A Better Way to Regulate Disruptive Technologies
Technological capability is advancing light years faster than can regulatory rules. As a result, industries most impacted by the proliferation of innovative technologies are looking to systems of experimental regulation. A regulatory sandbox is one such mechanism.
Sandboxes support the development, testing, and deployment of new product and service offerings. These structures allow regulators to have close oversight of and supervision over entities operating in the sandbox. The data that regulators collect from participants can better inform longer-term regulatory changes.
The United Kingdom Financial Conduct Authority created a sandbox in the finance industry in 2015. Since then, many countries have followed suit both in fintech and other sectors. Finland, Argentina, Netherlands, Korea, Singapore, Nigeria, Mozambique, and Poland, just to name a few, have implemented regulatory sandboxes across a wide array of sectors, including electricity, sustainability, and telecoms.
This approach to regulatory innovation is also spreading across the United States, with regulatory sandboxes in operation in the financial, insurance, agricultural, medical, energy, and property sectors. A growing number of states are now establishing cross-sector sandboxes.
The Legal Services Sandbox Has Entered the Chat
One state is leading the way in experimental regulation for legal services.
In 2020, the Utah Supreme Court implemented the nation’s first regulatory sandbox for legal services. It did so in an effort to “profoundly reimagin[e] the way legal services are regulated in order to hardness the power of entrepreneurship, capital, and machine learning in the legal arena.” The regulatory scope of the Office of Legal Services Innovation are entities seeking to practice without the limitations of unauthorized practice of law rules and the fee-sharing and ownership restrictions set out in Rule 5.4.
The Innovation Office is guided by five regulatory principles:
- Regulation should be based on the evaluation of risk to the consumer: there should be a focus on actual risk of harm to the consumer, and regulatory interventions should be proportional and responsive to this risk.
- Risk to the consumer should be evaluated relative to the current legal services options available: risk must be measured against the reality of the current market for consumer legal services, not as against an ideal of perfect legal representation by a lawyer.
- Regulation should establish probabilistic thresholds for acceptable levels of harm: regulatory resources should be focused on areas where there is a high probability of harm or a significant impact from that harm on the consumer or the market.
- Regulation should be empirically driven: the regulatory approach, whenever possible, must be supported by data from the market.
- Regulation should be guided by a market-based approach: regulatory tactics should seek to align regulatory incentives with increased revenue or decreased costs for market participants.
This risk-based regulatory framework is at the heart of the Utah sandbox. The Innovation Office has grouped the risks of consumer harm into three categories:
- Inaccurate or inappropriate legal result
- Failure to exercise legal rights through ignorance or bad advice
- Purchase of an unnecessary or inappropriate legal services
From these harms, the Innovation Office developed a model of risk categorization:
All entities that apply to operate in the sandbox must demonstrate that:
The likelihood that the average person will experience a harm using the applicant’s service is not
Office of Legal Services Innovation, Innovation Office Manual 2 (Aug. 25, 2021).
greater than the likelihood that the average person who might use their service will experience
harm without the service.
Opportunities for Legal Tech Entrepreneurs
Entities currently operating in the Utah sandbox include:
- traditional law firms taking on investment or ownership from those who are not lawyers
- traditional law firms and lawyers entering into fee sharing relationships with professionals who are not lawyers
- corporate entities (including those owned by non-lawyers) employing Utah-licensed lawyers to practice law
- firms or companies using technology platforms or allied legal professionals
- lawyers or firms entering joint ventures or other forms of business partnerships with others to practice law
For innovators in Utah and those in other states who have the opportunity to partner with Utah authorized legal services providers, the sandbox provides an unique opportunity to innovate in an industry badly in need of innovation.