Precaution has a price: the case for regulatory sandboxes in gambling
Regulatory inertia and outmoded legislation, unable to make sense of business models built on rapidly advancing technology, too often favour incumbents and suppress innovation. The cost falls on challengers, on competition, and on the economic and social benefits that competition would otherwise deliver. These barriers are increasingly difficult to justify in financial services, yet a tolerance for exaggerated restrictions and precautionary defaults persists in the gambling sector.
There is no panacea here. But there are lessons to be drawn from fintech and from financial services regulation more generally, lessons that could improve the way gambling is regulated. I do not say this to cast financial services regulation in a flattering light. The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry put paid to any enthusiasm of that kind.
The point is narrower. Gambling regulation could often benefit from more contemporary and nimble frameworks, and from less reflexive adherence to blunt precautionary defaults. A more sophisticated and evidence informed approach, one that is responsive to both rapidly evolving technology and shifting consumer and community expectations, is the better regulatory model.
It is easy to avoid risk by erecting cumbersome rules and blunt barriers to entry. But without risk there is no innovation, only constrained economic activity that surrenders investment and consumer benefits to more progressive jurisdictions.
Where obsolescent legislation or regulatory apprehension threatens to stifle progress, pathways are needed to surface novel products and bring innovation to market. These are pathways on which incumbents and challengers can experiment at the margins of, or outside, the existing framework, in a contained and controlled setting. The environment is supervised and time limited, but free of the prohibitive cost and delay of obtaining a full licence or satisfying every condition attached to one.
One tool that can accelerate innovation in a considered and responsible way is the regulatory sandbox: a safe harbour in which businesses test concepts under relaxed regulatory conditions and close supervision. Sandboxes have proved popular as a way to cultivate fintechs, reshape the banking landscape and advance financial inclusion. The model remains far less familiar in gambling regulation.
A few considerations worth weighing before establishing one:
Purpose. Be clear about the underlying intent. A sandbox is not a cure all, and it helps to know from the outset what it is meant to achieve. Is the aim to promote competition? To stress test the existing framework against new products and business models? Or to gather the evidence and momentum needed to support legislative reform?
Consult with industry. Engage with industry early, during the investigation and design stage. Doing so builds a clearer picture of the problems operators are actually confronting and whether a sandbox is the right response. As with any public policy, there is value in consulting stakeholders and, where appropriate, designing the parameters together with them.
Minimum viable product. Resist the false comfort of a comprehensive framework with elaborate application processes and narrow eligibility. Risks must of course be controlled, and the balance between enabling innovation and managing new risks has to be struck. But appetite to participate will turn on how accessible and usable the framework is. Better to fix a clear purpose, scope the problems industry faces, and bring a minimum viable sandbox to market efficiently, on the understanding that its design will benefit from participant feedback and adapt over time.
Raise with the regulator. Open dialogue with regulators is essential to an efficient and effective regime, and it is a mistake to treat the regulator’s engagement with market participants as regulatory capture. Regulators are well practised at balancing competing tensions, weighing risks and assessing the merits of different policy and regulatory approaches. Their decisions are simply more likely to be sound when informed by evidence and a thorough understanding of the sector and the challenges its participants face. So if you are confronting barriers to introducing novel products or deploying new technology, raising your perspective on the problem and the possible interventions with the regulator is an important step towards more efficient regulatory pathways.
Engage researchers. Gambling researchers are important stakeholders in these discussions and can help shape the development of regulatory approaches, sandboxes among them. They should be part of the conversation when interventions are being investigated and parameters scoped. Credible researchers add real value to policy development, helping to identify suitable safeguards and the monitoring and evaluation frameworks that allow a sandbox’s design to be refined over time.
Sandboxes are no longer groundbreaking, and they are not a panacea, nor necessarily the right intervention for every problem industry is wrestling with. What is clear is that regulatory uncertainty, amplified by outmoded legislation and cumbersome prescription, dampens innovation, saps industry vitality and economic activity, and impedes the social benefits that should follow.
The UK Financial Conduct Authority is widely credited with leading the way when it launched its sandbox in 2016. What began as a fixed cohort experiment has since become a permanent, always open feature of the regulatory landscape, replicated across dozens of jurisdictions and now extended to support testing of frontier technologies such as artificial intelligence. Participants have consistently reported substantial value: testing products and underlying technology in live but controlled conditions keeps business models responsive to feedback, and participation itself builds credibility with investors and the market.
Beyond sparking commercial innovation, sandboxes can also be a vehicle for smarter responsible gambling outcomes. In negotiating the parameters of any sandbox, regulators should consider requiring participants to invest in responsible gambling innovation, the kind that ultimately supports safer gambling and a more sustainable industry.
Paul Newson, Principal, Vanguard Overwatch
