World needs 21st century regulation to police gig economy

When he suspended Uber’s licence to operate in the capital, London mayor Sadiq Khan said that like everyone else, the $70bn company had to “play by the rules”.

But far from being like everyone else, Uber is part of a new digital species that is upending work and regulation across the globe. In any case, the rules to which Mr Khan alluded are far from perfect. Often impractical, unresponsive and varying between and within countries, they are ill-suited for international digital businesses and start-ups.

Existing regulations that protect employees, consumers and others have not adapted to 21st-century business. So it is little wonder that we are seeing regulatory conflicts like Uber’s employment rights dispute.

Adaptation — and meeting future needs — will require a wholesale rethinking of how we make the rules of the game which could even help avoid scandals like the unreported hack that affected 57m Uber passengers and drivers.

The challenges Uber presents are replicated throughout the global economy. Goods, services, money and workers are increasingly moving seamlessly across borders, flattening the world in ways none of us could have imagined a decade ago.

Rather than individual governments each drafting rules, that task is given to the market

These changes are putting enormous pressure on our conventional approaches to producing regulation. Rules enacted by local and national governments are unable to keep up with new transboundary businesses. Uber faces multiple regulatory regimes around the globe, none written with phone-based apps and the gig economy in mind.

Attempting to regulate global digital entities with 20th-century methods risks hampering the benefits these platforms can generate. The gig economy brings flexibility and improved efficiency to multiple markets. But it also hinders the ability of regulated markets to produce a better life for everyone, including improved conditions and wages for workers.

One way to reinvent the rules is what I call super-regulation. This approach confines the regulatory role of government to the licensing and supervision of private frontline regulators, and harnesses market incentives to spur the development of better regulation. It focuses political bodies on setting the regulatory objectives that their constituents care about. These objectives might be specified in metrics, such as accident rates, or principles such as the fair treatment of drivers.

Then, rather than individual governments each drafting rules and procedures to achieve these outcomes, that task is given to the market. Private regulators, for-profit or not, build regulatory systems and secure government approval by demonstrating that the entities they regulate achieve the determined goals.

Super-regulation would not need consensus or agreement between governments to function across borders as countries would remain free to set their own regulatory objectives, which are more than likely to be similar in their goals.

Governments in turn would assume the role of regulating the regulators: reviewing their procedures and auditing the results they achieve, granting and revoking licences to regulate. Under such a regime, companies would be required to choose an approved private regulator from a competitive market, subject to the constraint that these regulators could not offer a scheme that violated the rules governing them.

And while this may appear counterintuitive as a solution to the regulatory burdens of today by implying another level of complicated regulation, the goal is to streamline the process.

By administering regulation through dedicated and more agile private sector organisations and businesses, we would give companies some choice over which scheme they came under. That would also create an incentive for private providers of regulation to compete to figure out how to deliver frameworks that achieve common goals with lower costs and less risk for regulated entities.

The UK government has already implemented a kind of super-regulation model in England and Wales with its reformed approach to regulating the markets for legal professional services. The 2007 Legal Services Act set out the required regulatory objectives under broad-based principles such as protecting the interests of consumers, and then created the Legal Services Board to approve regulators that can show their regulations achieve those objectives.

Today, nine regulators have been approved to regulate licensed legal activities.

Could a similar system work for a completely different business like ride-hailing. where operators face a range of regulatory regimes?

If governments within a country or a region each settled just on regulatory objectives for ride-hailing services, private regulators could devise the best ways to fulfil them. They might invest in machine-learning technology to better determine what affects the risk of accidents to improve safety, or they might deliver apps to a driver’s phone to directly monitor speed or other driving behaviour. This might also lead to the development of sophisticated data monitoring techniques to identify security failures or fraud.

A private regulator competing to sell its services to multiple ride-hailing businesses while maintaining its licence to operate from the government would have an incentive to invest in those innovations.

Uber, like most global companies, would also rather choose just one or a few regulatory regimes with which to comply. Today’s government-drafted rules and regulations vary tremendously across jurisdictions and are the number one source of complexity global businesses face. If regulators could build systems that appeal to multiple governments, they could create a new international market in regulation that might one day simplify life for business.

The author is professor of law and economics at the University of Southern California’s Gould School of Law and author of Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy