Regulation is meant to strangle innovation

I guess I’ll build on yesterday’s blog, about the python of regulation, by harking back to a comment I heard many years ago in Brussels. Talking with one of the key regulators, I asked why they had the regulation in place with so much interpretation. My point was that Italy was implementing the regulation in a different way to Spain, in a different way to Germany, in a different way to the UK and so on. It seemed weird to have regulations that were meant to harmonise and standardise, but allowed so much interpretation that there were no standards or harmonisation.

His response?

Our aim is to get the sheep into the pen. We don’t care which direction they face as long as they are in the pen. Then, over time, we make the pen smaller, until they all face the same direction.

Countries and companies are sheep?

Maybe, but this is the stranglehold of regulations. The aim is to tighten, tighten, tighten and tighten until there is no more wiggle-room. In fact, this is what has led to Brexit in my view. Brexit became a higher and higher part of people’s agendas in Britain as Brussels and the EU forced more and more regulations over the country. We are seeing the same right now in the tussles between Poland and Hungary and the EU.

The more you control and tighten the regulations, the more the people and companies subjected to those regulations squeal and wiggle. Then, if there’s no wiggle-room, they either die or escape. Fight or flight? It’s a basic human response.

This is what we are seeing happening right now with Facebook. As the regulators in America talk about a break-up and WhatsApp and Instagram being forced into separately floated units, there are huge ranges of opinions about what that would mean, and how it would weaken the company.

Thing is that Facebook is only fifteen years old.

The same is happening in China with Ant Group and there botched IPO. The Chinese regulators woke up one day and realised that lending in China was an unregulated minefield, so they shut it down. Ant has been caught in that minefield – only two percent of their originated loan risk sits on their balance sheet  and that’s why the IPO was blocked … or maybe it was Jack Ma’s words … – either way, the regulator eventually gets in the way.

Some say this is a big issue: the state controls us, we want life, love, liberty and freedom.

Yea. And …

Wherever you live anywhere in the world, someone has power over you. Even the most powerful have power over them. It is the very nature of humankind.

This is why the regulations eventually strangle the innovation. Wherever this is risk and innovation, it will be followed by regulation and strangulation. It is inevitable.

And this is the key point: you have to be regulated and controlled to operate. It is why the only companies that succeed are those that do so in tandem with government. It is why most FinTechs that are doing well started with a regulatory mandate. It is why many FinTech start-ups began by talking to their country’s regulatory forces and government. It is why, if you ignore the regulator, you fail.

I don’t like this fact, you don’t like this fact, most don’t like this fact but … it’s a fact. Regulations strangle innovations eventually. That’s when the innovation stops being innovative, but is mainstream. And isn’t that what you wanted when you started-up: to become mainstream?