Competition in professional services

The European Commission is bringing professional services within the ambit of the Community rules on competition. Rules which restrict competition in this sector and are not justified on general interest grounds are to be amended or discontinued. This should mean that the services offered to the consumer will be not only more competitive but also of higher quality. The move concerns lawyers, notaries, accountants, architects, engineers and pharmacists. As the restrictions concerned are basically national restrictions, it will be primarily for the Member States, the national competition authorities and the professional bodies to end them.

ACT

Commission communication of 9 February 2004 entitled "Report on Competition in Professional Services" [COM(2004) 83 final - Not published in the Official Journal]

SUMMARY

Professional services have an important role to play in improving the competitiveness of the European economy with the result that their quality and competitiveness have important spill-over effects. The disappearance of anti-competitive regulatory restrictions in this sector would mean that consumers could be offered more competitive and better-quality services on advantageous terms.

TheCommission report shows the need to take action in the field of the professions from a competition policy perspective, to provide information on what the Commission has done so far and to present its interim findings on key restrictions and their alleged general interest justifications and on the Community legal framework within which those restrictions have to be analysed. Finally, it proposes a future course of action aimed at encouraging the elimination of unjustified restrictions.

Restrictive regulation of professional services

At present, the professional services sector is characterised by either state regulation or self-regulation by professional bodies.

The Commission has analysed the markets in which lawyers, notaries, accountants, architects, engineers and pharmacists operate in the European Union and has identified five main categories of national legislation or self-regulation that restrict competition. These are:

• Fixed prices: These are probably the regulatory instrument likely to have the most detrimental effects on competition, eradicating or seriously reducing the benefits that competitive markets deliver for consumers, particularly in terms of price choice. In most Member States, fees for professional services are negotiated freely between practitioners and clients. However, in a small number of cases the Commission has observed the existence of fixed prices (e.g. in Germany for tax consultants), minimum prices (e.g. in Italy and Germany for architects) and maximum prices (e.g. in Italy for lawyers). Although in some cases maximum prices might protect consumers from excessive charges, the Commission considers that less restrictive mechanisms (such as improved information on the services provided) could be put in place.
• Recommended prices: These have a significant negative effect on competition since they may facilitate the coordination of prices between service providers and/or mislead consumers about reasonable price levels. The Commission found that in a minority of Member States (e.g. in Austria and Belgium) recommended prices are published for certain legal, accountancy, architectural and engineering services.
• Advertising restrictions: Advertising may facilitate competition by informing consumers about different products and allowing them to make better-informed purchasing decisions. It is also widely recognised that advertising, and in particular comparative advertising, can be a crucial competitive tool for new firms entering the market and for existing firms wanting to launch new products. However, a large number of the EU professions are subject to sector-specific advertising regulation. In some cases (e.g. in France for notaries), advertising of any kind is prohibited. In others, specific media or advertising methods such as radio advertising, television advertising, "cold calling" or specific types of advertising content are prohibited. In certain cases, there is a lack of clarity in existing advertising regulations, and this, in itself, may deter professionals from employing certain advertising methods.
• Entry restrictions and reserved rights: Excessive licensing regulation is likely to reduce the supply of service providers, with negative consequences for competition and quality of service. The professions are subject to qualitative entry restrictions in most Member States. These can take the form of minimum periods of education, professional examinations and minimum periods of professional experience. In many cases, entry restrictions are coupled with reserved rights to provide certain services. In some Member States the pharmacist and notary professions are even subject to quantitative entry restrictions based on demographic or geographical criteria. Entry restrictions, combined with reserved rights, ensure that only practitioners with appropriate qualifications and skills can carry out certain tasks. The EU is currently putting the finishing touches to a proposal for a directive designed to reform the system for recognising professional qualifications. The purpose of this reform, which is aimed at pharmacists and architects, among other professions, is to create a single legal framework to further liberalise the services sector and facilitate the recognition of qualifications in Europe.
• Regulations governing business structure and multidisciplinary practices: Business structure regulations may have a negative economic impact if they prevent providers from developing new services or cost-efficient business models. For example, these regulations might prevent lawyers and accountants from providing integrated legal and accountancy advice for tax issues or prevent the development of one-stop shops for professional services in rural areas. Certain ownership regulations can also reduce access to capital in professional services markets, hindering new entry and expansion. A number of professions in the EU are subject to sector-specific regulations on business structure. These regulations can restrict the ownership structure of professional services companies, the scope for collaboration with other professions and, in some cases, the opening of branches, franchises or chains.

There are essentially three reasons for this regulation of professional services:

• "asymmetry of information", i.e. the difference in the information available to consumers and service providers: a defining feature of professional services is that they require practitioners to possess a high level of technical knowledge. Consumers may not have this knowledge and therefore find it difficult to judge the quality of the services they purchase.
• "externalities": the provision of a service may have an impact on third parties. Rules are therefore needed to ensure that both service providers and purchasers take proper account of these external effects.
• the concept of "public goods": certain professional services are deemed to be in the public good since they are of value for society in general, for example, the correct administration of justice or the development of high-quality urban environments.

While the Commission acknowledges that some regulation in this sector is justified, it believes that in some cases more pro-competitive mechanisms can and should be used instead of certain traditional restrictive rules.

Possible application of the EC competition rules

From the perspective of Community competition law, a distinction must be made between the liability of professional bodies and that of Member States.

Regulations adopted by professional bodies are decisions of associations of undertakings that may be caught by Article 81 of the EC Treaty. However, regulations that are objectively necessary to guarantee the proper practice of the profession, as organised in the Member State concerned, fall outside the scope of the prohibition.

Article 81 is, in itself, concerned solely with the conduct of undertakings and not with laws or rules emanating from Member States. Nonetheless, read in conjunction with the second paragraph of Article 10 (prohibiting measures by Member States which could jeopardise the attainment of the objectives of the Treaty) and with Article 3(1)(g) of the Treaty (which justifies intervention by the Community in order to ensure that competition in the internal market is not distorted), Article 81 prohibits Member States from introducing or maintaining in force measures, even of a legislative or regulatory nature, which may render ineffective the competition rules applicable to undertakings.

Where a State delegates its policy-making power to a professional association without sufficient safeguards, i.e. without clearly indicating the public interest objectives that must be complied with, without retaining the last word and without exercising control of implementation, the Member State can be held liable for any resulting infringement. Measures adopted by professional associations and legislative or regulatory instruments adopted by public authorities may therefore give rise to the liability of the members of the professions and of their associations under Article 81 of the Treaty and of Member States under Articles 10 and 81 of the Treaty.

Position of the Commission and proposed actions

A significant body of empirical research shows the negative effects that excessive or outdated restrictive regulations may have for consumers. Such regulations may eliminate or limit competition between service providers and thus reduce the incentives for professionals to work, in a cost-efficient manner, to lower prices, to increase quality or to offer innovative services.

The Commission therefore acknowledges that some regulation in this sector is justified, but it believes that in some cases more pro-competitive mechanisms can and should be used instead of certain traditional restrictive rules. There are a variety of less restrictive mechanisms to maintain quality and protect consumers. For example, measures to improve the availability and quality of information about professional services could help empower consumers to make more informed purchasing decisions.

The Commission is therefore inviting the regulatory authorities of the Member States to review the national legislation restricting professional services. They should consider whether the existing restrictions pursue a clearly articulated and legitimate public interest objective, whether they are necessary to achieve that objective, and whether there are no less restrictive means to achieve this. The Commission is also inviting all professional bodies to undertake a similar review of their rules and regulations. They should apply the same proportionality test as the regulatory authorities of the Member States and, where necessary, change existing rules or propose changes.

With the entry into force of Regulation (EC) No 1/2003 in May 2004, the national competition authorities and the national courts will have a more prominent role in assessing the legality of rules and regulations in the professions. In so far as competition restrictions are imposed within Member States, administrative enforcement of EC competition rules in the professions should be mainly the task of national competition authorities, although the Commission will continue to carry out casework where appropriate. The Commission also proposes discussing with national regulatory authorities whether the existing regulations are necessary, proportionate and justified.

In 2005 the Commission will report on the progress achieved in eliminating the restrictions identified above or on the factors justifying these rules. To this end, it will contact the regulatory authorities by the end of the year to ask them to report on any measures they have adopted that fall within the scope of this report. Any explicit justification of the restrictive rules which they wish to maintain should then be communicated to the Commission.

Background

Reform of the restrictive rules in the professional services sector was initiated in 2003 with the publication of a study commissioned by the Directorate-General for Competition on the economic impact of regulation of the professions in the different Member States. Commission action on this front complements the directive on services in the internal market. The Commission presented a further progress report [COM(2005) 405 final] in 2005.

RELATED ACTS

Commission communication to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions of 5 September entitled "Professional Services - Scope for more reform": Follow-up to the Report on Competition in Professional Services (COM (2004) 83 of 9 February 2004), [COM(2005) 405 final - Not published in the Official Journal]

In its communication the Commission makes a first assessment of the reform of unjustified restrictions in the professional services sector. It welcomes the progress made in some of the Member States but is concerned by the all too frequent persistence of unjustified regulation which seriously impedes competition in many others. The analytical work underway in most of them, which should lead to substantive reform, is encouraging. But some countries report no reform activity as yet.

The Commission consequently urges the Member States to step up their efforts to increase pro-competitive reform, advocating a more refined analysis of the markets concerned in order to arrive at a clearer definition of the general interest and to ensure better targeted regulation. Occasional users (individuals) of professional services may have a greater need of carefully targeted regulatory protection than the main users (business and the public sector). The position with respect to small business users is not entirely clear and needs to be analysed further.

Strong political backing at national level and greater input from the professions are essential to the reform process. The Commission will continue to act as a facilitator in this exercise, helping to spread best practice.

Last updated: 28.10.2005