How can regulation drive growth and ‘catalyse good’?

The scorecard of 100 days in power for any new government has become something of a cliché in political commentary. Yet even in the scramble to discern long-term patterns from initial activity, there’s already clear markers of appetite for change in the realm of regulation. We’ve seen an end called to Ofsted’s one-word inspection summaries, Ofwat given sharper incisors to take action against firms polluting waterways, and commitment expressed for a raft of new authority bodies – notably for football, rail, and a proposed Office for Regulatory Innovation.

In parallel, a number of ‘pull factors’ are forcing regulators to evolve. Unlike the regulators of old, which had a narrower focus on physical harms and encouraging competition, regulators today must deal with a host of new challenges and ambitions: sustainability and climate change; online safety; social equality; and the AI revolution – all of which vie for the title of biggest regulatory issue for several generations.

Regulators as a broader force for good

So, in the decisive decade ahead, it’s clear that regulators must adapt. It’s also evident that regulators start this journey with strong public support. In our survey of 2,000 citizens and 500 regulated business leaders, we found that:

• Three quarters (76 percent) of the public understand regulators’ roles
• 70 percent of businesses think regulators are effective
• And 76 percent respect regulators.

A range of issues have fuelled this anxiety, including data privacy, cyber risks, post-Brexit uncertainty, fake news, and the new threats posed by advanced data analytics and AI.

Against this backdrop, government will decide on the role of regulators for the decisive decade ahead – and how they can broaden their role; functioning not just as watchdogs or guardians, nor solely to promote effective competition – but to become catalysts for good to create positive momentum in the economy, and society. Regulators need to decide how they can better engage and support citizens and capitalise on the imperative for change.

Reframing the remit

The new UK Government has been clear in its commitment to a mission-led approach to governing. This creates an opportunity for regulators to reassess what their role is, clear up confusion, and boost buy-in – and in some cases to even re-think long established doctrine.

In our survey, almost half of regulated businesses (46 percent) thought that regulators work mainly in the interests of the largest businesses. A mission-led reappraisal, clearly communicated, can set the record straight, and make businesses more likely to welcome – and engage successfully with – new regulatory priorities.

The good news is that regulators are well placed to contribute to government mission delivery. They have strong track records as guarantors of quality, are networked and connected into business; and have tremendous convening power.

Any future reframing of a regulators’ remit will start from desired outcomes. This may mean lobbying for extra statutory powers, as well as being ready to adapt standards and shift priorities in response to evolving risks and opportunities. Then, because the world no longer neatly divides into verticals, working with other regulators to define their interlocking roles so the wider regulatory system functions better and delivers more. Co-ordination here would create an opportunity for regulators to determine how they fit into the regulatory system and whether their role overlaps, complements, or conflicts with others.

We’ve seen Ofqual do this to good effect by undertaking the organisation’s first ever ‘listening tour’ – meeting more than 100 school leaders and many more students across the country to inform decision making, prioritisation, and strategy.

Once the right strategy is in place, a mission-led approach can help regulators move mountains. When Thomas Cook Group – then the UK’s oldest travel firm – went bust in September 2019, over 150,000 hapless holidaymakers were left stranded abroad. Dealing with the fallout became the responsibility of the regulator, the Civil Aviation Authority (CAA).

Swiftly dubbed Operation Matterhorn, it was the largest repatriation of British residents since WW2. Empowered by this mission, up to 500 CAA staff worked 12 hour days to identify those needing help, and then chartered an impromptu fleet of aircraft to bring them home – along the way dealing with irate hoteliers, passengers needing special assistance, and even a dog who’d been rescued by a British couple in the Canary Islands.

Operation Matterhorn ended up costing some £50m, but within a fortnight the vast majority of the stranded were back on home soil. Returning holidaymakers gratefully described their deliverance as a “miracle” and “a fantastic job” – serving as an example of what regulators can achieve with a clear mission and strong sense of purpose.

However, to make available the capacity that will enable reframing of their remit, leadership teams need to genuinely challenge themselves on the day-to-day focus of their organisations. Regulators have discretion in prioritising their oversight activities and, exercising this, must seek to challenge the perceived safety in over-regulating familiar territory. In today’s rapidly evolving landscape, not doing so will constrain their ability to redeploy scarce resource and keep pace with the technological and societal changes that will underpin future economic growth.

AI’s rising tide

The UK is a market leader in AI, which is already driving the next big wave of technological change. According to Stanford University, between 2013-2023 the UK was home to 727 AI start-ups (defined as those receiving $1.5m or more in funding), nearly twice as many as any other European country and behind only the US (5,509) and China (1,446) in global terms.

As with every new technology, there is no getting away from the hype around AI. But for once it may well be justified – with its potential to fundamentally change the nature of work itself, AI could spark social and economic transformation every bit as large and wide-ranging as the Industrial Revolution. Estimates of its impact vary, but AI could add between seven to 14 percent to global GDP over the next decade.

To realise this, regulatory infrastructure will be key to maximising the upside of this new technology whilst mitigating less desirable consequences. Recognising this challenge, a 2023 government white paper set out five principles for innovation-led regulation of AI.

These principles – safety, security and robustness; appropriate transparency and explainability; fairness; accountability and governance; and contestability and redress – are fine as far as they go, But they don’t allow for the fact that AI is a horizontal technology that affects all sectors of the economy, whereas the current regulatory infrastructure is divided into discrete vertical markets and disciplines.

The pace of change will also mean new iterations and applications will come so thick and fast that individual regulators may drown in them.

A dedicated AI regulator is one potential solution, but given the horizontal nature of AI this approach may create as many problems as it solves. Perhaps a more promising model can be found in the way that cybersecurity is currently handled. Just as the National Cybersecurity Centre assesses and monitors the macro level of threat but leaves others to act on the intelligence it provides, a new high-level supra-regulatory body could scan the AI horizon, analysing the tech pipeline and interpreting it for individual regulators to apply in their own sectors.

Back innovation to spur economic growth

While the public and businesses are largely supportive of regulators, reservations remain over their role in spurring innovation. All too often, regulators are viewed as taking too long to make decisions; and as a brake on entrepreneurialism, new ideas, and economic growth; seven out of ten businesses told us they think that regulators are too slow to respond.

Yet regulators are well-placed to act as a spur to innovation – helping government achieve its wider goals for society. To do this, regulators need to do more than be able to foster innovation in their market – they need to be innovative themselves. The government’s pledge to establish a Regulatory Innovation Office (RIO) – effectively a regulator’s regulator – will help ensure just this. Once established, the RIO could use its influence to drive regulation aligned with government missions and to speed up progress in new regulatory arenas, including how to manage AI. It could also help prioritise additional resources for those regulators most in need.

At the same time, the new Innovation Office must avoid the temptation to “hold regulators to account” by placing more KPIs for growth on their operations. This type of heavy-handed approach is likely to elicit the opposite of what’s required, diverting efforts to backward-looking metrics rather than forward-looking conversations.

Already, we’re witnessing more examples of regulators being genuinely innovative to deliver on wider societal goals. Take flying, for example: greening aviation is an important part of the net zero agenda. In 2023, fossil-based aviation fuel supplied from the UK generated an estimated 32.9m tonnes of carbon emissions.

But aviation is also a highly regulated sector where safety is rightly paramount. Squaring this circle requires regulators who are prepared to engage proactively with innovation whilst maintaining their focus on safety. The Civil Aviation Authority (CAA), whose statutory remit encompasses everything from licensing pilots and engineers to aircraft safety and even picking up the pieces when travel operators fail, is doing exactly that. In 2023, it issued Virgin Atlantic with the world’s first regulator-approved Permit to Fly for an aircraft flight powered by a Sustainable Aviation Fuel (SAF), an innovative new jet fuel made from renewable sources that can reduce carbon emissions by up to eighty percent.

On the surface, that seems like regulation-as-normal for the CAA, but the process required extensive checks and authorisation – including ground testing – alongside regulatory collaboration with the US Federal Aviation Administration. A team of stakeholders – including Rolls Royce, Boeing, Air BP, Virent, along with a range of research and academic institutes, part-funded by the Department for Transport – all helped to establish a safety case for the flight. One further complication was that fuels are not typically certified by aviation authorities. Instead, they are held to a global standard of jet fuel – meaning the CAA needed to measure the SAF fuel against existing fuel standards to prove that the new fuel was safe and fit for use.

The flight was a landmark moment in the move towards ‘jet zero’ and full approval of SAF for general commercial aviation, and should prove a sustainability ‘win-win-win’ for government, industry, and passengers alike. In the words of Rob Bishton, chief executive at the CAA: “Innovation and sustainability are vital areas of work, but they must go hand in hand with safety.”

Finance is another sector where the regulator has embraced innovation whilst delivering on its day job. In June 2016, the FCA set up a new regulatory sandbox – the first of its kind in the world. The sandbox provided a controlled environment where financial services firms could test out new products and services on real customers, but without the systemic risk associated with full market access, or the danger that the burden of full compliance might kill off promising new concepts before they had a chance to prove themselves.

As a nursery for new businesses – and a way of better understanding how to regulate them – it was a huge success, helping to make the UK a world leader in fintech, attracting billions in venture capital to our shores, and giving consumers and businesses alike access to a range of useful and popular new financial apps and products.

The FCA’s sandbox has been widely copied by regulators around the globe, and the UK Fintech sector continues to flourish. There are now over 1,600 fintech companies in the UK providing 76,000 jobs and it remains the country’s most attractive sector for venture capital. Despite a global slowdown, investment in UK FinTech tripled year on year in the first half of 2024 to £5.7bn.

Embracing a new regulatory mindset

As we look to the future, it’s clear that regulators must evolve to meet the complex, compounding challenges and opportunities of the decisive decade ahead.

By becoming more purposeful and innovative, more agile and predictive, and able to leverage new technologies to stay ahead, regulators will be able to use their discretionary powers to go beyond compliance to actively encouraging positive outcomes. And in ‘doing good’, they can become catalysts for good – unlocking future generations of positive progress.