Regulatory tolerance — the condition in which regulators are aware of your activity but choose not to constrain it — is not the same as regulatory approval. It is more useful.
The Regulatory Tolerance Zone
Regulatory tolerance is the condition in which an activity occupies a zone of regulatory ambiguity — operating in ways that existing frameworks do not clearly address, and in which regulators are aware of the activity but have not moved to constrain it. This condition is fragile — it depends on regulatory inaction rather than regulatory authorisation — but it is often the most productive position available for innovative enterprises in industries where formal regulatory frameworks have not yet caught up with new operational approaches.
Building and maintaining regulatory tolerance requires a specific approach to regulatory relationships that is distinct from both compliance (which assumes clear rules and follows them) and regulatory capture (which assumes regulatory relationships can be used to prevent rules from being applied). Regulatory tolerance is built through transparency about what the enterprise is doing and why it believes it is operating within the spirit if not the letter of existing frameworks; through demonstrated engagement with the regulatory concerns that the enterprise's activity raises; and through the development of genuine relationships with regulatory staff that allow early warning of emerging regulatory attention.
The Tolerance-to-Authorisation Path
The strategic objective of operating in the regulatory tolerance zone is not to remain there indefinitely but to use the period of tolerance to demonstrate the enterprise's value proposition well enough that regulators choose to accommodate rather than constrain it when they eventually move to formalise the regulatory framework. The enterprise that operates in the tolerance zone while actively contributing to the development of the regulatory framework that will eventually govern it is in a much better position when that framework is finalised than the enterprise that ignores the regulatory process and hopes tolerance continues indefinitely.
Regulatory tolerance is a temporary position that must be managed toward a more durable one. The enterprise that manages it well uses the tolerance period to build the evidence base and relationships that turn eventual regulatory engagement into an accommodation rather than a constraint.
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