Self-Regulated Professions—Balancing Competition and Regulation

Report

2007

Table of contents

  1. Economic analysis
  2. Effective regulation
  3. Accountants
  4. Lawyers
  5. Optometrists
  6. Pharmacists
  7. Real estate agents

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Foreword

The professions comprise up to one fifth of Canada's service economy and seven percent of the total hours worked in Canada's business sector. It is cause for concern, therefore, that labour productivity in this important sector of the Canadian economy is approximately half that of the professions in the United States and is in the bottom quintile for labour productivity among Canadian industries.

Research by the Organization for Economic Co-operation and Development (OECD) confirms the worrisome state of Canada's professional services sector. The OECD reported earlier this year that Canada's best opportunity for growth is in labour productivity and specifically recommended that Canada promote competition in professional services by reducing regulation. Other research by the OECD has shown that countries that have streamlined and improved their regulatory regimes have seen significant payoffs in terms of productivity.

Much of the productivity problem that plagues Canada's professions may be due to regulators not considering competition issues, or considering them inadequately, when they were creating their regulatory schemes, in the context of a very different Canadian economy than exists today.

Normally, competition in a free market system protects both consumers and service providers better than any other alternative. The only time it is desirable to supplant competition by regulation is when markets are not functioning as well as they should be and when the benefits of regulation demonstrably outweigh the benefits of competition alone. But even then, regulation will be most effective when it imposes minimal restraints on competition.

This study, the first of its kind by the Competition Bureau, is a detailed look at the way regulation affects competition in self-regulated professions in Canada. As such it is a valuable tool for professionals, politicians, policy makers and consumer advocates. The Bureau is uniquely placed to do this study. As advocates for competition, we have considerable expertise in analyzing professional practices to identify uncompetitive elements. In addition, we hope that our advocacy and enforcement activities will work in tandem: by having regulators consider the competitive impacts of regulation, it will become unnecessary for the Bureau to consider them during investigations into alleged anti‑competitive conduct.

I encourage readers to see this report's findings as applying to all professions. Our recommendations, which we plan to revisit in two years, are certainly not an indictment of any of the professions. Rather, our goal is to identify opportunities for improving necessary regulations and eliminating unnecessary ones so that Canadians can benefit from the best combination of regulation and competition.

Some will no doubt argue, correctly, that competition needs to be balanced against other policy objectives. My concern is that we have regulatory regimes that were established without adequately considering competition.

Our collective challenge, whether we are professionals or users of professional services, is to bring more competition to the professions. This study is a good place to start.

Sheridan Scott

Commissioner of Competition

Executive summary

Despite comprising a significant part of the service economy in Canada, perhaps as much as one fifth, the professions comprise one of the overall economy's least productive sectors. According to the Conference Board of Canada, professional services rate in the bottom quintile for productivity per hours worked. In addition, labour productivity in the professions in Canada is approximately half that of the professions in the United States. At the same time, the professions are one of the most regulated sectors of the Canadian economy, and the regulation in place in the professions is more restrictive in Canada than in many member nations of the Organization for Economic Co-operation and Development .

Given a considerable body of evidence that shows that reducing regulation improves competition and, as a result, productivity, it is reasonable to ask whether and how professional services could be less regulated in Canada. The Competition Bureau is ideally placed to answer this question, since one of its primary responsibilities is advocating for competition in Canada. On several occasions, the Bureau has advised Canadian regulatory bodies on how to improve their approach to regulation to realize the benefits of competition. The Bureau also has considerable experience investigating anti‑competitive behaviour in the professional services sector.

The five groups of professionals—accountants, lawyers, optometrists, pharmacists and real estate agents—the Bureau chose for this study of the self-regulated professions in Canada are vital to the Canadian economy and are of great importance to Canadians in their daily lives. Access to advanced, innovative and competitive professional services is essential for individual Canadians as well as businesses. These professions affect the cost of many other services as well as most goods, including the most basic consumer goods.

These professions are also self-regulated, meaning that they have been given some powers that normally only governments hold. The organizations given self-regulating powers may therefore put in place restrictions that have the force of law. At the same time, these organizations have potentially conflicting concerns and interests—their own and those of the public. This is all the more reason to ensure that competition, from which both professionals and consumers benefit, is protected.

The Bureau selected these particular groups of professionals based on their volume of commerce as well as on the volume of complaints about anti‑competitive behaviour in these professions it received, both from the public and from within the professions themselves, which gave it good reason to believe that existing regulation might be restricting competition excessively. However, the Bureau's findings are transferable to other professions, since it is reasonable to expect the type of regulation found in these professions generally exists in others.

Competition and regulation

Competition is generally the best means of ensuring that consumers have access to the broadest range of services at the most competitive prices and that producers have the maximum incentive to reduce their costs as much as possible and meet consumer demand. However, professional services markets are characterized by particular qualities that can justify some form of regulation to protect consumers and ensure service quality. At the same time, there are compelling economic arguments that regulation can have the effect of severely limiting competition, thus preventing consumers from benefiting from the many advantages of a competitive environment.

The Competition Bureau does not argue blindly for competition at the expense of all other policy objectives, since there may be legitimate public interests other than the efficient allocation of resources at issue. The Bureau does, however, advocate that to be effective, regulatory decisions must be fully informed, keeping in mind the many direct and indirect impacts they may have on consumers through reduced competition. Regulation that is excessive or restricts competition more than an equally effective alternative comes at great cost and should be removed or modified.

This is an important message for all professions. Regulators—comprising provincial and territorial governments, and self-regulating organizations—must evaluate regulatory decisions through a balanced, evidence-based assessment, taking into account the numerous channels through which regulation can be beneficial or harmful to consumers of professional services. To this end, the governance structure of each profession must ensure broad representation. It is the Bureau's hope that this study will increase awareness of the competitive impact of regulation in professional services and motivate an expansive deliberation among regulators of the effects—favourable and not—of regulation.

Findings and recommendations

This study is the Bureau's first effort to identify potentially unnecessary and anti‑competitive restrictions that exist in a representative group of self-regulated professions and that may well be present in other professions. (The specific examples below are just that, examples to illustrate the Bureau's findings. Chapters 3–7 contain all the recommendations.) The Bureau's recommendations are not based on findings of wrongdoing; rather, they reflect opportunities the Bureau believes regulators should seize.

Restrictions on entering the profession

Most professions maintain substantial entry qualifications, coupled with continuing education requirements. The Bureau found that these qualifications are, in some instances, noticeably uneven across the country.

In general, the Bureau supports the need for entry requirements to assure quality in the provision of professional services. However, any proposed increase to required entry qualifications should be justified as being the minimum that will reasonably ensure consumer protection. Furthermore, jurisdictions that maintain higher standards than others should look to the outcomes of less regulated jurisdictions when defining the minimum necessary level of qualification.

The Bureau was interested to find that the authority to accredit all Doctor of Optometry programs in Canada and the United States rests with the U.S.-based Accreditation Council on Optometric Education, which almost entirely comprises members of the American Optometric Association. The Bureau is of the view that there is a risk that the Council's accreditation policies are formed and evolve based on conditions of supply and demand in the U.S. and do not necessarily reflect conditions in Canada. As a result, provincial and territorial colleges of optometry should consider ways to ensure that the Council takes conditions of supply and demand in Canada into account when developing accreditation policies .

The Bureau also reviewed empirical studies on the effect of market entry restrictions on the price and quality of professional services. Generally, the studies found that the incomes of members of professions with restrictions on entry are higher than the incomes of comparable professionals who do not face restrictions. The effect on quality is unclear.

Restrictions on mobility

Generally, the professions are moving in the right direction with respect to interprovincial and international mobility. In each profession, the majority of provinces have signed a mutual recognition agreement to remove unnecessary barriers to mobility of qualified professionals and to establish the conditions under which professionals registered or licensed in one jurisdiction may have their qualifications recognized in another. Further work can be done to get all Canadian jurisdictions on board and to develop strong dispute-handling mechanisms and consistent implementation of these agreements.

Most professions use various mechanisms to assess the qualification of foreign professionals wishing to have their credentials recognized in Canada. Many of these mechanisms take the form of national organizations that assess basic educational or professional qualifications on behalf of the provinces and territories. However, the pharmacy profession in Canada does not use any of these mechanisms, relying instead on each province to set its own evaluation and entry criteria and assessment process. Given that the roles and responsibilities of pharmacists are essentially the same across the country, there is no apparent reason for the variation in the admission requirements for foreign-trained pharmacists. When the requirements are higher than necessary, the cost of entry can be needlessly high, resulting in fewer foreign-trained professionals applying to become pharmacists in certain provinces and territories.

Restrictions on overlapping services and scope of practice

The Bureau has identified a number of instances in which professionals who provide overlapping services are requesting that their scope of practice be expanded to include one or more activities currently beyond their authorization. Regulators should conduct a thorough assessment of the overall effect of any proposed expansion. A full evaluation should take into account both the potential costs, in terms of public safety, and the potential benefits, in terms of lower prices, increased choice and enhanced consumer access to professional services.

For example, the Bureau learned that members of some accounting designations in some Canadian jurisdictions are not allowed to provide the full extent of public accounting services. Such restrictions limit the number of accountants who can offer this important service and therefore limit competition. The Bureau recommends that regulators reconsider these restrictions so that all accountants who are qualified to provide public accounting services may do so.

Restrictions on advertising

The Bureau has identified numerous restrictions that appear to go beyond what is necessary to protect consumers from false or misleading advertising and, as a result, limit consumers' access to legitimate information that greatly benefits competition. Among these are restrictions that limit the use of certain words and expressions and those that limit the size of advertisements. The Bureau is particularly concerned by restrictions on comparative advertising. Such restrictions obstruct competition between service providers and make it difficult for new entrants to advertise any distinct features of the services they offer, protecting incumbents from the full forces of competition.

The Bureau found many such restrictions on lawyers in many Canadian jurisdictions. Removing these restrictions would go a long way toward bettering this profession's competitiveness. Moreover, the Bureau recommends that the regulators in all professions review existing restrictions on advertising and remove those that go beyond prohibiting false or misleading advertising.

The Bureau also reviewed empirical studies on the effect of advertising restrictions on the price and quality of professional services. Generally, these studies found that restrictions on advertising increase the price of professional services, increase professionals' incomes and reduce the entry of certain types of firms. The effect on quality is small, except that the restrictions may result in fewer consumers using the service.

Restrictions on pricing and compensation

Some regulators publish suggested fee guides, which they claim to be non-binding. Fee guides that are purely voluntary in nature, while unquestionably preferable to any mandatory directive, remain a source of unease from a competition perspective, since they risk facilitating overt or tacit collusion. Given the negative effect of collusion on consumer welfare, the Bureau urges regulators to look to less intrusive means than fee guides to provide consumers with the information they need about prices. In addition, regulators should ensure that any maximum prices they set are not functioning as fixed prices in practice.

In the real estate industry, all provinces and territories but Quebec restrict agents' remuneration to either a fixed amount or a percentage of the selling price. Ontario goes even further and uses the phrase but not both in its restriction, meaning that real estate agents may not, for example, ask for a fixed amount for their initial work and then a percentage of a property's selling price. Such a restriction disallows two-part fees, a type of pricing arrangement one would expect to arise in a competitive real estate market in which some fixed level of work is generally required, but anything beyond it is uncertain. This approach prevents what would otherwise be a perfectly acceptable compensation arrangement that should spur competition among agents, since it maintains the incentive for them to work to get a higher selling price for their clients while ensuring that they will be fairly compensated for the preparatory work they do.

Restrictions on business structure

The Bureau is of the view that certain restrictions on business structure, namely restrictions on multidisciplinary practices between complementary service providers, have the potential to significantly reduce the benefits of competition.

Lawyers and public accountants, for example, appear to be natural complements to one another in terms of the services they provide. By working together, they would also be able to realize business efficiencies. However, the Bureau uncovered some restrictions in some provinces that prohibit or discourage members of these professions from working together or with other professionals in multidisciplinary practices.

Professions justify restrictions on multidisciplinary practices as preventing possible conflicts of interest, which is a laudable goal. However, the Bureau recommends that regulators consider less intrusive mechanisms than an outright prohibition on multidisciplinary practices to circumvent possible conflicts of interest, such as requiring all participants in collaborative relationships to adhere to similar rules of conduct.

Conclusion

An examination of competition in the self-regulated professions is a legitimate exercise at any time, since the right to self-regulate brings with it the responsibility for regulators to consider the greater good in all that they do, including competition.

The professions in general, and those included here, currently face a situation that is rich with opportunities to benefit from increased competition. These benefits will accrue not only to the professions themselves but also, and perhaps more importantly, to Canada and Canadians. This study is, as such, only a starting point. There is ongoing work for regulators to do. For the Competition Bureau's part, it plans to review in two years whether the professions have addressed the recommendations this study presents.

The Competition Bureau is an independent law enforcement agency. The Bureau contributes to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice. Under the direction of the Commissioner of Competition, the Bureau administers and enforces the Competition Act. As a law enforcement agency, the Bureau investigates allegations of anti‑competitive conduct and pursues criminal and civil remedies to stop anti‑competitive behaviour.

In addition to law enforcement, the Bureau also promotes competition through advocacy, of which this study is an example. As an advocate for competition, the Bureau frequently makes submissions to various legislative bodies and regulators, offering its unique perspective on how to implement reforms that encourage competition and ensure that competitive factors are taken into consideration in the formulation and review of policies.

Introduction

The Competition Bureau embarked on this study of self-regulated professions that is, professions governed in part by government and in part by organizations given self-regulatory powers in its capacity as an advocate for competition. The intent of the study is to identify restrictions self-regulated professions place on the entry of prospective members into the profession and on how existing members do business that may unnecessarily hinder competition. The Bureau also hopes to contribute to the discussion on how best to regulate these professions, and others, in an effective way that achieves the benefits of both regulation and competition.

The purpose of this study is not to urge professions to deregulate. Rather, it is to promote strong, effective regulation by applying competition analysis to this vitally important sector of the economy. In this way, the Bureau invites regulators comprising provincial and territorial governments and self-regulating organizations to consider the competition policy perspective when formulating, enacting and reviewing regulations, rules and policies.

As a first attempt to identify restrictions on competition in the self-regulated professions, this study focuses on five groups of professionals: accountants, lawyers, optometrists, pharmacists and real estate agents. This choice in no way indicates that these are necessarily the most regulated professions. Rather, the Bureau selected these groups based on their volume of commerce and the volume of complaints about anti‑competitive behaviour, both from the public and from within the profession, since this gave the Bureau good reason to believe that existing regulation might be the cause of that anti‑competitive behaviour. However, the Bureau's findings are transferable to other professions, since it is reasonable to expect the type of regulation found in these professions generally exists in others.

The Bureau approached this study, not as an impartial onlooker, but as a voice for the promotion of competition and the application of market forces wherever possible. The Bureau supports regulation only when necessary, and then, only to the minimum extent needed to achieve policy objectives. This study is premised on the Bureau's belief that competition is generally the best means to ensure consumers benefit from low prices, broad choice and the many other advantages of a dynamic, competitive landscape.

The importance of professions to Canadians

As the providers of services of great importance to the Canadian public, the five professions included in this study play a significant role in society and the economy. In this increasingly integrated and fast-paced world, the importance of access to advanced, innovative and competitive professional services is rising; individual consumers and business clients depend heavily on them every day. In fact, many professional services are at the heart of today's knowledge-based economy, meaning that the success of the professions is integral to the success of the Canadian economy as a whole.

Professions affect the cost of many other services as well as most goods, including basic consumer goods. The prices of the vegetables and breakfast cereal consumers buy at the grocery store, for example, have the grocery chain's legal, accounting and real estate costs built into them. When the chain offers its employees drug or eye care coverage, the prices of the products it sells will be influenced by its costs to provide that coverage.

It is difficult to quantify the contribution of professional services to the Canadian economy. However, there are some indications of their importance. For example, a University of Minnesota professor has estimated that in the United States 20 percent of workers in the year 2000 were in occupations with some form of state licensing, up from five percent in the 1950s. Taking into account local and federal government requirements, perhaps three of every 10 workers in the U.S. are required to have a licence to do their jobs. It is difficult to obtain parallel data for Canada, but it is reasonable to assume that the situation would be similar, although perhaps not as dramatic, since some of the occupations included in the professor's research are not considered to be self-regulating professions in Canada. Footnote 1 According to a recent Conference Board of Canada report, however, professional services account for approximately seven percent of the total business sector hours worked in Canada in 2004.Footnote 2

Given the significance of the professions in Canada, it is worrisome that recent evidence shows that they comprise one of the overall economy's least productive sectors. According to the Conference Board, professional services rate in the bottom quintile for productivity per hours worked. In addition, labour productivity in the professions in Canada is approximately half that of the professions in the United States. Footnote 3 At the same time, the professions are one of the most regulated sectors of the Canadian economy, and the regulation in place in the professions is more restrictive in Canada than in many other member nations of the Organization for Economic Co-operation and Development (OECD). Footnote 4

The role of regulation

In Canada, professional services are often governed by considerable regulation both direct government regulation and the rules self-regulating organizations impose on their members. Trade associations can also play a governing role; however, since they do not have direct power to regulate, they are outside the scope of this study.

The primary basis for regulating the professions is to protect consumers of these services as well as the general public in response to the presence of factors that may cause the market to function less efficiently than it otherwise should. (See Chapter 1 for a thorough review of the economic theory behind regulation and the related effect on competition.)

While the nature and rigour of regulation varies across professions, the net result is that the professions have not traditionally been subject to the full forces of competition that prevail in other sectors of the economy, thus reducing the many ways in which consumers benefit from a competitive environment.

The regulatory restrictions that have the greatest potential to hamper competition are restrictions on market entry, including restrictions on entering the profession, mobility and on overlapping services and scope of practice, and restrictions on market conduct, including rules controlling advertising, pricing and compensation, and business structure.

While appropriate standards of quality can improve the efficiency and effectiveness of markets for professional services, professionals must be unburdened by ineffective, unnecessary and outdated regulations. This will allow professionals to make full use of their qualifications and deploy their vitally important skills in vibrant, efficient and competitive markets. Consequently, this will ensure that Canada is well positioned to take advantage of the many benefits of the knowledge-based economy. (See Chapter 2 for more on effective regulation.)

In addition, given the considerable body of evidence that shows that reducing regulation improves productivity, it is reasonable to ask whether and how professional services could be less regulated in Canada.Footnote 5

Research process

The Competition Bureau conducted extensive research on the five groups of professionals, soliciting input from provincial and territorial regulators through a voluntary questionnaire (see Appendix 1) and by reviewing existing restrictions (as found in legislation, regulations, policies, codes of conduct and other instruments), holding follow-up consultations on the findings and conducting independent research. (See Appendix 2 for a complete list of regulators, self-regulating organizations and others that provided input at various stages of the research process.) Due to the sheer volume of information collected, the report only highlights selected restrictions in various provinces and territories to illustrate potential competition issues.

In using the questionnaire and the subsequent consultations, the Bureau made every effort to be accurate. While mindful that restrictions are not always implemented the same way as they are written in regulation, the Bureau worked with the available information. Although the Bureau relied heavily on the information it received from the questionnaires and consultations, the views and recommendations contained throughout this report are the Bureau's own.

To complement its own extensive expertise in the area of competition economics, the Bureau also sought the assistance and advice of expert economists to analyze the potential anti‑competitive and efficiency effects of regulations regulators may impose.

Structure of the study

The study comprises seven chapters. In Chapter 1, economic analysis guides a theoretical discussion of the rationale for regulation of the professions, and exposes the types of restrictions that have the potential to negatively impact competition. The economic arguments for and against regulation are considered together to highlight the need for policymakers to balance the public benefits of restrictions against the potential anti‑competitive effect.

Chapter 2 sets out overall recommendations for the formulation of optimal regulation. In particular, the Bureau posits six guiding principles to help regulators develop strong, efficient regulation that will maximize consumer welfare through competition but still meet policy objectives. The chapter concludes with a brief discussion of how to incorporate an assessment of the impact on competition into the formulation or modification of regulation.

Chapters 3 to 7 consider existing restrictions on five groups of self-regulated professionals: accountants, lawyers, optometrists, pharmacists and real estate agents, respectively. The Bureau identified six categories of restrictions that have the greatest potential to harm competition: restrictions on entering the profession, mobility, overlapping services and scope of practice, advertising, pricing and compensation, and business structure. Details on problematic restrictions, including any rationale for them the Bureau found or was made aware of, and how they are likely to reduce competition, are accompanied by recommendations to review, and when necessary, remove or replace them with less intrusive alternatives. Appendix 3 contains a complete list of the recommendations.

The questionnaire responses and consultation submissions referenced in chapter 3 to 7 are on file with the Competition Bureau. The URLs for websites referenced throughout this study are accurate as of mid-October 2007.

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