Self-regulated professions

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2. Effective regulation

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

In this chapter, the Bureau puts forward six guiding principles to help regulators —comprising provincial and territorial governments and self-regulating organizations— develop and maintain strong, efficient regulation that maximizes consumer welfare. The chapter also outlines a framework for regulators to detect and assess the impact on competition of restrictions under development or review.

Principles

Regulation should have clearly defined and specific objectives

If regulation is to be effective, it must be premised on clearly defined and specific objectives. A regulatory scheme should state the reasons for its existence and the outcomes it intends to achieve. Rather than simply presenting broad general principles, the scheme should address specific problems. Clearly defined and specific objectives will improve transparency and reduce the likelihood that regulation will be used to pursue private interests under the guise of public protection.

Restrictions should be directly linked to clear and verifiable outcomes

Specific restrictions chosen to achieve regulatory objectives should be directly linked to intended outcomes. To this end, a regulatory scheme should include performance standards that tie restrictions to outcomes through evidence rather than theory alone.

Regulation should be the minimum necessary to achieve stated objectives

Regulation should only comprise what is reasonably required to protect the public and should not restrict competition any more than is necessary to achieve the desired objectives. When considering regulatory options, regulators should look to regulatory schemes that exist across the country or elsewhere that have been shown to meet the intended policy objectives, while not compromising the quality of professional services or competition.

It is often the case that multiple restrictions aim to achieve the same objective. Such overlap may indicate that there is more than the minimum necessary regulation in place. For example, regulators often justify restrictions on advertising as a form of quality assurance; however, this may be unnecessary when high minimum entry qualifications and licensing, also intended to ensure quality, already exist.

The regulatory process must be impartial and not self-serving

In order to achieve the public policy objectives of regulation in the most effective manner, professional organizations must ensure they have the best possible governance structure. To this end, professional organizations must broadly represent all aspects of the profession being regulated, with independent public members at the table alongside professionals. Such representation helps ensure that self-regulatory activities are in the public interest by providing a window on the profession's operations. With broad representation, no one market participant or group of participants can control the regulatory process and manipulate it to its advantage.

While the Bureau recognizes the need for professional organizations to be informed by the expertise of the profession, it is likely overrepresentation to have an overwhelming majority of the members be professionals themselves, which may lead to their pursuing the profession's private interests. Since regulation of the professions is most commonly justified in terms of consumer protection, it seems appropriate that the points of view of consumers be effectively represented in professional organizations.

A regulatory scheme should allow for periodic assessment of its effectiveness and be subject to regular reviews

Regulators should produce annual reports on their activities and regularly review the regulatory scheme to ensure it effectively meets current needs. In light of ever-changing technology and market conditions, regulators must continually question the effectiveness of current restrictions. For example, as discussed in Chapter 1, restrictions on the entry and conduct of professional service providers are often justified as addressing instances of asymmetric information, when consumers are unable to make informed decisions about professional services. The appropriate regulatory response to this has likely changed in recent years, with consumers increasingly using the Internet to find out about services before they buy them. Moreover, regulators must regularly review restrictions to identify those that have undue costs or those whose goals could be better achieved through less intrusive approaches. Without a dynamic review mechanism, regulatory schemes run the risk of losing their relevancy and becoming suboptimal responses to policy objectives.

A primary objective of the regulatory framework should be to promote open and effectively competitive markets

To help minimize unnecessary or overly restrictive regulation, all regulators should promote competition as a primary objective. C ompetition is generally the most effective way to promote the efficient, low-cost and innovative supply of products meeting consumers' tastes and needs. A market is open and effectively competitive, and provides the maximum benefits of low prices and the efficient use of economic resources, when the following conditions are met:

• all potential competitors have the ability to compete, subject to any necessary technical, safety or other such requirements, based on their costs and ability to meet consumer demands at a lower price; and
• no participant in the market has sufficient market power to profitably sustain a significant and non-transitory price increase.

Competition assessment

To determine whether regulation has the potential to negatively impact competition, regulators should subject it to a competition assessment.

The Organization for Economic Co-operation and Development's (OECD) Guiding Principles for Regulatory Quality and Performance recognize the importance of an effective assessment of the effect on competition of regulatory measures. ¹ Competition assessment has the following objectives:

• to attain public policy goals in ways least restrictive of competition;
• to develop a framework to identify, at the development stage, legislation and policies that unnecessarily restrict the functioning of the market; and
• to determine alternative approaches that would be less intrusive.

Regulators should analyze regulation with the net public benefit in mind, taking into account both the potential anti-competitive effects and consumer protection benefits. Such informed analysis is the only means by which regulation is assured to be in the overall public interest, striking the optimal balance between the potential benefits of both competition and regulation.

To help identify and measure the impact of regulation that may unduly restrict competition, the OECD developed a toolkit and guidance document for competition assessment. ²

The OECD toolkit comprises three questions designed to detect whether regulation or other intervention in the market is likely to restrict competition and a framework for assessing any competition effects.

Detecting competition issues

The following three questions are designed to identify regulation and other market interventions with the potential to hinder competition.

• Does the proposal limit the number or range of suppliers? This is likely to happen, for example, when regulation grants certain professionals exclusive rights to provide certain services, establishes a licence as a requirement to practise, limits the scope of practice of certain professionals or significantly raises the cost of entry.
• Does the proposal limit the ability of suppliers to compete? Professionals are likely limited in their ability to compete when regulation, for example, controls or significantly influences the prices for services through fee schedules or limits the manner in which professionals may advertise their services.
• Does the proposal reduce the incentive of suppliers to compete vigorously? This incentive may decrease in the case of, for example, restrictions on the size and scale of businesses, recommended fee schedules, or a regulatory scheme that increases the costs to consumers of switching service providers.

Answering yes to one or more of the three questions signals a likely competition concern. (Answering no means that no further competition-related work is required immediately, although regulators should review all restrictions regularly to see whether they remain free of competition effects.) As discussed in Chapter 1, several types of restrictions potentially have negative effects on competition in the self-regulated professions and would trigger a yes answer to at least one of these threshold questions, thus warranting a full assessment.

Assessing competition issues

Carrying out a full competition assessment includes clearly identifying policy objectives, considering alternative regulatory responses to achieve those objectives, and evaluating and comparing the impact on competition of the various alternatives.

When a proposal merits assessment, regulators should evaluate the harm to competition. Key factors to look at, as set out in the OECD toolkit, include the following:

• entry of new firms;
• prices and production;
• quality and variety of goods and services;
• incumbent businesses;
• innovation;
• market growth; and
• related markets.

Through this analysis it may become apparent that the policy objectives can only be met by imposing a restriction that would have a negative impact on competition. In that case, the competition costs should be weighed against the other benefits of the regulation to ensure that the intervention provides net benefits to the public.

Following this framework should allow regulators to identify regulatory options that achieve policy objectives with the minimum impact on competition.

Conclusion

From the broadest perspective, an effective regulation is one that achieves its stated aim. From a competition perspective, at least three other issues arise. First, would competitive forces by themselves achieve the same end as regulation? Second, do the additional costs to the economy and consumers of the anti-competitive effect of regulation outweigh or cancel the benefits sought? Finally, is there an equally effective regulatory mechanism that is less harmful to the competition process?

The six principles of effective regulation outlined in this chapter are premised on the view that regulation, when necessary, must be developed and implemented in an open, effective and reviewable way. Regulators, comprising representatives of various interests— including consumers, regulators, professional organizations, professionals and competition experts, each bringing their various areas of expertise to the table—must ensure that restrictions are aimed at defined, measurable and limited goals. Furthermore, restrictions must be subject to regular and ongoing assessment. Meeting these essential conditions will help minimize unnecessary restrictions on competition by ensuring scrutiny and balance.

That alone is not sufficient, however. The drafting and reviewing of regulatory measures should have as one of its primary objectives to promote open and effective competition. The Bureau hopes that the principles for effective regulation outlined above, as well as the competition assessment framework, will help regulators develop strong, efficient regulatory schemes that achieve both the policy goals of the profession and the public policy goal of promoting a vibrant competitive environment for professional services.

Finally, it is also the Bureau's hope that applying these principles will increase awareness of the competitive impact of regulation in professional services and motivate expansive deliberation among regulators of the effects—favourable and not—of regulation.

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¹ OECD, June 2005, www.oecd.org/dataoecd/19/51/37318586.pdf .

² See OECD, Competition Assessment: Brief for Policy Officials , February 9, 2007, www.olis.oecd.org/olis/2007doc.nsf/7b20c1f93939d029c125685d005300b1/
7b1c42380f21686dc1257261003e84d1/$FILE/JT03221509.PDF , Competition Assessment: Guidance , February 8, 2007, www.olis.oecd.org/olis/2007doc.nsf/3dce6d82b533cf6ec125685d005300b4/
74c1d85e45d65e46c1257261003e8611/$FILE/JT03221469.PDF , and Integrating Competition Assessment into Regulatory Impact Analysis , February 8, 2007, www.olis.oecd.org/olis/2007doc.nsf/3dce6d82b533cf6ec125685d005300b4/
14d0619d11f02e44c125726100390581/$FILE/JT03221472.PDF .