Regulating the Digital Economy after Brexit, what is the UK Governments approach?

Published: Fri Feb 04 2022

Following its Benefits of Brexit Policy Paper and the Plan for Digital Regulation the UK's Post Brexit approach to regulating the digital economy is taking shape

The tech sector is the UK's modern success story, the most recent DCMS data showed that the sector added 150.6bn to the UK economy in 2019 [1], supporting 1.56 million jobs.[2] UK tech is on a rapid expansion path, the sector grew by over 25% in the decade from 2010 to 2020[3] and 2021 was the best year ever for investment in UK tech start-ups[4]. Research from DCMS suggests that if digital ecosystems across the UK are effectively supported, they could add another 678,000 jobs by 2025 across the country.[5]

As digital technologies and services have become ever more ubiquitous to the way we live our lives regulation of the sector has grown. The 2020's will be a major moment for this with new rules on competition, data protection, online safety, artificial intelligence and telecommunications being introduced in the UK, but also around the world.

This global shift brings with it a debate on how best to regulate the digital economy. What is the right balance between protecting consumers and citizens while also enabling the benefits, economic and social, that digital connectivity and services bring.

Following the UK's exit from the EU the UK is seeking to define its own path in digital regulation and seeking to navigate between the global trading giants like the EU and the USA.

As the UK seeks to chart its path on digital regulation what we are seeing is a third way approach with legislation from the Government setting objectives at a high level and the UK's regulators being tasked to deliver detailed guidance, generally in the forms of codes of conduct or standards for the industry.

This approach aims to strike the right balance between identifying clear outcomes such as boosting competition in digital markets or making the UK the safest place to be online while seeking to include flexibility so regulators can be adaptive in their enforcement as well as modifying guidance as new technologies emerge. This trend will also likely see supplementary duties being set for regulators to consider the economic implications of intervention as well as having due regard for innovation.

Regulation is enormously important for the UK tech sector, around 96% of tech sector output and 81% of exports is in services, where regulation is vital for the research, development and then deployment of digital services. Increasingly regulation is cited by techUK members as important for investment decisions and the comparative advantage of the UK economy. In our recent Digital Economy Monitor Survey members highlighted that good regulation can be a driver of demand and stability, but that contradictory regulations or differing approaches may frustrate growth plans.

Below we explore (1) how is digital regulation being defined in the UK, (2) how is the UK Government implementing its approach and what are the initial trends? and (3) how can the UK deliver on its digital regulation plans to ensure it seizes on the opportunities available to it in the post-Brexit regulation of the digital economy.

1. How is digital regulation being defined in the UK?

How the UK Government perceives digital regulation is set out most substantively in their policy paper Digital Regulation: Driving Growth and Unlocking innovation [6], often referred to as the plan for digital regulation. Here the Government defines in its view of what digital regulation is as:

Digital regulation' refers to the range of regulatory tools that government, regulators, businesses, and other bodies use to manage the impact that digital technologies and activities can have on individuals, companies, the economy and society. These include norms, self-regulation, statutory codes of conduct, and rules in primary legislation.

The activities it associates with digital regulation, among others, include the accumulation, processing and portability of personal data, the oversight, accountability and verification of digital content and the transparency and use of advanced data analytics and algorithms scale. The Government also recognises that these activities take place across sectors such as in health, finance, advertising, and communications.

In terms of the approach to regulation the Government has set itself a number of goals, these appear across the plan for digital regulation, the benefits of Brexit policy paper and a recent consultation on reforming the better regulation framework. Here key tenets such as proportionate outcomes, due consideration for impacts on economic growth and innovation, preference for non-regulatory interventions and moving away from the EU's precautionary principle are advocated.

2. How is the UK Government implementing its approach and what are the initial trends?

Much of the legislation which will see these trends put into practice are still being enacted, however there are some clear initial trends such as:

Legislation will set the objectives at a high level while regulators will be tasked with developing the detail as well as enforcement: legislation such as the Telecommunications Security Act, Online Safety Bill and any forthcoming Competition Bill will outline objectives at a high level with regulators required to create codes of conduct that provide detail guidance for company behaviour as well as how the rules will be enforced. This will see regulators importance in policy development increase.
Regulators themselves will take more responsibility for policy reform: as the codes of conduct will deliver the majority of new regulatory regimes regulators themselves will be more important for ensuring these codes are updated as markets and technology change.
A more participatory approach to regulation is emerging: Across regulators and in the policy objectives being set by the Government there is an increased focus on non-regulatory interventions and closer direct working between business and regulators. This has been set out by Government as a broad policy goal in both the Plan for Digital Regulation as well as the recent benefits of Brexit policy paper. Regulators themselves have sought to achieve their outcomes via non-regulatory means, effectively striking a deal with companies to address concerns the regulator has about consumer harm. The Competition Markets Authority (CMA) has done this recently, negotiating commitments with Google over its Privacy Sandbox. The proposed Digital Markets Unit (DMU) being established to improve competition in digital markets will principally focus on a more participatory approach to regulation.
Duties to have regard for innovation and the economy will have their importance increased when regulators consider interventions: Across several consultations such as on the Government's new data protection proposals and on the pro-competition regime for digital markets secondary duties for regulators to consider innovation and the wider economy are being considered. The inclusion of these would mean regulators would likely need to increase their use of economic impact assessments before making regulatory interventions. The Brexit opportunities paper also urges an increased use of regulatory Sandboxes and testbeds which will generally be sponsored by regulators. The Government's Innovation Strategy also highlights Sandboxes, testbeds and living labs as vital for innovation and economic growth.
Cooperation and information sharing between regulators is being prioritised: The Digital Regulation Cooperation Forum (DRCF) is an information sharing can coordination forum sponsored by the ICO, FCA, Ofcom and CMA to better co-ordinate on digital regulation. While the DRCF has been set up on the initiative of the regulators themselves the Forum enjoys support from Government and industry and is viewed as preferable to a single regulator for the digital economy. The DRCF has just appointed its first CEO and will publish a review of its first year of operation and a new annual plan for the financial year 2022/23 which is likely to see its activities increase. The DRCF is a relatively unique enterprise and is being watched by other jurisdictions.

3. How can the UK deliver on its digital regulation plans?

On the whole the trajectory of post Brexit regulation for the digital economy is promising, with the opportunity of creating a flexible approach to digital regulation that can keep up to date with new developments in the market as well as creating schemes that directly sponsor innovation. For example, by increasing the use of non-regulatory interventions and initiatives such as sandboxing.

However, this is a complex initiative and has many moving parts across Government and regulators meaning the path to achieving this will not be smooth. There is also a risk that poor oversight and overreach by regulators could lead to a contradictory and burdensome regulatory environment.

techUK and our members have made a number of suggestions of how to improve the Government's approach.

Clear objectives set in legislation: ensuring the success of the UK's approach will mean Government starts with clear objectives in the legislation itself. If these are not clear it is likely regulators will struggle to deliver effective codes of conduct that work for the industry and consumers. For example the proposals in the Online Safety Bill for tackling legal but harmful' content have been criticised by MP's as being difficult to implement and could undermine the effectiveness of the regime.
Sufficiently resourcing regulators: under the UK's approach regulators will be asked to do much more. While resourcing for regulators such as CMA and Ofcom are increasing ensuring this is enough and that regulators are not under resourced will be vital to the success of the UK's plans for digital regulation. There have also been some concerning suggestions from the Government's consultation on the new pro-competition regime for digital markets and the data protection reforms that could see resources increasingly being dependent on fines or by cutting services elsewhere. Resourcing will also be hugely important to ensure that duties to consider innovation and carry out economic assessments can be done well.
Expert regulators: expert staff and those with technical knowledge will be increasingly important as regulators will need to have a good understanding of the underlying technologies that power our digital economy in order to make effective decisions. This will mean staff will need to be trained as well as drawn in from industry. This will be difficult due to the high salaries that are often present in industry and the expense and time needed for good training.
Recognising the compliance burden on firms: the amount of upcoming regulation is very large. Ensuring this is sequenced to allow companies to provide input and the time and space to prepare to comply will be vital for the broader digital economy. Many of techUK's smaller members have raised concerns that they do not have enough bandwidth to feed into consultations and may struggle to onboard new regulatory requirements. The quality of the design of regulation and how it is implemented will suffer if firms are overstretched and Government should be alive to this concern.
Making sure the DRCF's work is well published, and it engages with industry: the DRCF has made a good start, however, to ensure it lives up to its potential to effectively coordinate digital regulation its work should become more transparent, and it should develop a programme of proactive engagement with businesses. There is an opportunity to do this in its first report as well as its plan of work for 2022/23.
Ensuring economic assessments and evidence thresholds are robust: this will be hugely important for ensuring regulatory action is effective, proportionate and achieves the aims of addressing consumer harm while not distorting markets. As much as possible the requirement for high standards of evidence gathering should be set in legislation. For example the proposed DMU will have very significant powers under its pro-competition interventions (PCIs), techUK has advocated that where powers like these are used significant evidence should be needed to instigate a PCI and there are sufficient avenues for redress.
Supporting international trade: digital services face trade barriers in similar ways to other goods and services when significant divergences in regulation exist between markets. While the UK does not need to copy and paste regulation from abroad to ensure trade can continue, alignment on general principles and equivalence of standards is important to facilitate trade and cooperation. Getting the balance right here will allow important arrangements such as the UK-EU adequacy decision to continue while it will also encourage regulators between countries to cooperate and set memoranda of understanding and other agreements that can increase opportunities for trade. The UK should also not ditch pro-innovation provisions that it has inherited from the EU such as protections against intermediary liability included in the eCommerce Directive.
Scrutiny and ensuring the UK sticks to its overarching principles: This will be hugely important to ensure that Government and regulators are sticking to the principles that have been set out across the Opportunities of Brexit policy paper, plan for digital regulation and the suggested approach to reforming the better regulation framework. This should include Government carefully monitoring the increasing role regulators will play in developing and delivering policy, increased oversight by Parliament of both Government and the regulators and strong initiatives for engagement with the industry from regulators as well as from Government.

You can find further information on what techUK, and our members are advocating to Government across a number of initiatives on digital regulation, for further information please email neil.ross@techuk.org.

Company: techUK

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