectory of an innovation (speed of development, adoption, dissemination); how the innovation will be used; public attitudes to the innovation; and impact of current regulatory practice on the innovation.
In this role, the regulator is stimulating or enabling (marketplace) innovation in support of regulatory goals, for example, by developing standards for enabling approaches such as open data or through innovation competitions. The Catalyst role is a more ambitious stance for a regulator to take.
Challenge Works are globally recognised experts in the design and delivery of challenge prizes (or ‘innovation competitions’) and innovation funds that support entrepreneurs, start-ups and small businesses to solve pressing problems. These methods can help regulators directly stimulate innovation in areas of unmet need in order to meet their objectives or respond to market failures. This approach can also generate insight into emerging innovation to inform future regulation. We’ve worked with regulators acting as Catalysts on a number of projects:
Another example of a regulator taking on the Catalyst role is the UK’s Financial Conduct Authority’s (FCA) regulatory sandbox which allows businesses to test innovative propositions in the market with real consumers. When selecting its cohorts, the FCA often signals innovation it is particularly interested in stimulating. For example, when seeking applications for a sandbox cohort in the wake of the pandemic, the FCA expressed interest in business, product and service innovations that helped improve financial resilience.
The Catalyst role can help achieve regulatory objectives by changing the innovation environment. Regulators may take on this role because of a motivation to identify and implement regulatory action to unlock or facilitate greater innovation in a specific domain. Regulators’ response may depend on: whether they believe there’s ‘enough’ and ‘the right kind of’ innovation emerging and gaining traction; the major drivers/impediments to innovation in the sector; how the marketplace would respond over time to these regulatory actions; and whether there might be unintended consequences of regulatory action.
But why distinguish between Innovator, Steward and Catalyst roles?
By distinguishing their specific role and related motivations with regards to innovation, regulators and supporting stakeholders can adopt a common language that helps distinguish their objectives—in other words, what they really mean by “regulatory innovation”.
Different roles may entail the regulator grappling with different kinds of risk and uncertainty and may therefore have different implications for the skills, culture or tools required. The Catalyst role, for example, is likely more external facing than the Innovator role and therefore requires approaches to engage industry. Further, because of this external-facing nature, some regulators may feel that playing this role brings on greater risk and the regulator’s culture and attitudes toward risk and uncertainty may need to adjust.
Over time, the balance of roles played by regulators will need to shift.
We hope this framework helps regulators distinguish between the roles they could play, take stock of the roles they currently play and identify roles they may need to move into. The ideas and examples above can then help regulators implement any changes in roles to help better achieve their “regulatory innovation” objectives.
