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​​​​​ ​GERHARD VAN DEVENTER Senior Fintech Analyst in the South African Reserve Bank’s Fintech Unit focussed on financial market innovation (including being the product owner for Project Khokha) and co-leading the IFWG’s Regulatory Sandbox. What the FUD: Do we need anticipatory governance as financial s​ervices regulators? By Gerhard van Deventer  | 10 March 2021 ​ “The world is changing faster than ever. New technology is creating new industries, changing existing ones and transforming the way things are made. We need a more agile approach to regulation, that supports innovation while protecting citizens and the environment.” – Her Majesty’s Government (2019: 6) In a world increasingly full of fear, uncertainty and doubt (FUD) stemming from constant and accelerating change traditional means of governance are becoming increasingly irrelevant. The FUD is further flamed by global risks, including increasing cybersecurity threats and digital exclusion. Due to accelerating ‘deep change’ [​1] we can no longer expect the future to be an extension of the past which means that it is becoming hazardous to limit policy options by only thinking in the short term and not considering that different futures may unfold (Fuerth, n.d.: 32). Governance structures are no longer simply dealing with complicated (difficult), but complex (non-linear) problems which may result in unintended consequences (Fuerth, 2009: 29). According to the World Economic Forum (WEF) the Fourth Industrial Revolution (4IR) will change the way that society works, lives and interacts, requiring the need for more agile governance in order to accelerate minimising the risk and harvesting the benefits of emerging technology driven innovation (WEF, 2018: 4). Furthermore, the British Government stressed that enabling and promoting responsible innovation is crucial to solving society’s most pressing issues, including economic growth and protecting the environment (HM Government, 2019: 8-9). It supported the idea that an anticipatory governance approach provides a competitive advantage and can lead to prosperity for a country’s citizens. This blog will consider the prevalence of anticipatory governance to South African financial services regulators in the context of agile governance measures already implemented. Anticipatory governance ​ ​Fuerth set forth anticipatory governance within the context of national government as a set of concepts helping entities deal with complexity and accelerated change, in order to think and act strategically. Current policy thinking tends to be linear which suggests that problems can be broken down into individual components to be addressed and resolved sequentially without collapses, or interruptions, in the curve. Complexity ignores bureaucratic boundaries and recognises that real-life problems are non-linear, stemming from concurrent interactions between multiple systems of events. Generally, there are no permanent solutions to complex problems, which require an integrated approach to formulation and implementation of policy, and require the situation to be constantly monitored and managed after implementation, since systems tends to morph after the policy actions were taken (Fuerth, n.d.: 31-34; 2009: 20). According to Fuerth (n.d.: 36) anticipatory governance is “a system of institutions, rules, and norms that provides a way to use foresight, networks, and feedback for the purpose of reducing risk and increasing capacity to respond to events at earlier rather than later stage development”. Systems in anticipatory governance must be designed to handle multiple streams of information and events with complex interactions. It is a complex system of systems making up its own environment and its own characteristics. The four basic components of an anticipatory governance system are: (1) a foresight system; (2) a networked system integrating the policy and foresight process; (3) a feedback system to assess performance and manage institutional knowledge; and (4) an open-minded culture (Fuerth, n.d.: 36; 2009: 20). The blog will next consider strategic foresight in a bit more detail as it is the key component of an anticipatory governance system which essentially enables and allows it to be anticipatory. Strategic foresight ​Strategic foresight is the disciplined analysis of alternate futures, including approaches helping organisations identify faint signals of different future scenarios, enabling greater flexibility and speed in response to the emerging future. Faint signals of potential long-range trends and events must be identified and tracked. These signals are also used as drivers in the development of alternate scenarios, which is used to simulate, test and analyse different policy responses, including their first- and second order implications. Fuerth highlighted the European Commission, Singapore and the United Kingdom as entities which had, at the time, already developed these capabilities. Foresight enables testing courses of action before they have to be deployed (Fuerth, 2009: 29, 33, 36-37). Although foresight should not be confused with predicting a specific future, knowing various possible futures enables entities to set a path to the most desirable future. Hines (2006) defined a strategic foresight framework consisting of six phases, reflecting a rough guide to a strategic foresight exercise which should not be seen as a step-by-step guide. Framing sets the context for the exercise and includes defining the purpose, objectives and stakeholders for the engagement. Scanning can be performed of history, the system, and the context, as well as future, of the issue. Forecasting uses uncertainties, drivers and other tools to develop alternate futures. Visioning uses the implications from the forecasting to envision designed outcomes. Planning determines the options and strategy for achieving the vision. Acting involves developing action plans, communicating results, setting action agendas, and institutionalising strategic thinking and developing intelligence systems (Hines, 2006: 18).​

An example of anticipatory governance already employed by the Government Office of Science (England) is a foresight report examining trends to 2040, as part of a Future of Mobility Grand Challenge, used to identify policy choices and trade-offs. In considering regulation for the 4IR during 2019 the British Government proposed the establishment of a Regulatory Horizons Council, [2] with the purpose of identifying implications of technology innovation (through scanning the environment and stakeholder engagement) and advising on potential resulting regulatory reform. Regulatory responses may include new, changed or dropped regulation as well as alternatives to regulation, including voluntary standards (HM Government, 2019: 10-12). The blog will next consider agile governance as a means to enable quicker policy responses to emerging strategic priorities and associated developments

Agile governance

​According to the WEF the speed of change requires the redesign of policy processes; the political nature of innovation highlights a mandate for agile governance; and governance values, such as social benefit, directs the development of emerging technologies and its beneficiaries. It defines agile governance “as adaptive, human-centred, inclusive and sustainable policymaking, which acknowledges that policy development is no longer limited to governments but rather is an increasingly multistakeholder effort” (WEF, 2018: 4-6). Regulators are required to be continually ready to rapidly, proactively or reactively, embrace, and learn from, change. Conceptually agile governance is meant to change and speed up the way in which policies are developed, deliberated, enacted and enforced. Policymakers must become more proactive and inclusive (through rapid, iterative stakeholder interaction) and promote sustainable policy positions by monitoring and updating existing policies. The WEF highlights systems and design thinking as two methods prevalent to agile governance, which may be employed in two approaches to implementing agile governance, namely: finding ways to work around existing governance structures (for instance through regulatory sandboxes, policy labs and crowdsourced policymaking); and changing the policymaking system (WEF, 2018: 8-10).

Looking at agile workarounds in the South African context, the Intergovernmental Fintech Working Group (IFWG) has already implemented a Regulatory Sandbox and the Innovation Accelerator through initiatives, such as the Crypto Assets Regulatory Working Group, embodies element of a policy lab. Additionally, some of the regulators in the IFWG are considering implementing their own innovation facilitators, [3] for instance the South African Reserve Bank is considering whether a policy lab could be used to co-create central bank policy positions cutting across multiple departments and stakeholders. The IFWG is already conducting experimentation initiatives, such as Project Khokha, in collaboration with industry with the aim of informing policy positions, and is looking to increase technology exploration efforts, for instance through conducting techsprints. [4]​

Changing the policymaking system may be more challenging. Regulators already subscribe to technology neutral and principle based approaches, including that similar rules should apply to similar activities. However, more could be done to make our governance systems more agile. Existing legislation needs to be renewed and become principle based, technology neutral and define desired outcomes, allowing for the detail to be clarified in regulation. Greater collaboration is needed amongst policymakers (and other stakeholders) in developing interconnected policies and avoid unintended consequences. A recent example of agile policymaking and regulation can be seen in the European Commission (EC)’s approach reflected in its Digital Finance package and strategy, which aims to reap the benefits of digital finance, while managing the risks (EC, 2020a: 1). Tokenised debentures and equities are proposed to fall under existing financial regulation, such as the Markets in Financial Markets Directive (MiFID), as financial instruments. The EC further drafted a proposal for regulation on markets in crypto assets (MiCA) covering sub-categories of crypto assets, namely utility tokens (provides digital access to a good or service); ‘asset-referenced tokens’ (stablecoins backed by multiple assets); and (e-)money tokens (backed by single fiat currency and used for payments). The proposal seeks to provide legal certainty; support innovation; protect consumers and investors; and contribute to ensuring financial stability. Should the proposal be implemented the EC must report back to the European Parliament and the Council after three years on the application of the MiCA regulation and, if appropriate, make a legislative proposal (EC, 2020a: 140). Also included in the package is a proposal for a pilot regulatory regime for distributed ledger technology (DLT) market infrastructures to enable experimentation in a safe environment providing evidence for future amendments. The pilot regime will allow for DLT market infrastructures to be temporarily exempted from some specific requirements in the European Union, which would otherwise prevent them from developing their financial (instrument) solutions. This should enable the regulators to gain experience in crypto based financial instruments and their underlying technology. In this​ instance the EC is proposed to report back in five years on proposed regulation (EC, 2020b: 1-2, 12, 36). They are therefore allowing innovation to happen under a (pilot) regulatory framework before making legislative changes. I am not sure how many other regulators have taken such steps, nor how many would be willing to do so.​

Conclusion

As highlighted financial services regulators in South Africa have already started to take steps towards implementing agile governance. However, as a regulatory collective, we have not implemented anticipatory governance, including foresight, practices to inform our policy thinking and prepare for a preferred future for South Africa’s citizens. We should consider establishing structures, both within the IFWG and the individual regulators and policymakers, which scan the environment for signals of change; identify the implications of technology driven change and trends on existing policies and regulation; advising on possible policy and regulatory changes; and identifying metrics to monitor the emergence of specific trends. Implementing an anticipatory governance system would benefit South African financial services policymakers and regulators by enabling us to, in a timely fashion, co-create future-ready and agile regulation to help meet South Africa’s developmental goals through enabling responsible innovation. The consequence of not changing may be slow death through irrelevance. Such profound institutional change is only possible if we as individual regulators and policymakers adapt to the changing world around us.

Notes

[1] Fuerth does not define the term, but a 1996 book by R.E. Quinn with the title Deep Change speaks about profound organizational and personal change required to keep pace with the change happening in the world. It is radical and irreversible change arising from within and which cannot be externally controlled.

[2] The Regulatory Horizons Council has already been established. See its website: https://www.gov.uk/government/groups/regulatory-horizons-council-rhc

[3] A collective term used by regulatory standard setting bodies referring to structures employed to help facilitate and promote innovation, including innovation hubs, regulatory sandboxes, guidance units and accelerators.

​[4] The Financial Conduct Authority defines a techsprint as an event bringing together multiple stakeholders in order to develop proofs of concept or technology based ideas in response to specific industry challenges. https://www.fca.org.uk/firms/innovation/regtech/techsprints​​

European Commission (EC) (2020b) Regulation of the European Parliament and the Council on a pilot regime for market infrastructures based on distributed ledger technology. Available from https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020PC0594&from=EN​ [Accessed 10 December 2020]

Fuerth, L (2009) Foresight and anticipatory governance. Foresight. Volume 11, Number 4, 2009. Available from: https://pdfs.semanticscholar.org/4a0c/484ee8f923fea8727e5258212979d583cb62.pdf?_ga=2.21873595.1468454313.1615371186-1930562809.1613410010 [Accessed on 10 March 2021]

Fuerth, L (n.d.) Operationalising anticipatory governance. Prism 2. No. 4. Available from: https://cco.ndu.edu/Portals/96/Documents/prism/prism_2-4/Prism_31-46_Fuerth.pdf [Accessed on 25 January 2021]

Hines, A (2006) Strategic foresight: The state of the art. The Futurist. Sep/Oct 2006, 18-21.

HM Government (2019) Regulation for the Fourth Industrial Revolution. HM Government – Department for Business, Energy & Industrial Strategy. Available from: https://www.gov.uk/government/publications/regulation-for-the-fourth-industrial-revolution [Accessed on 25 January 2021]

World Economic Forum (WEF) (2018) Agile governance: Reimagining policy-making in the fourth industrial revolution. World Economic Forum. Available from: http://www3.weforum.org/docs/​WEF_Agile_Governance_Reimagining_Policy-making_4IR_report.pdf [Accessed on 26 October 2019]

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