2 September 2022

Will the Government let our tech startups drown in a sea of misguided regulation?

By Camilla de Coverly Veale

Tech startups have been the British economic success story of the past decade. Our thriving ecosystem is widely regarded as Europe’s leading startup hub and the UK is now the third country in the world to pass 100 tech unicorns, trailing only the US and China. The UK attracted £30bn in tech investment in 2021 alone.
The tech ecosystem is one of the best sources of economic growth and job creation across the country. But the Online Safety Bill represents a looming tidal wave that threatens to overwhelm all this success.
For startups, the bill is a minefield of duties, considerations, and obligations, underpinned by expected high compliance costs (in both time and money). The legislation is also mind-bendingly broad in scope. Essentially, if the service or platform enables users to interact, it’s covered. That’s an eye-wateringly large number of businesses and services for a bill that is supposedly about bringing the biggest social media platforms to heel.
Earlier this year I wrote that the tech giants have a ‘cash pile to rival a medium-sized Gulf state and half of the Magic Circle law firms on retainer’. They still have that. For startups, however, it’s a very different story. There’s a funding crisis, with valuations cut, hiring freezes imposed and investment drying up. Is byzantine regulation and extra costs really what Government wants to pile on top?
Our latest report into the Online Safety Bill, published today, delves deeper what startups will have to contend with, as well as what we think needs to change.
When it comes to concerns about the bill, startup issues have been regularly waved away – but it’s not hard to see why the wider tech community is highly sceptical of the proposals being effective.
Take the impact assessment, which probably the most accessible part of the bill. It suggests businesses should be able to hire a specialised lawyer to assess their new obligations – including the crucial decision of whether or not they are in scope – all for under £90. I’m sure platforms would very much like to meet this lawyerly unicorn. The same impact assessment also expects startups and smaller platforms to face relative compliance costs of between 90 and 180 times those of the big incumbents. So already you can see why startups see the bill as a highly effective moat-maker for the dominant players.
Nor do the Government’s plans adequately consider the vast range of business models across the tech sector.
Our report looks at seven of these models and their likely experience of the proposed regime. While there are some explicit exemptions, such as for emails or SMS, the bill makes only limited mentions of ‘internal business services’. The vagueness of this phrasing risks bringing into the new regime’s scope many business-to-business (B2B) or software as a service (SaaS) models, which make up a large proportion of the UK’s digital landscape and pose vanishingly little risk in terms of harmful content.
By mandating routes to ‘do online safety’ – rather than outcomes – the bill risks having a chilling effect on competition in digital markets and the willingness of entrepreneurs to found businesses that may be within its scope. Nor do we want to risk the UK’s current status as a top-tier market in which to introduce a service or scale a business. But that is a real danger if we introduce a regime that makes startups and scaleups think they can only do business here if they have a large compliance team in place.
Or take Web 3.0 startups. With our incredibly strong record in financial services and Fintech, the UK has the potential to be a world leader in crypto or Web 3.0. Companies are flocking to the UK to build a new waves of exciting platforms. But because of the way Web 3.0 platforms are built, they will find it incredibly difficult, if not impossible, to comply with the OSB as currently drafted.
The US may have won the Web 2.0 race but the UK’s current regulatory environment means there is a good chance the UK could lead the internet’s next generation – unless, of course, the Online Safety Bill shuts our ecosystem down before it really gets going.
The bill is still in Parliament, there is still time, the question for whoever leads the new Government is this: will it enable startups to surf this regulatory wave, or will it let them drown?

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Camilla de Coverly Veale is Policy Director at the Coalition for a Digital Economy (Coadec).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.