Can the UK win at "Regulation Arbitrage" ?

Recently I attended a round table discussion organised by COADEC to look at how the UK will reorganise its regulations in light of Brexit, to diverge from Europe and for our regulatory framework to become more friendly and conducive to entrepreneurship. The discussion was chaired by the MP John Penrose who is the process of writing a report on competition for the government and much of the discussion focused on proposed up-coming reforms to the Competition & Markets Authority (CMA) and best practices that can be taken from some of the more forward think regulatory bodies here and elsewhere in the world. 

I think myself and some of the much brighter people on the call were keen to communicate that:

A: All regulations especially licence to trade regulations favour incumbents over new entrants and if any government wants to encourage new entrants ( predominately new entrepreneurs) in order to increase competition ( generally seen better for consumers) then the less regulation the better. As far as I know the FCA is the only regulator that has a third mission (on top of maintaining the structural integrity of the financial system and protecting consumers from fraud and sometimes themselves) to promote competition and it is this objective that not only meant that FCA creating sandboxed for pre-regulated startups to build and market test new products but also led to Open Banking regulations which have been a big reason for the success of the UK Fintech sector. More of this thinking is needed across all UK regulators. At present the UK regulators seem to be too slow, not sympathetic to innovations and biased towards incumbents who are able to use legal address to slow down change. Penrose seemingly suggests the government will address these issues

B: The EU regulation such as GDPR still applies in the UK. In the case of Medical Devices we will be accepting EU CE Marking until 2023. The EU will continue to apply regulations on any company wishing to trade in the EU and given that they are a super active legislative in this field, we can expect more rules and regulations imposed on UK businesses and startups without us having much say. In fact there is a danger that recent EU proposals, particularly its published plans to  regulate AI (far too broad in my view and punitive for AI First startups) could have a massive negative impact on one of the few sectors where the UK has a big relative advantage. Another to keep a watchful eye on is in Quantum Computing where the EU is keen to keep the UK institutions and startups out of any EU funding and to limit collaborations with institutions and businesses in the EU and where defensive EU regulations are expected. Technology areas like this rather than fisheries is where attention should be focused. 

C: Defensive Regulations, competition policy and trade barriers imposed to protect or nurture strategically important industries are now being practiced by all of the major trading blocs ( USA, EU, China, India etc). Not only that, but all the trading blocs are funnelling government money to build up their own national capacity in frontier technology. To be fair when the government had an Industrial Strategy (at present it is unclear we still have one or whether it remains a mere feature of the overriding place based, level-up agenda) we were also prepared to pump in money. Projects such as ARIA suggest we still are willing to play with the big boys but given our relative limited resources compared to Biden's USA, China and even the EU, for how long. Also are we prepared to change competition policy and regulations to protect nascent frontier tech industries, or allow national champions to emerge that may initially dominate the UK market but are still small players on the international stage. In our discussion with John Penrose there was lots of talk about how the Competition Markets Authority (CMA) blocked the merger of Crowdcube and Seedrs even when they know that as a % of the UK (never mind the world) they are providing a tiny amount of early stage capital to startups. The CMA seemly recognised that there eventually will be a dominant platform in the crowdfunding space ( the combined annual income of both is only ￡16m so economics alone makes that likely) but that they seemingly do not want it to be consolidated (via a planned and mutually beneficial merger) on their watch. Do we want “National Champions”? - seemingly not if you are the CMA.

As a counter-balance to the view that nothing will change to applying regulations strategically, parliament recently approved “National Security and Investment Bill” that sets out the UK government's intention to intervene to which countries and which overseas firm UK tech can be bought and sold too. This is an indication that the government will be active to preserve and protect the UK's IP assets and as such it is not only involved in removing “red tape” but on occasions adding to it if it is needed to protect national and strategic assets. Not sure this is a positive thing but   

 D: The regulation of state aid subsidies is now governed by the WTO. If amongst all the news around the pandemic you missed the changes, then you can read them here. The government is still curtailed from financing what they want willy-nilly but overall it is a looser arrangement than the EU State AID Regulations. For instance you may notice that a single beneficiary under WTO rules can now receive up to ￡350,000 over three years. Under the EU the limit was 200,000 Euros which had a big impact on restricting the amount of support that early stage startups could receive from the likes of SEIS and Innovate UK. Hopefully the limits on both ( the maximum qualifying SEIS investment a startup can receive is presently ￡150,000) can be substantially increased. The government is to set out its new state aid rules in this week's Queen's Speech.     

So the government intention to use regulation and competition policy to favourably position the UK economy, particularly in regards to encouraging tech entrepreneurship and inward investment, is not straightforward. 

It is also not straightforward because for startups any deviation from the regulation ( especially license to trade certifications) set by the major trading blocs ( especially the EU or USA) casts major doubt on the wisdom (especially for Fintech, Health/Med Tech startups) of bothering to focus on getting a product into the UK market in the first place. If the size of the UK market/ “size of the prize” is so much smaller than the USA or EU, and regulation and safety approval process you need to go through in the UK has no bearing on getting approval in the bigger trading blocs, why not just skip the UK and go and set up in the bigger markets. If your team is small, your resources tight and your runway is short, can Tech startups really afford to be focusing on a niche market ( i.e. UK) that is not a “beachhead” ( fast track route) into a larger market (i.e. EU or USA). 

Last week I found myself advising three startups that they should consider relocating to the USA because the size of the UK market, “size of the prize” is under ￡100M and in consequence likely to be too small a market to be attractive to Venture Capitalists. The exception to this rule of thumb is if the startup can get their product in and adopted by a good % ( 10-20%) of the small UK market in a very short period of time ( 2-3 years). For this to happen there will need to be big changes in how innovative products' safety and efficacy are “proven” or established to the satisfaction of the regulators, certifying authorities and industry opinion leaders. A recent article in the BMJ shows unless we do change then we may of reached "Peak Life Science in the UK". What we need is much more:

Speed - If there is one thing that will keep great tech companies in the UK and attract more great innovative startups/ inward investors is a focus by all on the speed to regulation and the speed to adoption. In short “Fast Track” everything. 

Transparency - At present, finding out what needs to be done to get through a regulation/ certification process is an insiders game. Yes the regulators websites have fact sheets and general information on process but what is really needed is more granular data specific to the needs of the startup or company bringing a new technology to market. 

Engagement - The big success of the UK Vaccine programme has been down to how engaged the UK government has been in helping the vaccine developers overcome the barriers to getting their new Vaccine into the arms of UK citizens. They provided direct help with clinical trials, with the manufacturing and distribution, with cash when required and by providing the Vaccine makers with a ready and willing customer. We need to find a way to replicate that level of engagement. In Health for instance we need to coordinate much more better across the various agencies involved ( NIHR, MRC, Innovate UK) on supporting startups to complete clinical trials and I think we in the UK need to adopt “bundle” programmes like the MCIT in the USA that funds hospitals and medical centres to adopt new technologies that have received “fast track” FDA approval. When the government is the customer, lets forward buy, when they are not then lets offer tax breaks ( like the Super-deduction) to encourage the private sector to be an early adopter. 

Purposefulness - If the government and its agencies are going to get more actively involved in getting innovative new products to market and supporting their early adoption either directly or indirectly then we are back to a need for a clear and focused Industrial Strategy to pick the markets and sectors where the UK could have a long term competitive advantage in. I think ARIA is a super interesting initiative but I would suggest helping innovators get their problem solving technologies through the barriers to market entry and adoption is probably a more pressing need. Whether we need a new agency I am not sure, but we do need action. 

Finally, what if we don’t do anything? What if we just shrug our shoulders and let the market work out a solution. I cannot predict the future but I think for tech startups, especially those with regulatory barriers to entry, moving at the earliest possible date to the USA in particular will increasingly look like the best option. It may already be happening as by far the largest group of non-American founders on YC is from the UK and I am reliably informed that up to 1/5th of the founders on the West Coast startup support network phenomenon On Deck are British. Talent agglomerates, flocks to the best places, concentrates in the best firms and therefore without action, without a STEP Change, British entrepreneurial and scientific talent is likely to be on the move and destination is likely not to be London, nor the 100 Priority Places for the UK's Level Up Agenda but the USA.