Paul Newson, Principal
Regulatory inertia and outmoded legislative frameworks, that cannot comprehend emerging business models, enabled by rapid advancement in technology, often favour incumbency and suppress innovation, to the detriment of challengers, competition, and associated economic and social benefits. These not insignificant regulatory barriers are increasingly inexcusable in the financial service space, however, the tolerance for exaggerated restrictions and precautionary approaches persists in the gambling sector.
There is no panacea or easy fix. However, I think there are lessons to be learned from the Fintech space and financial services regulation generally. Lessons that can be adopted for the betterment of gambling regulation. Do not misunderstand me though. I do not mean to paint financial services regulation in any particularly favourable light. The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry doused that misconceived enthusiasm.
I recognise, however, that the gambling sector could sometimes benefit from more nimble contemporary regulatory frameworks and less stubborn default adhesion to exaggerated and blunt precautionary approaches. I believe a more sophisticated, nuanced and evidence informed approach, that is responsive to both rapidly evolving technology and evolving consumer and community expectations is the appropriate and preferred regulatory model.
It is terribly easy to avoid risks by creating cumbersome regulations and blunt barriers to entry. But without risk there is no innovation and only constrained economic activity that surrenders investment and associated consumer benefits to other more progressive jurisdictions.
Where obsolescent legislation or regulatory apprehension risks stifling innovation, regulatory pathways are needed to surface novel products and accelerate innovation. Pathways where incumbents and challengers can innovate on the margins of, or outside of the regulatory framework, in a contained and controlled environment. A supervised and time bounded environment but unencumbered by the prohibitive time and expense required to obtain a relevant licence or meet the full conditions of same.
One possible tool that can accelerate innovation in a considered and responsible manner is a regulatory sandbox. A regulatory sandbox is a safe harbour, where business can test concepts under relaxed regulatory conditions in a controlled environment. Regulatory sandboxes have proved popular to cultivate fintechs and change the banking landscape and advancing financial inclusion, however, the model is less familiar in gambling regulation.
Some key considerations when thinking about establishing a regulatory sandbox:
Purpose. Be clear about the underlying intent. Regulatory sandboxes are not a cure all, but it is helpful to understand what you are trying to achieve from the outset. Is it to promote competition? Test the extant regulatory framework with new products and business models? Or is it about gathering evidence and momentum to support legislative reform?
Consult with industry. It is best to speak with industry in the investigation and development stage to have a more informed understanding of what issues industry are confronting and whether a regulatory sandbox is the appropriate and preferred pathway. Like development of other public policy, it assists to consult and consider co-designing regulatory sandbox parameters with stakeholders.
Minimum viable product. Resist the perceived safety of a comprehensive framework with detailed application processes and narrow eligibility. It is essential risk are controlled and the right balance between facilitating innovation and mitigating new risks is achieved, however, industry appetite to participate will be underscored by accessibility and usability of the framework. It is better to ensure clarity of purpose and effectively scope the issues industry are facing to inform a minimum viable sandbox product and bring it to market efficiently knowing its operation and requirements will benefit from participant feedback and will be iterative adapt overtime.
Raise with the regulator. An open dialogue with regulators is essential to support an efficient and effective regulatory regime and it is misconceived to frame participation in conversations with market participants as regulatory capture. Regulators are adept at balancing tensions, carefully considering risks, and weighing merits of potential public policy and regulatory approaches. But decisions are more likely to be effective when informed by evidence and a thorough understanding of the sector, and challenges faced by market participants and stakeholders. So, if you are confronting regulatory barriers to introduce novel products and leverage technology, speaking with the regulator to share your perspective on the issues and possible interventions is an important step towards creating more efficient regulatory pathways.
Engage researchers. Gambling researchers are important stakeholders in public policy discussions to help inform thinking and development of regulatory approaches including sandboxes. Researchers ought to be included in stakeholder discussions when investigating possible interventions and scoping parameters for any potential regulatory sandbox. Credible researchers can provide substantial value to policy development and assist identification of suitable safeguards as well as appropriate monitoring and evaluation frameworks that can help iterative improvement of sandbox design and parameters.
Regulatory sandboxes are no longer ground-breaking, and they are not a panacea or perhaps even the right intervention for the issues industry might be wrestling with. What is clear is that regulatory uncertainty, amplified by outmoded legislation and cumbersome prescription dampens innovation and can be a blight on industry vitality and economic activity and impede associated social benefits.
The UK Financial Conduct Authority is recognised as leading the way with its regulatory sandbox launch in 2016 and participants have reported it has delivered substantial value. Being able to test fintech products and underlying technology in live but controlled environments ensures business models are responsive to early feedback and participation builds credibility in the market.
In addition to sparking industry innovation, sandboxes can be a vehicle to advance smarter responsible gambling initiatives and outcomes. When negotiating the parameters of any potential sandbox, regulators should consider requiring participants invest towards accelerating responsible gambling innovation that ultimately supports safer gambling and sustainable industry.
Paul Newson is a Principal at Senet and leads the Advisory practice. Paul was the former Deputy Secretary, Liquor, Gaming & Racing with the NSW Department of Industry and immediate former President of the International Association of Gaming Regulators and former trustee of the NSW Responsible Gambling Fund. Paul can be reached at +61 428 563 376 or firstname.lastname@example.org