With the European Union proposing new rules for artificial intelligence and machinery, regulation finds itself once again in the news cycle. The willingness of some sectors to self-regulate can be a positive force in the implementation of good practices, which saves government money, time, energy, and results in rules established on greater industry insight. However, regulatory models must meet the needs of markets and their individual risks. Self-regulation can be effective, but within specific limits. As we will see, what works in one domain might be entirely inappropriate for another.
Healthy rules and norms are extremely important within all sectors. Allowing market pressure alone to govern an industry can have major negative outcomes, from damaging the health or well-being of the public, to creating onerous financial or environmental circumstances.
At the same time, government regulation is costly to create, implement, and oversee, and according to Information and Innovation Foundation, it puts a drain on ingenuity:
Government regulation by its nature addresses identified harms, and as such can inadvertently create barriers to innovation or competitive entry when it establishes norms that only address current market participants and practices.
Such expenses bleed into compliance as companies are encumbered by regulatory hurdles, further limiting innovation. These issues reach the end customer invariably the public in the form of higher prices for products and services. Government rule-setting can also be a source of adversarial chemistry between industry and regulator, which can generate undesirable gaps between rules in writing and rules in practice.
One alternative is self-regulation, whereby entities within the industry come together to agree on appropriate and proportionate rules to protect the general public without being overly detrimental to industry-specific interests.
Self-regulation has many strengths
Self-regulation comes from the industry and is, as such, founded on a higher degree of sectoral expertise. By design, the industry is onboard with the process. This reduces friction, conflict, and alleviates the government burden of establishing and maintaining standards. As a result, self-regulation is relatively cost-effective.
Proponents of self-regulation point to markets where it has been demonstrably successful. Take, for example, online behavioural advertisement (OBA), where companies use data to predict user preferences or interests in order to deliver targeted advertising online.
OBA in the United States is an industry that self-regulates. It is a young market, so rules and controls have had to be developed as the industry grew. In 2007, the Financial Trade Commission (FTC) released a report laying out a set of principles that would be effective as industry working practices. The Digital Advertising Alliance (DAA) then developed and released its owns set of principles in 2009, based on the FTC report. In 2010, the DAA codified this into a self-regulatory program.
Many people are satisfied with how this process developed and do not feel the need to create strict government regulation thanks to the efficient public-private collaboration of the two organisations.
Limitations of self-regulation
On the other hand, there are those who believe more in the primacy of privacy who are not content to have rules governed by the industry however effective they may appear. The above case highlights the trade-offs that must be considered for effective regulatory decision-making.
In Europe, sentiments are far more strongly privacy centric, resulting in the development of the General Data Protection Regulation, a strict and expansive rule book for data. It is generally understood and accepted that this will have a stifling effect on company and industry growth.
True self-regulation has its limits.
The strength of rules must sometimes be watered down before receiving approval from a consensus of industry players. Equally, oversight might lack the teeth for effective control, or be more performative than effectual. If self-regulatory bodies are too close to the industry, there are also risks of regulatory capture, through which the system becomes unfit for purpose.
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