As officials in major economies rethink regulation, the experiences of two sectors show downsides of traditional approaches.
There is a third way that can help governments break the decades-long cycle of crisis and overcorrection.
In financial services, red tape and lack of coordination are stifling innovation and expansion of banking services. Regulators, in pursuing stability, have gone granular on everything from product design requirements to rules on pricing models and even board composition. Detailed requirements are sometimes necessary, but too often they turn into micromanagement that adds costs and makes it more difficult for banks to meet evolving customer needs. Oliver Wyman research shows that banks now allocate 10% to 15% of their cost base to regulatory compliance alone.
It might be tempting to conclude that deregulation is the solution. But the technology sector shows that while unfettered markets can deliver unprecedented innovation, it sometimes comes at the cost of exacerbating societal problems, from large-scale data breaches to negative impacts on mental health and democratic discourse.
For both, recalibration is the answer — to promote innovation and competitiveness while ensuring broader societal resilience.
Finding the right balance
Business regulation stands at a crossroads in 2025, with many major economies reassessing their approaches to market oversight in the wake of national elections. The debate itself isn’t new; global markets have repeatedly cycled through exuberance and crisis over the years, while regulatory response is uneven — sometimes overcorrecting while simultaneously underregulating across different industries.
Regional differences can magnify these imbalances. The United States’ relatively lighter touch to regulation outside of banking has contributed to higher labor productivity — exceeding the Euro Area in cumulative growth from 2015 to 2023 by 8 percentage points, according to the Organization for Economic Cooperation and Development — but at the cost of widening social disparities. While European workers enjoy greater protections and more equitable income distribution, American workers face greater income volatility and workplace uncertainty.
As artificial intelligence is set to accelerate change across sectors, the next decade presents a unique opportunity to rebalance regulation and growth. With over 60% of firms in major economies citing regulatory barriers to investment, according to a report by the European Investment Bank Group, capital remains sidelined. Yet the next decade’s technological transformation demands a new approach.
Proportionate regulation can create a positive flywheel: Appropriate oversight builds confidence, enables investments via industrial policy, and drives growth by scaling what’s working. To succeed, regulators need both robust oversight tools and the flexibility to adapt as technologies mature.
High-stakes industries show how this balance can work. Aviation’s careful, incremental adoption of autopilot technology, for example, demonstrates that even safety-critical sectors can embrace innovation without compromising standards. The key is matching oversight to risk — avoiding both the excessive prescriptiveness experienced in financial services and the delayed guardrails evident in technology.
How to recalibrate
Implementing a balanced regulatory approach requires streamlining complex webs of oversight bodies while preserving their essential functions. Beyond sector-specific regulators, many firms also must navigate horizontal oversight bodies, from competition authorities to environmental regulators, each with crucial public policy objectives but often with uncoordinated approaches to data collection and compliance. This fragmentation not only increases costs but can reduce policy effectiveness by creating blind spots between agencies and overwhelming firms with overlapping requirements.
Innovation-enabling frameworks can help regulators stay ahead of market evolution while maintaining appropriate safeguards. Regulatory sandboxes, which allow companies to test products without full oversight, are one proven model. Since the UK Financial Conduct Authority launched the first one in 2016, more than 100 have been implemented globally. The results are compelling: Participating firms become 50% more likely to raise capital, according to a 2020 Bank for International Settlements working paper, while regulators gain vital insights to refine their approach.
Effective regulation provides predictable responsiveness to unpredictability. When unexpected challenges arise — from pandemics to technology —firms benefit from predictability in regulatory response and adaptation. One study found that policy uncertainty during the global financial crisis accounted for roughly one-third of declined capital investments. Crises are challenging because they unfold unpredictably, so it’s impossible to provide complete certainty. But governments can standardize assessment timelines for different risk levels, create transparent decision frameworks that prevent overreaction to minor incidents, and coordinate surge capacity for genuine crises.
The effectiveness of regulatory frameworks ultimately depends on the sophistication and efficiency of their implementation. By investing in modern systems, governments can more efficiently collect, analyze, and leverage data. However, many public agencies still struggle with legacy systems and incompatible hardware. A recent Oliver Wyman survey revealed that while AI transformation tops five-year priority lists, fewer than 10% of oversight bodies have deployed AI solutions, and more than one-third acknowledge a lack of organizational readiness. The public sector should only use systems that are battle-tested at scale, as the Australian Stock Exchange’s AU$250 million ($170 million) write-off on an unproven blockchain system shows.
The momentum toward increased growth and productivity through more efficient regulation — reflected in American political discourse and European initiatives like the Draghi report — creates an opening for a more balanced approach. Neither complete freedom nor comprehensive control serve economies well. Success lies in matching oversight to risk, aligning it with strategic priorities, and building systematic capabilities for emerging challenges. Striking this balance may well determine the next century of economic progress.