Principle Based Regulations

Regulation can never keep up with technology. What we need to do is develop principles-based regulation and allow regulators discretion in its implementation through effective post-facto enforcement. We should presume that regulatory actions have been taken in good faith unless proven otherwise and build transparency into our systems to ensure that regulators do not exceed their authority. Regulators should list all applicable regulations on their website and not attempt to enforce anything outside those regulations.

This article was first published in The Mint. You can read the original at this link.

One of the recurring themes of this column is the challenge of regulating technology. Lawmakers are generally slow to move, taking their time to consider all the consequences of their decisions before enacting regulations. In comparison, technology is always changing—transforming itself, sometimes in a matter of months. This is the primary challenge of tech policy formulation and the problem we most urgently need to solve.

Three Point Solution

In a previous article, I proposed a three-point solution. I argued that regulators must first identify the real objective they want to achieve and then detail what needs to be done to achieve it. I urged regulators to seek help in doing this—from economists, social scientists and technologists, or anyone with the requisite experience to give them inputs so that they can apply an appropriate level of nuance to their regulations. Most importantly, I suggested that these objectives need to be abstracted into principles, defined at the highest possible level, so that evolutions in the underlying technology do not mandate changes to the form and structure of regulation.

In subsequent articles, I elaborated on these ideas, calling on the government to adopt systems-thinking to determine the parameters for regulation and design-thinking to formulate policymaking tools. I drew inspiration from a World Economic Forum paper which suggested that the complexity of modern life requires governments to be agile, and recommended that we adopt this approach to making technology policy.

Principles Based Regulation

Last week, as I read the Economic Survey 2020-21, it was heartening to note that some of these themes were reflected in the government’s thinking. Chapter 6 —titled ‘Process Reform: Enabling Decision-Making Under Uncertainty’—noted that most regulators react to the complexity of the modern world by trying to conceptualise every eventuality that could arise, so that they can then regulate them through statutory means. It is precisely because of this that most modern regulations tend to be impossibly complex, to cover all possible scenarios even though it is clear that this is impossible to ever do. This has resulted in legislations like the Dodd-Frank Act in the US, which, as the survey points out, requires banks to be responsible for 184 additional activities even though most of those responsibilities are either unnecessary or impossible. Indian regulators are no different, spelling out increasingly complex obligations for every new situation they come across.

The survey suggests the reason regulators do this is that they fear the consequences of having their discretion audited ex-post facto. By ensuring that regulations comprise checklists of all the actions that regulated entities need to perform, their role can be reduced to merely certifying that the required steps have been performed. So long as every eventuality has been spelt out, there is no need for them to exercise discretion and little risk of being held accountable for discretion improperly applied.

Unfortunately, no regulation, no matter how exhaustive, can spell out every possible circumstance that could come to pass. So, instead of reducing discretion, regulations make room for even more of it, since each new regulation is now capable of being interpreted in different ways. What’s worse, with the addition of far more compliance obligations, it is near-impossible to monitor discretion to see if it’s being exercised properly.

For these reasons, its suggestion is that we need to fundamentally change our legislative approach. The Economic Survey recommends that we should look to develop principles-based regulation that allows for regulatory discretion, while also ensuring transparency in decision-making, and put in place effective post-facto enforcement measures. It recommends borrowing the Best Judgment Rule from corporate law and applying it to regulators—suggesting that we should presume that regulatory actions have been taken in good faith unless proven otherwise. This, it argues, will provide us the tools to deal with the complexity of the modern world.

PBR in Tech Regulation

While the suggestions in the Economic Survey might have been primarily directed at the financial sector, this approach could just as easily be applied to the regulation of technology. Given how frequently technology products transform themselves, regulators find themselves always having to play catch up. If we can stop worrying about writing rules for every occasion and focus on developing principles that can be applied regardless of changes in technology or the sector’s business models, we will no longer need to amend the law to address each new invention.

But alongside this, we will also need to implement the other recommendations of the survey. If we move to principle-based regulation, we will need to let regulators exercise discretion in applying these principles—without fear of ex-post facto sanction. We will need to improve enforcement so that egregious behaviour is punished efficiently and effectively.


But most importantly, I believe we need to build transparency into our systems, requiring, as has been suggested, regulators to comprehensively list applicable regulations on their website and to enforce only those listed regulations. Too often have we been called upon to comply with arcane rules nobody knew existed, and it’s time for that sort of ambush enforcement to end.