Regulation: a catalyst for innovation?

Legal tech was one of the breakout areas for technology investment in 2018, with more than $1bn of capital raised worldwide for applications in the legal sector according to Forbes.

So is the legal sector finally catching up with the financial services sector in harnessing the transforma­tive power of technology to improve access to and standards of service?

Well not quite. Although larger law firms in the US, UK, Australia and some parts of Europe are experi­menting with artificial intelligence, we do not yet have a legal Revolut or Mon­zo – a consumer-centred, technology driven legal service provider.

Although the courts in the UK and elsewhere have begun to address e-filing and explore the concept of online dispute resolution, little has changed.

There are many reasons for the slow take-up of tech­nology in the legal sector: Lack of investment appetite and capacity in traditional consumer facing legal ser­vice providers, data deserts and consumer conservatism, to name a few.

But concern is also some­times expressed about the role that regulation might play, given the complexities of the legal sector regulatory framework and how it varies from jurisdiction to jurisdiction.

Since many tech business­es start by looking for a use case for a particular tech­nology, rather than from a problem statement to which a technological solution might be sought, startups will inevitably steer clear of regulated sectors. It is only once technology has begun to take-off in a sector and where a community of in­novators has grown up, that attitudes towards regulation begin to mellow.

The legal tech start-up community can learn from the experience of fintech, where regulation has helped to create clarity, transpar­ency and trust – all of which are rocket fuel to consumer take-up of new services.

But it is far from clear that legal regulators worldwide are ready to open their arms to an influx of new tech-driven businesses. Most regulators in the legal sector are statutorily focused on cleaning up ex-post mistakes made by individuals, rather than on regulating markets.

Their engagement with legal tech will therefore only happen once there are regulatory problems to solve. And worse, without a com­mon international regulatory framework, as the financial sector has in the Global Financial Innovation Net­work, individual regulators will act in isolation from one other, adding an extra chill factor for entrepreneurs and investors who want a global market for their services.

If this turns out to be the case, then the legal sector will have missed a trick. The experience of other sectors, from financial services and medical devices through to the automotive sector, suggests that regulators need to open themselves up to external influences, be prepared to engage with po­tential entrants much more deeply and rethink how they regulate, rather than simply extrapolate from their exist­ing toolkit.

The need for new thinking for the regulation of busi­nesses driven by artificial intelligence (AI) is a particu­lar case in point. The real benefits of AI will only come once machine learning is al­lowed to take place, and this may require technology to be unleashed on consumers before it has been perfected.

This challenge is not isolated to the legal sec­tor, and both the financial and healthcare sectors have shown what can be done. In the US, for example, Soft­ware as a Medical Device (SaMD) is not expected to meet the same initial licensing standards as traditional medical devices while it is gathering the data needed to demonstrate its value added. Instead it is subject to different, targeted controls. The financial sec­tor ‘sandbox’ performs a similar function.

And herein lies one of the major lessons for legal regulators. Legal tech solu­tions should be regulated according to the risk that individual applications pose and set against the poten­tial longer-term benefits of allowing them to develop. Here in the UK, if we have learned one thing from the Legal Services Act 2007 and the introduction of ABSs, it should have been that one size does definitely not fit all.

Alison Hook is director and co-founder at co-founder of Hook Tangaza hooktangaza.com