Regulatory systems: disruption on all fronts

The disruptive power of emerging technologies is one of the dominant trends of today. Fundamentally, the innovations of the information economy are changing how we buy and sell goods and services. And there is a lot more change on the horizon. 

Now it appears the pressure from technological disruption is well and truly boiling over for several of our regulatory systems. 

Facing the challenge of redesigning our regulatory regimes is now unavoidable. 

Given that this is a cross-government challenge, now is the right time for more strategic thought on adapting our regulatory systems to the ‘disrupted’ economy. 

Under review 
Disruption means it is essential  our approach to regulation changes. Indeed, change is already under way. Currently, there are at least four significant consultation programmes driven by the impacts of disruptive technologies: 

1. MBIE’s Telecommunications Act 2001 Review, which is looking at both how to regulate communication services and the form of economic control to apply to communications infrastructure. 

2. The Electricity Authority’s consultation on the implications of emerging technologies on distribution pricing arrangements.

3. The Commerce Commission’s Input Methodologies Review, which partly involves considering how to treat (for regulatory purposes) investment in emerging technologies by electricity distribution companies.  

4. The Ministry of Transport’s Small Passenger Services Review, which is proposing a unified set of requirements to regulating small passenger transport operators. 

Each of these reviews is taking place in the context of different regulators, with different statutory requirements and objectives (and scope for change), and, of course, the unique circumstances of each industry.

They still have much in common, however. 

Regulatory decision-makers are all performing a difficult balancing act between providing certainty for both established operators and new entrants, and providing frameworks that are fair, flexible and technology neutral, where investment decisions are economically efficient. 

And, no final decisions have been made. The future direction of each regulatory approach is still not settled. 

Traditional approaches are breaking down.

Our current regulatory frameworks are generally designed around specific products or classes of business. 

This approach worked well when there were products and business could be easily segmented into different, relatively stable categories. 

However, new, increasingly affordable and accessible technologies, particularly communications platforms, are breaking down the barriers that once divided different services and businesses. 

Suddenly, businesses that were once considered stable are finding themselves subject to heavy competition. For example, traditional services like taxis have suddenly faced competition from app-based platforms like Uber. New peer-to-peer ridesharing and carpooling platforms are also emerging. 

In other sectors, drones present significant challenges to aviation regulation, and there have even been recent reports of food sellers using Facebook to circumvent food safety laws.  

Problem definition 
The dramatic changes that have already been wrought by emerging technologies do not just present a challenge from a regulatory enforcement perspective.

More broadly, outdated approaches to regulation jeopardise our economic wellbeing. 

If our regulatory frameworks are insufficiently adaptive or technology neutral, business will suffer from continued risk and uncertainty. 

New, innovative businesses may struggle to operate if they find themselves working with rules that were designed for different business models, and for a different era. Frameworks that set requirements for technology-based business at a too high a level risk preventing innovative services from developing. 

Industries and businesses currently subject to competitive markets can find themselves stranded with legacy assets and costs whereas regulated industries investing in products and services that perform similar functions might receive protected revenues under current rules.  

These outcomes suggest some form of regulatory reset is required. However, care must be taken not disturb regulatory certainty too much. Fundamentally, efficient levels of long-term investment will not take place in an environment characterised by considerable regulatory uncertainty

Change is needed but it needs to be well signalled and considered. 

Strategic direction needed 

There is a risk that ‘siloed’ regulatory decision-makers, working to reform and update their ‘siloed’ regulatory approaches, come to  different conclusions and how best to respond to evolving technologies. 

For example, the relatively prescriptive proposals for small passenger services contrast sharply with the technology-neutral provisions that apply to crowdfunding and peer-to-peer lending in our financial services legislation, legislation that emphasises innovation and flexibility. 

It seems likely that the regulatory framework for small passenger services will have to be redesigned once again when, and if, services based on driverless cars become a reality. 

Although it is legitimate for different approaches to be taken, it is important that each framework strikes the right balance between supporting innovation and growth into the future, and achieving their regulatory objectives (such as promoting investor certainty). 

There is arguably value in having a common set of principles to guide regulatory change processes driven by the challenges posed by disruptive technologies. 

New Zealand would benefit from a more systematic consideration of whether our regulatory systems are fit for purpose. Greater emphasis on longer-term thinking might avoid us having to redesign frameworks  again in 10 to 20 years. 

The government’s work digital convergence and the Productivity Commission’s inquiry into regulatory institutions and practices provide the foundation for this work. Let’s get started. 

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