Fostering regulator–innovator collaboration at the frontline: A case study of the UK's regulatory sandbox for fintech

• Published date: 01 April 2022
• Author: Lauren A. Fahy
• Date: 01 April 2022
• DOI: http://doi.org/10.1111/lapo.12184

ORIGINAL ARTICLE

Fostering regulator–innovator collaboration at the

frontline: A case study of the UK’s regulatory

sandbox for fintech

Lauren A. Fahy

Utrecht University School of Governance,

Utrecht, The Netherlands

Correspondence

Lauren A. Fahy, Utrecht University School of

Governance, 3511 ZC Utrecht, The

Netherlands.

Email: l.a.fahy@uu.nl

Funding information

European Research Council

Abstract

When supervising emerging technologies, regulators

are more effective when they collaborate with business.

Yet, innovative businesses are often small, inexperi-

enced, and mistrustful. How can regulators motivate

them to collaborate? This study examines this question

by applying responsive regulation theory to a case

study of the United Kingdom’s regulatory sandbox for

financial technology. This study illustrates how front-

line regulatory interactions foster regulator–innovator

collaboration, in ways that differ from how these inter-

actions foster collaboration between regulators and the

mature industries upon whose study responsive regula-

tion is based. As one of the first academic studies to

collect data from sandbox participants, this article

offers unique insights into “what works”about the

United Kingdom’s much-imitated model.

1|INTRODUCTION

When supervising emerging technologies, regulatory agencies are more likely to succeed if they

collaborate with their stakeholders. This is the consensus emerging among innovation gover-

nance and law scholars (Allen, 2019; Kuzma, 2013; Malloy, 2013; Mandel, 2013;

Marjosola, 2019). Traditionally, stakeholder participation in the development and implementa-

tion of regulation has been relatively “passive”(Malloy, 2013, p. 129). Opportunities for input

are limited to review and comment procedures, legal challenges, and advisory panels

(Kuzma, 2013; Malloy, 2013). Scholars increasingly argue that such incidental, passive stake-

holder participation is inadequate when developing regulatory responses to innovation

DOI: 10.1111/lapo.12184

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use,

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©2022 The Author. Law & Policy published by University of Denver and Wiley Periodicals LLC.

162 Law & Policy. 2022;44:162–184.

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(Mandel, 2013). For several reasons, effective innovation regulation requires continuous, active

stakeholder collaboration.

First, innovation is hard to effectively regulate.

1

New products and services emerge and evo-

lve rapidly. Innovations can be complex and highly uncertain (Mandel, 2013, pp. 254–255). An

innovation’s risks and benefits are rarely obvious and uncontroversial ex ante (Brownsword

et al., 2017). To manage the risks that innovations pose, regulatory agencies need to gather as

much information as possible early in the innovation process. To mitigate uncertainty, they

need to experiment with, and regularly adapt, their rules. To manage controversies, they need

to gradually build consensus (Mandel, 2013). Gathering information, experimenting, and build-

ing consensus necessitates active stakeholder collaboration that begins early and is maintained

throughout the innovation process; from research and development to commercialization and

diffusion (Kuzma, 2013, pp. 195–196; Malloy, 2013, 129).

Stakeholder collaboration is thus central, explicitly or implicitly, to many of the regulatory

models that innovation law and governance scholars advocate (Allen, 2019; Huising &

Silbey, 2011; Marjosola, 2019; Zetzsche et al., 2017). Yet, these scholars rarely address whether

or under what conditions stakeholders will be motivated to collaborate (Abbott, 2013, p. 11).

An exception is Mandel (2013). Regulators hoping to implement his “new governance”

model, he says, will need to proactively facilitate participation by new start-up type firms,

because they will otherwise lack the resources and knowledge to do so (Mandel, 2013, p. 60; see

also Gray & Pelisse, 2019, p. 7; Kuzma, 2013, p. 196). In addition to lacking capacity, anec-

dotal evidence suggests that some firms may be unmotivated to collaborate for strategic or ideo-

logical reasons (e.g., Uber, which is known for its aggressive anti-regulation tactics). This

argument is supported by regulatory scholarship, which has found that small businesses are

often underinformed about the regulatory regime in which they operate, lack capacity to engage

with that regime, and are unmotivated to do so (Gunningham & Sinclair, 2002, pp. 13–14). This

article focuses on the young, innovative firms that Mandel argues are least likely to participate

in the regulatory processes, and how regulators can motivate their collaboration.

This article draws on responsive regulation theory (Ayres & Braithwaite, 1995;

J. Braithwaite, 2002,2013). In this theory, collaboration between regulator and regulatee is

often said to emerge from the frontline. Direct interactions between regulator and regulatee

staff can motivate regulatees to collaborate with the agency in the future (Braithwaite

et al., 1994; van Erp et al., 2020; Loyens et al., 2019; Mascini & van Wijk, 2009; Nielsen &

Parker, 2009). Responsive regulation theory, however, was developed largely through studies of

mature industries and has never before been applied to the context of innovation supervision. It

has not been established that frontline interactions have the same effects on regulatee motiva-

tion, and in the same ways, when regulators are dealing with new, highly uncertain products

whose legal status is unclear (Liu et al., 2018). This study aims to begin to address this gap by

asking: How do frontline interactions build innovative firm motivation to collaborate with

regulators?

This study employs an explanatory, embedded, single case study (Yin, 2014, pp. 220–226)

of the UK Financial Conduct Authority’s (FCA) regulatory sandbox for emerging financial

technology. The sandbox represents a formal attempt by a regulatory agency to create a space

for collaborative interactions between regulator staff and innovative firms. Data were collected

through a document study, questionnaire, and qualitative interviews with senior managers from

21 UK fintech firms. The analysis evaluates whether interactions in the sandbox were indeed

collaborative and whether they had the positive influence on firm motivation that responsive

regulation theory anticipates.

The study results contribute to responsive regulation theory by demonstrating how frontline

interactions may play a more foundational role in fostering future collaboration in an innova-

tion context than they do for more mature industries. Innovative industries are characterized by

new products, new firms, and new, inexperienced managers. In the case study examined here,

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