Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

Toward Greater Competition in the Self-Regulated Professions:
A Win for Consumers and the Economy

The Economic Club of Toronto
Toronto, Canada

December 11, 2007

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Thank you for the introduction. It is a pleasure to be here.

I thought I’d start today by telling you a little about the Competition Bureau and how we look at markets, before moving to our study of competition issues in selected professions.

Many of you may know the Competition Bureau for our enforcement actions. It emerged recently, for instance, that our investigators raided the head offices of some of Canada’s major chocolate manufacturers as part of a cartel probe. We also recently acted against Lululemon Athletica, securing their agreement to remove unsubstantiated claims from some of their clothing tags. That falls under another of our business lines, policing false and misleading business representations.

As Commissioner of Competition, I have a statutory mandate to enforce federal laws against anti-competitive behavior. The cases I’ve just cited made the news, perhaps for obvious reasons. But I want you to know that every day, in every major Canadian city, we have investigators on the ground dealing with complaints and acting, through negotiated settlements or court action, to ensure the marketplace delivers the benefits of a free and open economy. At the Bureau, we contribute to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice.

What may be a little less well known is our role as a statutory advocate for competition. But we are no less serious about this aspect of our work, and no less dedicated. In past decades, when so much more of the Canadian economy was government-regulated, this often took the form of representations before other government bodies, whether the Ontario Energy Board or the CRTC – where, incidentally, we argued for years that consumers would be the winners from long-distance and local telephone deregulation. This was hard slogging, and not often headline-grabbing, but it was important work, and we believe many of the suggestions we put forward have, with time, come to fruition.

I want to make one last important point about this work before I move to the heart of today’s talk. You will rarely, rarely, in any of those filings over many years, find a call for naked deregulation, shorn of any public oversight. We are not competition zealots. We accept the legitimate role of regulation, whether by government or some other body, to ensure the public good is respected. We accept the legitimate social, health, cultural, security and other objectives that governments choose to pursue when they regulate. We see our role as ensuring that, in the pursuit of these objectives, the costs in terms of reduced competition are recognized, and wherever possible, minimized.

Now, as many of you know, governments have lessened regulation in several areas over the last two decades, from foreign investment to transportation and telecommunications. That has led us in recent years to begin to focus our advocacy efforts equally on areas outside the traditional government sphere, but where we have reason to believe there may be significant and unnecessary impediments to competition.

That was the impetus for our study of generic drug pricing, released in October. There we found a generic drug manufacturing industry where in some cases a dozen or more companies were competing for shelf space at pharmacies. Yet international comparisons suggested retail prices in Canada were higher than average.

I won’t delve into our findings. You can find them on our Web site and they do make for interesting reading. What is germane today is the way we went about our work. International comparisons indicated a potential competitive disconnect. We put a team on the matter and they gathered and analyzed public and voluntarily-produced information over the course of a year using the lens of competition. Then we issued a report that does not recommend dismantling the regulatory framework, but does point out flaws in the system and areas that warrant further attention.

So too with our study of the regulated professions in Canada. We already had considerable experience examining the professions from various perspectives and decided to put together a team to do a more systematic review. Our timing could not have been better.

A recent OECD report, Going for Growth 2007¹, identified five key policy priorities for each member state that would be most likely to boost the growth of GDP per capita. The list varies by country, but for Canada, one of the five keys to improving future prosperity, according to the OECD, is a lessening of regulation in the professions. We are seen by the OECD to be among the countries with the heaviest regulatory regime for the professions, with possible negative effects on our economic growth and productivity.

And certainly the evidence points in that direction.

A 2006 report by the Conference Board of Canada² found the professions rate in the bottom fifth on their relative labour productivity. The situation is even worse if you compare the professions in Canada to their counterparts in our largest trading partner. Canadian professionals are only about half as efficient as their colleagues in the United States.

Given that the service sector in Canada accounts for as much as 70 per cent of the overall economy, and the professions comprise a significant portion of that, the issue is troublesome.

This information provides the economic foundation for examining the professions in Canada. However, there are dozens of such associations in Canada, and our resources are limited, so we decided to focus on five. Our reasons for choosing them are quite straightforward. Each represents an important group of professionals whose services are highly relevant to the public; the Bureau already has considerable experience dealing with most of them; and each represents one of the largest groups of professionals.

We asked ourselves, and them, a basic question: what are your regulatory practices, and are there some that hinder competitiveness without the saving grace of safeguarding a clear public interest?

I’m here today to announce publicly the results of our study into the competitive implications of the self-regulation regimes for lawyers, real estate agents, accountants, optometrists and pharmacists.

Let me preface our findings by saying once again that the Competition Bureau does not question the fundamental value of regulation, or even self-regulation. I am of the firm belief that regulation can play an important role in helping governments meet their goals, including protecting the health and safety of citizens. And in many instances, it is the professions themselves that are in the best position to decide on the rules their members should follow.

But it is surely not impertinent to wonder whether all the rules are necessary, whether any of them are informed more by self-interest than by the public interest, and whether changing or dropping some of these rules mightn’t lead to wins both for the overall economy and for consumers individually.

Our study found that rules that limit advertising, set prices for services and restrict who can offer some professional services may go beyond legitimate consumer protection. These rules can lead to higher prices, limit choice and restrict access to the type of information consumers need to make decisions.

We uncovered numerous examples of rules that regulators should consider revising or removing to promote greater competition, to serve consumers better and enhance productivity.

Let us look a little deeper. The usual rationale for regulation in the professions is protecting consumers. The problem is that in many instances the regulation intended to protect consumers can have the opposite effect. It can limit the information they have to make informed purchasing decisions, increase the prices they have to pay and narrow their choice of service provider.

Let me take a few minutes now to touch on two areas where we think there is definite room for improvement.

At the top of the list are the numerous restrictions we found on advertising—everything from limits on the size and contents of advertisements to outright bans on ads that compare services and prices.

These regulations are of considerable concern to us because they deprive consumers of valuable information they need to make informed purchasing decisions.

The bans on comparative advertising in a number of professions are particularly troublesome. When professionals compare their prices to those of their competitors, consumers can verify whether these claims are true. There is, therefore, no need to prohibit comparative advertising outright.

It is our opinion that the self-regulating professions should resist the desire to restrict advertising. Yes, there is a legitimate concern about false and misleading advertising, and consumers must be protected from it. But there is already a perfectly good law on the books that deals with dishonest advertising. It is the Competition Act, which is complemented by provincial consumer protection legislation. Additional requirements, particularly broad, sweeping restrictions, should be questioned.

Restrictions on advertising are particularly prevalent for lawyers, even to the point of not permitting the names of retired judges to be part of law firm names. Unless law societies can show that this restriction and countless others are addressing specific instances of significant harm, then I strongly encourage that they be removed.

A second major area of concern the Bureau uncovered relates to prices for professional services. The cost of a service is always of interest to consumers. In our study, we paid particular attention to how regulators affect how professionals determine the fees they charge. It is our view that fees should be determined with as little outside intervention as possible—ideally, none. It should be up to the market to justify or reject them.

The Bureau is therefore concerned when we see suggested fee schedules or suggested minimum or maximum prices, particularly when there are restrictions on how professionals can advertise their prices or compare them to those of other service providers. “Suggested minimum” prices can discourage people from charging less while “suggested maximum” prices might create a very real risk that prices will drift up to them.

Fortunately, we found no instances of regulated minimum prices. However, we did find examples of suggested fee schedules. For instance, there are some that recommend the prices for pharmacists’ services, other than dispensing drugs, which we feel should be revoked, especially when they exist in combination with restrictions on price advertising.

What did jump out at us with regard to prices was the restriction that many real estate agents face on how they can structure their fees.

If you’ve ever sold a house, you know that the real estate agent gets a commission equal to a percentage of the selling price. For the most part, these rates are set by competition, which is a good thing, since consumers generally pay less for services when professionals compete on price.

However, there is regulation in Ontario that limits price competition.There is no opportunity to choose from a menu of services, or to pay a flat rate for some services and a commission on the sale price, to maintain an incentive for the agent to seek the highest possible price. The Bureau recommends that real estate regulators remove this restriction.

If I had more time, I could list many other instructive examples. Besides advertising and pricing, our study also looked at:

• limits on who can offer certain professional services, which is a concern that arises, for example, in the provision of eye care and accounting services in certain provinces;
• restrictions on professionals in different fields forming companies together that deprive consumers of the convenience of multi-service firms and possible cost savings; and
• uneven licensing requirements across the country that limit the number of professionals and restrict their ability to move where there is demand for their services.

But as our time is drawing to a close, I will let the rest of the study speak for itself. It is being posted today on our Web site. There you will find not only chapters on each of the five professions we examined, but also a chapter that lays out the kind of competitive analysis we think every self-regulated profession should undertake. This is a blueprint for taking the self-interest out of self-regulation, and making sure the true public interest prevails.

I will close by observing we are not alone in probing these issues. Six years ago our British sister organization, the Office for Fair Trading, issued a report citing numerous restrictions in the professions. Since then, self-regulating organizations in Britain have dropped or modified many of them, in areas such as comparative advertising³.

Still in Britain, Sir David Clementi, a former deputy governor of the Bank of England, was asked to review self-regulation in the legal profession specifically. He proposed some very interesting reforms when he reported three years ago, summing them up when he stated: “The current regulatory system is focused on those who provide legal services: The new framework will place the interests of consumers at the centre.” That sounds to us like a good starting point.

Closer to home, and just last month, the front page of one of Canada’s leading newspapers for lawyers carried the front-page headline, “Is lawyer self-regulation a Canadian anachronism?” The story below went on to quote an associate dean of the Dalhousie Law School, Richard Devlin, who said, “It seems to me either naïve or obtuse to suggest that there is no need to have an enquiry into the status of self-regulation in Canada. Virtually every other similarly situated jurisdiction in the world is at least exploring these other options if not already reworking its regulatory regimes.”

Now, we’ll leave it to the legal profession to decide on the scope of their introspection, but the point for us is clear: it’s time to reconsider some long-held policies.

A final example, this time of some change already under way in another profession. Dental hygienists, supported by Competition Bureau submissions, have been lobbying their provincial governments to be allowed to practice separately from dentists. Have you ever wondered why you have to visit the dentist in order to get your teeth cleaned? We certainly did. Or, to use the framework of our study, we wondered what objectives were being pursued by restricting hygienists’ ability to practice on their own, and whether these objectives could be met in a more pro-competitive form. Increasingly, provincial legislatures are agreeing with the hygienists, and with us.

Just last month, Nova Scotia became the third province, following Ontario and Alberta, to either propose or enact legislation giving hygienists greater freedom to set up their own practices.

We are proud to have played a part in this change. What we need now is for this trickle to expand into a flood of small changes in rules and regulations, all of them carefully considered but each of them leading to greater consumer choice and more economic efficiency.

And lest you think the economic argument is at best theoretical, let me remind you of the stakes. Academic Roger Martin, in his sixth annual report on Ontario productivity, put the prosperity gap between Ontario and other U.S. jurisdictions at $8,600 per household, much of it driven by lower productivity. With the professions falling in the bottom fifth of productivity in Canada, it doesn’t take much imagination to see the link.

We say some regulations are harming the public interest, by limiting consumer choice, curtailing price competition, and hurting the Canadian economy.

We call on the professions, across Canada, to re-examine their regulations in the light of our study and the simple question that, at its heart, it poses: is there a true public interest behind every competition-limiting rule you have?

Thank you for your time and attention.

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¹ http://www.oecd.org/document/45/
0,3343,en_2649_201185_38086509_1_1_1_1,00.html

² http://www.conferenceboard.ca/documents.asp?rnext=1886

³ http://www.oft.gov.uk/news/press/2002/21-02