The regulatory challenge for disruptive business models

May 2018  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2018 Issue

There can be no doubt about the irresistible penetration of digital technology into global economic models. Indeed, elements such as the proliferation of connected devices and multi-connectivity have introduced many disruptive business models that have pushed the global economy toward new, as yet unexplored frontiers.

The introduction of these new disruptive business realities has generated a significant number of challenges across multiple areas. Business models based on disruptive approaches, such as those derived from so-called ‘cooperative economic systems’ have exploded in the last few years, significantly changing the traditional rules that previously governed the markets. We have seen traditional markets like housing, passenger transportation, home delivery of goods, and finance and banking disrupted by the emergence of new entrants into the space and with models that have clearly challenged business structures that have existed for decades, if not centuries.

Nevertheless, these new business models also face a number of significant challenges, such as making them compatible with applicable legal and regulatory frameworks in relevant markets. This is an important issue as most of the markets that have been affected by the appearance of disruptive models are heavily regulated. And what is relevant here is that most of the applicable laws and regulations in these cases were designed and approved pursuant to a classical economic model, without contemplating features that have been introduced by the technology revolution that has occurred in the last few years. In most of the cases, a failure to update the applicable legal provisions governing these activities will result in them facing significant problems, as being compatible with ‘outdated’ legal frameworks is often almost impossible.

There are many examples of this legal tension. For example, national and local legal frameworks do not contain specific regimes for the emergence of the sharing economy or companies such as Airbnb. Therefore, business models that are based on cooperation and the sharing of goods between their owners and clients, under those disruptive systems, are often called into question for two main reasons. First, the lack of applicability of existing regulatory coverage for the activities in question. Second, the need to ensure adequate standards that guarantee the protection of users, as well as traditional competitors whose business models are fully aligned with the applicable, traditional regulatory frameworks.

Abstractly speaking, the solution for this problem would appear to be clear: updating the laws and regulations to ensure they address these new business realities. Nonetheless, in practice, this has proven to be a very difficult challenge. Certainly, most of these disruptive models are focused on economic activities that are conditioned by burdensome regulations aimed at ensuring that operators in the corresponding markets provide sufficient protection guarantees for both consumers and competitors. Hence, any amendment to those regulations should guarantee a proper balance between a more flexible approach and the need to maintain adequate protective frameworks. As a matter of fact, any such amendment also faces reluctance from traditional operators which have been bound for a long time by the regulatory burdens that were historically associated with the operation of their businesses.

Regardless of these difficulties, regulating these new disruptive models should be a top priority for the authorities. This should be taken as a good opportunity to update regulatory frameworks that have proven to become less and less efficient due to being disconnected from the actual market and technology evolution.

One of the classic examples in this respect is the so-called ‘Knowledge of London’. Since 1865, any driver hoping to obtain a taxi licence in London is required to pass an exam where the applicant must prove that he or she knows by heart some 25,000 streets and landmarks. More than a century and a half ago, this approach could make sense, as “taxis can be hailed in the street and asked to go anywhere, taxi drivers must have a thorough knowledge of London,” according to the London transport authority. Today, however, requiring potential taxi drivers to pass this difficult test, arguably, is no longer relevant given the ubiquity of GPS technology.

Moreover, experience has shown that ignoring new business models that do not specifically fit into pre-existing categories does not make them disappear from the market. On the contrary, they continue to grow and often consolidate themselves without offering the required coverage for companies and consumers. Therefore, defining an updated legal framework for the operation and use of those business models still makes a lot of sense, regardless of the obvious difficulties the task may entail.

There are precedents that may allow some optimism in this respect. The most obvious example is online gambling. This sector grew quickly, offering games through a globally accessible and attractive environment. Nonetheless, gambling was one of the most highly regulated markets and its online expansion created tension with traditional operators. This situation was corrected in Europe where most jurisdictions enacted specific legislation that defined the rules for operation of these activities, helping companies, consumers and authorities to define a reasonable and balanced framework for the operation of online gambling activities. This was a difficult process but has proven to be the alternative for ensuring an adequate balance between providing popular new services in regulated markets and guaranteeing the rights of users and competitors.

Jurisdictions looking to regulate disruptive business models could learn a lot from the emergence of the legal and regulatory framework for online gambling.

 

Albert Agustinoy is a partner and Miquel Peguera is an academic advisor at Cuatrecasas. Mr Agustinoy can be contacted on +34 933 127 184 or by email: albert.agustinoy@cuatrecasas.com. Mr Peguera can be contacted on +34 932 905 585 or by email: miquel.peguera@cuatrecasas.com.

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BY

Albert Agustinoy and Miquel Peguera

Cuatrecasas

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