The UK’s growth puzzle: regulation vs innovation

‘Kickstarting economic growth’ is one of the Government’s core mission statements, yet GDP growth has been inching along. Inflationary pressures and global market uncertainty are proving a difficult economic landscape to navigate. With big decisions set to be announced at the Autumn Budget, the debate over how regulation shapes growth is a prominent topic.

On one side is the push for innovation to drive higher productivity, competitiveness, and economic growth. A number of headlines have pointed out the government’s eagerness to cut back ‘red tape’ as a strategy to enable this. In 2025, the Government announced a planned regulation shake up that echoed the 2010 Coalition’s ‘bonfire of quangos’ and started to introduce legislation, such as the Planning and Infrastructure Bill to reduce barriers to building more infrastructure and housing.

On the other side lies the need for robust regulation to protect consumers, ensure fair markets, and deliver on other priorities like sustainability and digital security. AI regulation is a notable challenge, with around 7 in 10 saying more regulation would make them safer and there’s concerns over the knock-on effects of data centres on energy bills. But, AI is also potentially a massive driver of economic progress.

In this blog, we explore the tension between regulation and innovation from business and government perspectives, drawing on insights through our own research along with comment by Sector Heads Matt Barnes (Business & Enterprise) and Alistair Kuechel (Regulation).

A business perspective

In recent years, businesses have navigated a turbulent landscape shaped by the UK’s exit from the EU, the Covid-19 pandemic, and economic and political uncertainty. At the heart of these challenges lies regulation: a persistent and often contentious factor in the business environment.

The Business Perceptions Survey (BPS) has been running since 2007 and offers valuable insight for the Department for Business & Trade into how regulation is perceived. One key measure tracks the percentage of businesses agreeing that “the overall level of regulation in the UK is an obstacle to your business’ success.” The latest figures, recently published by the Department, show that 47% of businesses agree with this statement. This follows a sharp rise in 2022, when this rose from 37% to 45%, reflecting the strain businesses faced during that period.

But what drives this sentiment? Analysis reveals that the main reasons for dissatisfaction with regulation are the time required to comply, the complexity of compliance, and perceptions of disproportionate regulatory burden. Businesses feel the impact of regulation differently depending on their size and sector. Large firms, while spending more time and money on compliance, typically have the resources to manage it. Micro and small enterprises often feel the regulatory burden more acutely. Importers and exporters, particularly in the wake of EU exit, have also experienced heightened regulatory challenges.

The tension between regulation and innovation becomes especially clear among “innovative businesses” – defined in the BPS as those that have introduced new or significantly improved products, processes, or business models, or entered new markets in the past year. These businesses are more likely to cite regulation as a key obstacle to success.

Artificial Intelligence (AI) is one area where businesses could sit under this definition, and it’s developing rapidly.  Growth at this pace brings challenges though, as it tends to outstrip regulatory frameworks and safeguards. A previous survey IFF also conducted for the Department for Science, Innovation and Technology that focused on businesses that use AI, revealed that nearly half (47%) had no specific cybersecurity practices in place for AI technologies. Add in geopolitical pressures from billions in foreign investment, and a tricky balancing act becomes even more complex.

…the main reasons for dissatisfaction with regulation are the time required to comply, the complexity of compliance, and perceptions of disproportionate regulatory burden.

Through a government’s lens

Governments are increasingly focused on how emerging technologies, data use, and market dynamics intersect to shape growth and regulation.

The UK Government continues to champion the five principles set out in the 2023 Pro-Innovation AI Regulation White Paper – safety, transparency, fairness, accountability, and contestability.

Although these principles remain non-statutory, regulators are embedding them into sectoral guidance and supervisory expectations, effectively making them operational requirements. Looking at two of the regulators we currently work with we, we can see how the challenge of balancing innovation with protection is being addressed.

In March 2025 the ICO announced new measures supporting the UK’s growth agenda, including simpler guidance for businesses developing or using AI for more clarity around data protection law. The idea is that it will helping businesses adopt AI where it adds value, encouraging technological innovation (leading to growth) whilst also building public trust. As well as this, the ICO has committed to a trialling a pilot scheme. This lets businesses experiment with AI solutions that are privacy-preserving within a controlled environment. And importantly, this means that there’s no fear of immediate enforcement, reducing compliance uncertainty.

IFF’s 2025 Data Controllers Survey for the ICO highlighted that 25% of firms which had considered a technology but not implemented it, said the effort to understand compliance requirements was a barrier to adoption. The new frameworks will help address this barrier.

Similarly, the FCA has recently outlined its own approach to support the safe and responsible adoption of AI in UK financial markets and written to the Prime Minister to explain how they’ll support growth. The FCA’s strategy avoids creating specific AI regulations. Instead, it maps AI risks to existing frameworks such as Consumer Duty, SM&CR, and operational resilience, while using sandboxes (experimenting in a controlled, isolated environment) and live testing (using in the’ real-world’ with supervision) to support innovation. The FCA is also exploring how AI models can help within an operational context for more efficient processes.

Striking the right balance

Reflecting on these perspectives, how can smart regulation support innovation? Drawing on the current regulatory landscape and insights from our research, it’s clear that if we want to encourage innovation while safeguarding people and the economy, regulation needs to be guided by three core principles:

Proportionality over rigidity

Where possible, regulation should be risk-based and proportionate, not one-size-fits-all. This means tailoring requirements to the scale, nature, and potential impact of innovation. Smaller firms and early-stage innovations shouldn’t necessarily face the same burdens as larger, established players.

Clear, defined and principle-led guidance

Businesses need clear, accessible guidance but also need some room to adapt. Regulators should focus on principles-led frameworks that provide direction without locking firms into strict compliance paths. This helps support innovation in fast-moving sectors.

Open collaboration with supportive supervision

Smart regulation is co-created. Regulators, businesses, and researchers should work together through tools like sandboxes, live-testing, and consultation exercises to shape rules that are both effective and enabling. Early engagement and iterative testing can build trust, reduces fear of enforcement (which stifles growth), and still ensures regulation evolves with technology, not far behind it.