The necessary tension between regulation and innovation

This morning’s result from the UK General Election 2015 prompts thoughts about ‘where next for the legal landscape during the next Parliament?’.  Although I suspect that the political outcome of the Election would have made little actual difference to future public funding for legal aid, it is likely that the number of citizens facing a potentially unmet need for legal advice and representation in the next few years will continue to increase unless new forms of provision can be encouraged.  Given that these new forms will not be paid for from the public purse, private and third sector innovation must be key.

That leads me to ponder whether the current legislative and regulatory framework for legal services is doing as much as it should to encourage innovation.  I don’t know for sure, but I suspect that regulation does indeed dampen entrepreneurialism in legal services.  I’ve already expressed some thoughts recently about how the Legal Services Act might be reformed (available here).  But there are also some interesting and analogous thoughts in the Economist of 2 May.

What caught my eye were statements like “Shredding the rules”, and “A striking number of innovative companies have business models that flout the law”, as well as the opening sentence that “Pioneering entrepreneurs have often had an uneasy relationship with the law.”

Referring to the taxi service Uber and the room-letting service Airbnb (and they might have mentioned LegalZoom, too), the article notes that, “The tension between innovators and regulators has been particularly intense of late”.  Indeed: “It sometimes seems as if the best way to identify a hot new company is to look at the legal trouble it is in.”

For lawyers contemplating innovation, this is perhaps a counterintuitive proposition!  The article elaborates:

There are two big reasons for this growing friction. The first is that many innovative companies are using digital technology to attack heavily regulated bits of the service economy that are ripe for a shake-up. Often they do so by creating markets for surplus labour or resources, using websites and smartphone apps: Uber and Lyft let people turn their cars into taxis; Airbnb lets them rent out their spare rooms; Prosper lets them lend out their spare cash. Conventional taxi firms, hoteliers and banks argue, not unreasonably, that if they have to obey all sorts of regulations, so should their upstart competitors.

Conventional law firms no doubt feel the same.  The current regulatory gap in legal services, which regulates qualified lawyers in the provision of non-reserved activities but allows those who are not so qualified to conduct those activities without the cost and burden of regulation, is a case in point.  That cost and burden creates a powerful disincentive for law firms to innovate.  But there is certainly scope for innovative market disruptors to adopt digital technology and new processes in the provision of legal services, and to create new markets for surplus legal labour and resources.

The Economist continues:

The second is the power of network effects: there are huge incentives to get to the market early and grow as quickly as possible, even if it means risking legal challenges….  Advocates of the strategy calculate that, by providing a better service than incumbents, and by portraying their critics as defenders of vested interests, they can mobilise public opinion and get the rules changed, or interpreted, in their favour. They can also rely on politicians’ desire to appear forward-thinking.

These propositions neatly encapsulate the policy choices.  The economic imperative for growth, on the one hand, and the political drive for deregulation, on the other, both seriously impede any case for bringing more legal activities within the regulatory framework.  Extending regulation to the currently unregulated, in an attempt to level the playing field with those who are already regulated, is not therefore an easy proposition.

The result of yesterday’s General Election arguably strengthens the growth and deregulation agenda.  The alternative approach under which legal innovators might suggest that there should be less regulation of their activities to allow them more scope for innovation and cost-effective implementation is therefore perhaps now more fitting.

While in favour of economic growth, and in principle in favour of as little regulation as necessary (so as to allow legal businesses scope to exercise their own judgement and flexibility in responding to consumer demand and market opportunities), I believe that still there are dimensions to legal services that underpin the public interest and public good.  These should prevent deregulation being the only dominant policy choice.

In these terms, then, the tension between regulation and innovation will remain.  We definitely need more innovation to help serve the considerable (and possibly growing) volume of unmet need.  We also need the proper framework of regulation to protect the underlying public interest and confidence in legal services and access to the justice system.  The issue for the immediate future is not that there should be no tension between regulation and innovation in order to facilitate growth and deregulation, but that there should be the right tension.

My contention, therefore, is that we do not currently have the right balance – indeed, we have the wrong tension.  In some areas, we need less regulation in order to unleash the latent entrepreneurialism and innovation that is need to address unmet legal needs; in others, we might well need more regulation to make sure that the public interest and consumers are better protected.  After this Election, do we now have the political will to rebalance?  Can we, in the Economist’s terms, “rely on politicians’ desire to appear forward-thinking”, and create a more effective tension between regulation and innovation?

One thought on “The necessary tension between regulation and innovation

  1. Stephen the result of the recent bencher election for the Law Society of Upper Canada (Ontario) speaks volumes about the state of a legal profession constrained by regulation and, in my opinion, paralysed by cultural legacy. Your voice needs to be heard across the Atlantic.

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