Regulatory sandboxes: innovative public-private partnerships to advance technology

By Lola Bardají & Mónica Reig

In a globalised economy, the governments of advanced democracies need to respond to the demands of an increasingly developed, complex and interdependent society. These changes in the social and economic environment underscore the need for public agencies to maximise the synergies between the resources, capabilities and knowledge of the public sector, the private sector and society to meet collective needs.

In today’s dynamic societies, the state takes on a strategic position and assumes the role of guarantor of the regularity, continuity, neutrality and quality of services for citizens, performing a complex strategic function that interrelates regulation and competition between operators. The law must be adapted to this new reality in which the state is no longer the sole protagonist and be reshaped as a dynamic system of rules and mechanisms capable of interacting with their environment.

This context entails a more cooperative way of governing, in which public and private institutions participate in the formulation of public policy and government uses forms of persuasion and negotiation based on coordination and cooperation to mobilise the resources and capabilities of the public sector, private sector and society.

Regulatory sandboxes are laboratories or test areas to align the law with new business models that lack regulation

Traditionally, as part of their work to establish stable and certain regulatory frameworks, lawmakers have worked with a view to permanence. The legislative technique used in regulated sectors is intended to achieve a sound, comprehensive regulatory framework that can be maintained over time.

The law, previously defined as the product of the state, is now dependent on other actors, who accumulate more knowledge than the state itself and who act at the transnational, global and local levels.

The dizzying speed of today’s technological development has impacted lawmakers' mindset, and they are striving to prevent the traditional legislative technique from stifling innovation and the economic development of their societies.

As a result, new models of law-making techniques have arisen, from "sunset rules" to "agile regulation." These models are designed to encourage the inclusion of an expiry date in the law and allow it to be tweaked, based on a sort of "trial and error" approach.

Regulatory sandboxes fall under this dynamic and innovative mindset that lawmakers are gradually adopting. Regulatory sandboxes are laboratories or test areas to align the law with new business models that lack regulation precisely because they involve an unprecedented technological transformation.

Sandbox MAS
The Monetary Authority of Singapore (MAS) has launched the FinTech Regulatory Sandbox (Photo: MAS)

The financial industry is making the most use of the sandbox technique, as it allows companies to test and evaluate the market contribution of innovative products that do not fit into existing regulations. The process is carried out by opening the sandbox to companies and consumers and gathering and prioritising their fears and concerns.

Two standout examples in this area are the United Kingdom and Singapore. The UK's Financial Conduct Authority (FCA) created the first regulatory sandbox and exported the concept to the rest of the world, whilst the Monetary Authority of Singapore has launched the FinTech Regulatory Sandbox.

Sandboxes are thus a new form of public-private partnership in which the public sector – regulators and public institutions – opens a testing area to work with businesses and consumers to strike the right balance between overregulation, technological innovation and new business models. It is a disruptive model of collaboration that public institutions are implementing beyond the financial industry.

Sandboxes are a new form of public-private partnership in which the public sector opens a testing area to work with businesses and consumers

The regulatory factor is key to developing innovation ecosystems that attract talent and investment. Creating a direct communication channel between the various stakeholders can significantly improve the regulation and its effects. Such a channel allows public authorities to better identify how to integrate the knowledge and capabilities of the private sector to build regulatory frameworks in dynamic environments that safeguard the public interest of innovation and allow companies to adjust their value propositions to the interest of consumers.

One country that has embraced the sandbox model to improve security, wellbeing and national competitiveness is Finland. The Finnish public sector is working on such interesting projects as the possibility of a sandbox to develop a regulation that would enable the transfer and secondary use of personal data held by government agencies, as long as the party concerned provides his or her consent through the MyData platform.

Helsinki University Central Hospital
Helsinki University Central Hospital is working on a top-tier sandbox platform (Photo: HUCS)

Meanwhile, Helsinki University Central Hospital (HUCS) is working on a top-tier sandbox platform where partners can develop new solutions in collaboration with healthcare professionals aimed at simplifying the treatment of diabetes through the use of artificial intelligence, data processing and patient consent. These projects are part of the national Age of Artificial Intelligence strategy (2017), launched by the Ministry of Economic Affairs and Employment, whose final report, Leading the way into the age of artificial intelligence, was published in June 2019.

It is a good example of how the public sector can use an innovative legislative technique to consider more dynamic regulatory frameworks tailored to the needs arising from the technological reality. The public sector must promote innovation, taking care to avoid the constraints imposed by past legislative techniques and opening spaces for shared reflection with the private sector and civil society. In this sense, the public sector itself is innovating.

The public sector must promote innovation, taking care to avoid the constraints imposed by past legislative techniques

This innovation can be a lever for economic development and social progress. Technology can play a key role in the development of currently available products and services, improving consumer access, enhancing quality or lowering the supply price.

The sandbox initiative offers the public sector a tool to better understand the latest innovations, develop shared learning spaces to identify the risks and potential of applying technology to new business models, and guide and correct specific value propositions made by economic agents to align them with the general interest.

The post-Covid-19 regulatory framework will foreseeably be more demanding. We need a public sector that facilitates innovation, with institutional capabilities that allow it to collaborate with other actors with guarantees, integrating knowledge and capabilities from the private sector that make it possible to establish regulatory frameworks that safeguard the interest and protection of consumers and encourage more sustainable and inclusive productive markets.

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