Self-regulated Professions—Balancing Competition and Regulation — Chapter 1 to 4

1. Economic analysis

In well‑functioning markets, unfettered competition is the best means of ensuring that resources are allocated efficiently, 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. Markets for professional services are particularly vulnerable to factors that prevent them from functioning efficiently, including asymmetric information and externalities, as discussed in detail below. Economic conditions in these markets may therefore suggest that regulation of some sort has the potential to counter these sources of market failure and, as a result, enhance efficiency and improve consumer welfare.

Although regulators in self‑regulated professions ‑comprising provincial and territorial governments and self‑regulating organizations‑ often justify regulation on the basis of countering market failure, it is important to recognize that market failure, while a necessary condition for regulating, is not a sufficient condition for doing so. Ultimately, it is not enough for regulators to identify the existence of market failure as the reason to regulate; they must make a clear case that regulation is likely to improve upon free and open competition. Once they have done so, they must then turn to how best to regulate, including deciding which regulatory instrument (or mix of instruments) to use. The chosen regulatory response should directly target the identified market failure in a way that least restricts competition. (Chapter 2 contains more information on the analysis regulators should do when developing regulatory proposals or reviewing existing regulatory measures.)

This chapter sets out the economic theory behind both the potential anti‑competitive effect and the public benefit of regulation in professional services markets, highlighting the need for regulators to balance the two. The chapter starts by reviewing the potential sources of market failure that might lead to the need for regulation. This section is followed by a discussion of the ways in which regulation may adversely affect competition among professional service providers and of the potential effect of regulation on price and service quality. These concepts are then applied to three types of market entry restrictions (restrictions on entering the profession, mobility, and overlapping services and scope of practice) and three types of market conduct restrictions (restrictions on advertising, pricing and compensation, and business structure). In addition, the empirical economics literature on the effect of entry restrictions and advertising on the price and quality of professional services is reviewed. A conclusion follows.

Market failure and the potential benefits of regulation

Markets for professional services are potentially vulnerable to two main sources of market failure: asymmetric information and externalities. In the presence of such market imperfections, free markets may not generate efficient outcomes, which may be a rationale for regulation, based on protecting the public interest.

Asymmetric information

Asymmetric information arises in professional services markets when consumers cannot accurately assess the quality of the services they need because they do not have the information to do so. This divide between buyers and sellers is perhaps the most important source of market failure in professional services markets and is the rationale regulators cite most for imposing restrictions in these markets.

It is useful to distinguish here between search goods, experience goods and credence goods (which in all cases comprise services as well as goods). The terms search, experience and credence refer to the accuracy with which consumers can observe and evaluate a good's characteristics. Search goods are defined as goods whose characteristics and quality consumers are able to evaluate with some degree of certainty before buying them. In contrast, consumers only learn the quality of experience goods upon consumption. The problem of asymmetric information becomes even more pronounced in the case of credence goods, the quality of which consumers are not fully able to assess, even after consumption. It is difficult for consumers to choose goods that suit their preferences from among experience goods, and especially credence goods, a fact that perhaps warrants some regulation to give consumers external quality signals. Eyeglasses frames are an example of search goods, since consumers are able to determine whether the fit and style suit their preferences prior to purchase. The lenses that are made for the frames are likely experience goods: consumers can only determine whether their vision has become clearer by looking through the lenses for some time. Complete eye health exams are credence goods, since consumers would not know with certainty after all the tests whether the resulting diagnosis for poor vision was correct.

Particular characteristics of professional services markets may give rise to problematic information asymmetries. First, the services professionals provide are often complex, such that consumers may be unable to judge their quality until after they have used them, if at all. Moreover, consumers may draw imperfect conclusions about service quality, due to the often tenuous relationship between professionals' abilities and the results they achieve. For example, even the highest quality lawyers lose cases.

The problem of asymmetric information may be amplified by the fact that many consumers do not use professional services often. In contrast, it may be less of a concern for businesses, since they are likely to be more sophisticated or frequent purchasers of professional services and thus over time may be able to discern service quality.

Under certain circumstances, asymmetric information leads to two economic problems: adverse selection and moral hazard.

When quality is difficult for buyers to determine, sellers may have an incentive to offer lower quality services without lowering their prices. When consumers cannot distinguish between high‑ and low‑quality service providers, they may assume that any service offering is of average quality and only be willing to pay as much as they think such service is worth. As a result, providers of the highest quality and highest price services might exit the market because they cannot get the prices they wish for their services. This process of overall quality deterioration driven by asymmetric information is known as adverse selection. ^{Footnote 1} Under this theory, average quality would decrease further over time, until only low‑quality, low‑price services remain.

Asymmetric information also has the potential to create skewed incentives for service providers to act for their own benefit, contrary to consumers' best interests. This leads to the problem of moral hazard. In well‑functioning, competitive markets with informed consumers, the incentives of buyers and sellers align. However, in markets characterized by asymmetric information, these incentives may diverge. When consumers cannot communicate their preferred combination of price and quality, service providers may, for example, oversupply quality in order to charge higher prices, even when lower quality services at more affordable prices would better serve consumers. Hypothetically, if pharmacists were free to receive compensation from drug manufacturers they might have an incentive to dispense more expensive brand name drugs when a lower priced generic might be the better option, unknown to consumers.

Given the risks of adverse selection and moral hazard, regulation in markets exhibiting asymmetric information may enhance consumers' ability to choose their preferred combination of price and quality, and dissuade professionals from exploiting consumers' lack of knowledge.

For example, entry restrictions may correct for adverse selection by preventing low‑quality professionals from providing services. Although consumers tend to be harmed when their choices are limited, in circumstances of substantial asymmetric information, consumers may benefit. This is because the lack of choice reduces their uncertainty about quality, thereby ensuring that the prices consumers are willing to pay are high enough to induce high‑quality professionals to offer their services.

Moral hazard is likely better addressed through restrictions on conduct than entry. For example, restrictions that set maximum prices may, in theory, reduce the potential for moral hazard by hindering service providers' ability to charge more by supplying higher quality services than consumers require.

Restrictions that ensure a minimum standard of quality to correct for asymmetric information and consequent problems of adverse selection will likely benefit consumers in markets in which consumer demand is low for low‑quality services, highly sensitive to quality and relatively insensitive to price. ^{Footnote 2} However, when consumers prefer a combination of low quality and low price, restrictions on entry may exacerbate the negative impact of moral hazard.

Externalities

Although less prevalent and not cited as often as asymmetric information as a source of market failure, externalities‑both negative and positive‑potentially provide a justification for regulation in professional services markets.

Negative externalities most commonly appear in markets for professional services as negative effects on third parties that stem from consumers purchasing low‑quality services. For example, consider a legal system in which clients hire low‑quality lawyers who argue poor or incomplete cases before the courts, leading to substandard decisions. Such a scenario could undoubtedly have negative effects not just on the individuals who hired the low‑quality lawyer but also on society as a whole. When buyers and sellers do not take the potential negative effects of their purchasing decisions into account, the market may not function efficiently. As a result, there may be a public benefit to regulating to ensure minimum service quality and reduce as much as possible the potential for negative externalities to arise.

In contrast, positive externalities associated with professional services arise when benefits accrue to third parties as a result of consumers purchasing high‑quality services. In this case, such high‑quality services may be undersupplied in unregulated markets if purchasers are only willing to pay for the private benefit they receive, not the additional benefit to others. Indeed, some services may even rise to the level of public goods. Economists define public goods as goods or services that are both non‑rival and non‑excludable. They are non‑rival in the sense that one party using them does not preclude other parties from doing so. Non‑excludable means that it is not possible to limit the use of the goods or services just to the parties who pay for them: when they are available to some, they are available to all (although different people may value them differently). An example of a positive externality is a pharmaceutical system that works quickly and effectively to distribute medication to those with illnesses. The individual consumer who obtains the appropriate medication swiftly with all side effects explained benefits, as does society because the risk of illness spreading is minimized.

Anticompetitive effects and the potential costs of regulation

In light of asymmetric information, potential externalities and the possibility of some services being akin to public goods, markets for professional services most likely require some form of regulation. However, regulation may inhibit competition beyond what is optimal, which would deprive consumers of the lower prices and high‑quality services that result from open competition. Indeed, regulation that protects professionals from the forces of competition may in fact precipitate, rather than correct, market failure by creating, enhancing or preserving the market power of incumbents, which may lead to a lower supply or quality of services at higher prices than in a competitive market.

Specific restrictions that regulators impose may affect competition in several ways:

• by serving as barriers to entry and decreasing the supply of professionals and providers of substitute services;
• by increasing the likelihood of collusion; and
• by raising the costs of members of the profession.

Barriers to entry

Restrictions serve as barriers to entry in two ways. First, they may directly limit entry into the profession by, for example, capping the number of places available in required degree or training programs, or limiting the use of professional titles to qualified professionals. Second, restrictions may deter entry by raising the costs of joining the profession. Restrictions that increase the duration of initial training, for example, impose on those wishing to become members of the profession additional direct costs, such as paying for their training, and opportunity costs, because they forgo earnings during their training.

Barriers to entry may harm competition by reducing the supply of professionals, leading to higher prices and a correspondingly lower quality of service than would otherwise prevail. Since barriers to entry protect incumbents from outsiders, they may also limit competition on the basis of quality: the presence of fewer service providers likely decreases the incentive to develop innovative services.

Collusion

Restrictions may increase the likelihood that members of the profession can successfully collude to raise prices above the competitive level and lower output below it. Such collusion may be explicit, as is the case when the profession sets minimum or mandatory prices, or tacit, which could result from the profession issuing suggested price lists. Because collusive prices are higher than competitive ones (or quality is lower), collusion results in substantial harm to consumers.

The ability of members of the profession to maintain collusive prices depends on the extent to which the profession successfully restricts entry. In the absence of barriers to entry, new entrants would be attracted into the profession by the supra‑competitive profits members earn, which would undercut members' ability to maintain the collusion, since they would have to arrange with new entrants to join it.

Raising members' costs

Finally, restrictions may raise the costs of members of the profession, which ultimately hurts competition. Increased costs may result in members reducing their output, since firms generally supply less of a service at a particular price when the cost of providing it increases. The reduction in output, in turn, will cause the price of the service to rise. Increased costs may also deter some prospective members from joining the profession. This will result in price increases, since there will be fewer service providers.

It is important to distinguish between an equal increase in all members' costs, which is not associated with any enhancement of market power, and a disproportionate increase in costs for only some members, since the latter may be anti‑competitive. An across‑the‑board cost increase simply acts as a barrier to entry. In contrast, an increase for only some members hampers their ability to compete effectively.

Examples of restrictions that raise the costs of all members of the profession include restrictions on advertising and restrictions on business structure. Restrictions on advertising force members to compete for consumers' business in more costly ways, resulting in a decreased willingness of members to provide the service at some prices. (Restrictions on advertising may also affect demand for the service by decreasing consumers' responsiveness to changes in price: because providers lack the ability to inform consumers of the lower price, there may be little incentive for them to, in fact, have lower prices.) Restrictions on business structure may decrease the returns associated with engaging in the profession by requiring members to organize their firms in inefficient ways and thereby discouraging prospective members from entering the market (and perhaps protecting high‑cost incumbent firms from competition from lower cost rivals).

A new diploma requirement from which incumbents are grandfathered is an example of a restriction that only raises some members' costs. In this case, entrants have higher costs than do incumbents such that entrants are unable to compete as effectively. As a result, prices go up, benefiting the lower cost incumbents.

Restrictions

The remainder of the chapter reviews six types of market restrictions in two categories:

• market entry restrictions: restrictions on entering the profession, mobility, and overlapping services and scope of practice; and
• market conduct restrictions: restrictions on advertising, pricing and compensation, and business structure.

Market entry restrictions

Market entry restrictions include measures that have the effect of limiting the number of professionals able to enter a profession, that may limit professionals from offering their services elsewhere than where they are currently licensed, and that restrict members of related professions from offering similar services. For competition in professional service markets to be vibrant and effective, it is necessary that they be open to new entrants. When it is difficult for consumers to determine service quality, reasonable requirements for professionals to demonstrate competence are likely to be consistent with promoting competition and efficient markets.

Entering the profession

The following are examples of restrictions facing individuals wishing to join a profession:

• educational requirements for certification or licensing;
• quotas on the number of new entrants or limits on the number of educational or training places available; and
• work experience, apprenticeship or practical training requirements for certification or licensing.

Restrictions on entering a profession limit the supply of professionals by affecting either the ability of potential entrants to join the profession or the returns associated with engaging in the profession. Restrictions that limit the number of training places available to entrants, for example, are typical of the former restriction. Lengthening the required training is an example of the latter; such restrictions would indirectly affect the number of entrants into the profession by increasing the cost, both in terms of foregone income (instead of working, potential entrants are in school) and direct educational expenditures.

The principal justification for restrictions on entry is that they protect consumers by increasing the quality of the services professionals provide. Restrictions on entry accomplish this goal by limiting the ability of less qualified individuals to engage in the profession. These restrictions may enhance demand for services when consumers are uncertain about quality‑for example, when they are unable to distinguish between low‑ and high‑quality service providers‑by assuring them that the service providers meet minimum quality requirements.

While proponents of entry restrictions argue that demand may grow among certain consumers because they are more confident of the quality of the service, the resulting price increase will likely reduce demand among others, including those who prefer lower quality service at a lower price or those who are no longer able to afford the service at the higher, regulated price. This reduction may be viewed as a decrease in service quality for those consumers who no longer choose to purchase the service or who are no longer able to. This can offset the increase in quality consumers who continue to purchase the service enjoy.

Restrictions on entry may also have harmful non‑price effects, such as limiting consumers' access to a profession, either because there is an insufficient supply of professionals to meet consumer demand or because geographic access to members (in non‑metropolitan areas, for example) is reduced. Additionally, although regulators may argue that these restrictions are intended to enhance quality by setting educational, training or experience requirements, any restrictions that reduce the supply of professionals may also lessen competition among them. This, in turn, may offset the public benefits of these same restrictions by inhibiting quality competition among professionals or hindering their ability to develop innovative services.

Members of a profession may have an incentive to restrict supply more than is strictly necessary to ensure quality, because they would benefit from the higher prices and reduced competition that could result. If this were the case, the harmful effect of the restrictions on competition would outweigh the public benefit gained.

When weighing the consumer protection benefits of restrictions on entering a profession, it is important to consider whether the restrictions necessarily increase service quality. Although professionals with greater education or experience may provide higher quality service, the overall quality of the service may be largely due to unregulated characteristics of the professionals themselves. Similarly, some restrictions on entry, such as limits on the number of places available in training programs (which could serve as de facto quotas), may have little impact on quality and may, in fact, lessen the supply of professionals. A more effective approach then may be to have occupational controls that have the same quality‑enhancing effect as entry restrictions but do not limit the supply of professionals. For example, a professional certification administered by the government or another regulatory body could signal quality to consumers while not preventing them from purchasing services from members of the profession who do not have the certification.

Mobility

Restrictions on entry may also include restrictions on the mobility of professionals. When different professional regulators control entry in different jurisdictions, the entry requirements imposed in one jurisdiction may not suffice for entry into another, limiting the ability of existing members to move between them.

Such restrictions on mobility may limit the ability of professionals to respond promptly and effectively to changes in demand, which may lead to a misallocation of service providers.

Overlapping services and scope of practice

Examples of restrictions that reduce the supply of professional services by limiting the ability of members of related professions to offer similar services include the following:

• restrictions on the use of titles by members of the profession;
• restrictions that give certain professionals exclusive rights to offer certain services; and
• restrictions that limit consumers' access to members of other professions offering complementary services.

The foundational concept here is demand substitutability‑that is, what services do a sufficient number of consumers view as good substitutes for others, such that suppliers of one service are unlikely to be able to unilaterally raise their prices or otherwise harm competition?

In this context, restrictions on related professionals offering similar or overlapping services may limit the supply of substitute services, potentially allowing members of the profession to raise prices above the competitive level.

The benefits of these restrictions are closely related to the benefits of entry restrictions, discussed above‑ that is, in the presence of asymmetric information, these restrictions may enhance consumer demand by reducing uncertainty about the quality of the service.

Restrictions on professionals' use of titles may reserve a title for members of the profession who meet certain education, experience or training qualifications. Such titles may act as a quality signal to consumers, which may increase demand or reduce their search costs. Conversely, these restrictions may suggest to consumers that only professionals holding the title are qualified to provide certain services. This may harm competition when, as a result, consumers must purchase higher quality services than they need, at correspondingly higher prices. Restrictions on the number of professionals allowed to use a title may also inhibit price and quality competition among those holding it, resulting in a decline in consumer welfare.

Restrictions that give exclusive rights to members of a profession to offer certain services may protect consumers from low‑quality service providers. For example, members of the profession may argue that related professional service providers lack the education or training required to provide the service, cannot provide the complete range of interrelated services, do not hold the malpractice insurance necessary to protect consumers, or are not required to adhere to conflict of interest guidelines that serve to protect consumers. Restrictions of this type may also reduce consumer uncertainty regarding service quality and enhance consumer welfare by limiting negative externalities associated with low‑quality service.

At the same time, these restrictions may also pose anti‑competitive risks similar to those associated with entry restrictions. In addition, members of the related profession may be able to offer services at lower prices than can members of the profession. This may be because they have a higher degree of specialization or because their costs, including their opportunity costs, are lower. In such cases, consumers benefit from lower prices.

The risk to competition of restrictions that limit the ability of related professions to offer similar services may be particularly acute. Although these restrictions may have some benefits, professions have an incentive to impose them, in the absence of any benefits to consumers, because they foreclose potential competitors and thus increase the returns associated with engaging in the profession. Alternatively, accreditation or registration programs may provide a quality signal to consumers without preventing other professionals from offering services.

Restrictions on overlapping services and scope of practice may also affect members of professions offering complementary services. For example, professions may only permit professionals who offer complementary services to provide those services in conjunction with members. In certain places in Canada, for instance, paralegals must work under the supervision of lawyers. (Conversely, professions may prohibit members from collaborating with members of related professions; see "Restrictions on business structure," below).

These restrictions may mitigate instances of asymmetric information. Since members of the profession may be better able than consumers to judge the quality of the complementary services, they can function as gatekeepers for their customers, ensuring high‑quality service. Integration of complementary service providers may also enhance quality by allowing members of the profession to take advantage of any synergies or economies of scope that exist. ^{Footnote 3} Integration may also facilitate the development of innovative services. Finally, consumers may benefit from the convenience of being able to purchase complementary services from a single firm or reduce their search costs.

However, the restrictions regulators impose may, in fact, make this integration impossible. First, a profession may be able to dictate the supply of professionals providing complementary services by requiring them to practise in an integrated environment. For example, when entry into the profession is inefficiently low because of entry restrictions, entry into the complementary profession may also be inefficiently low. Second, members of the profession who have been conferred some degree of market power, due to market entry restrictions or market conduct restrictions, may also be able to exercise that market power in the provision of the complementary services. For example, members may require consumers to purchase higher quality complementary services than they otherwise would or may require consumers to pay for access to members of the complementary profession.

Evidence of the effect of market entry restrictions

The following table provides a brief summary of the findings of various empirical studies that sought to determine the effect of market entry restrictions on the price and quality of professional services, as measured primarily by professionals' incomes. Generally, the studies found that the incomes of members of professions with restrictions on entry are higher than those of comparable professionals who do not face restrictions. Kleiner and Ham (2005) also provide an estimate of the effect of entry restrictions on the quality of the service provided, using data on complaints and the cost of malpractice insurance. With one exception, the studies focus on professions in the United States.

Note: Full bibliographic citations for the studies listed in this table may be found at the end of this chapter (see page 35).

Market conduct restrictions

Professions may restrict how members may compete with another when offering professional services. Typical market conduct restrictions include the following:

• restrictions on advertising by members of the profession;
• suggested or mandatory fees for professional services; and
• restrictions on business structure, such as those on ownership, multidisciplinary practices, and firm location and size.

Advertising

Professions frequently restrict their members from engaging in various types of advertising, including comparative advertising, canvassing or soliciting, and offering inducements or discounts. In addition, professions often regulate the size, style and medium of advertising.

Advertising greatly facilitates competition by informing consumers of the characteristics, availability and prices of services. Advertising can also reduce consumers' search costs, ease entry for new professionals and enhance incentives for existing firms to innovate and expand.

Arguments in support of advertising restrictions focus on asymmetric information. When it is difficult for consumers to assess the accuracy of advertising, its information value may be minimal. For instance, advertising may lead consumers to think that one service offering and its alternatives are poor substitutes for one another when they are, in fact, identical or nearly so. Countering this misperception may require service providers to spend more on advertising than they otherwise might. For prospective suppliers, these costs may be a barrier to entry, while existing suppliers may pass them on to consumers. In both cases, consumers may end up paying higher prices without having benefited from the advertising.

Professions may also argue that restrictions on advertising may be necessary to protect consumers from false or misleading advertising, particularly in the face of asymmetric information. In such circumstances, consumers may be unable to assess the accuracy of advertising as it relates to quality, and so advertising may enhance demand for low‑quality service providers who choose to advertise, to the detriment of high‑quality service providers. Restrictions on advertising designed to protect consumers from false or misleading advertising must be assessed to determine whether they inhibit legitimate advertising to the least extent possible. The Competition Act and, in many instances, provincial and territorial consumer protection laws already prohibit false or misleading advertising, so no additional restrictions are necessary to protect consumers. ^{Footnote 4} However, given the complexity of many professional services, there are circumstances in which the profession is in a unique position to evaluate what constitutes false or misleading advertising.

Significant risk exists that over‑regulation of advertising will deprive both consumers and practitioners of the many benefits of informative advertising. Informative advertising serves to make consumers' demand for services more responsive to changes in price because they have better information about the supply of those services. This enhances competition because professionals have greater incentive to compete by lowering their prices. As a general rule, professionals considering whether to lower their prices must take into account two offsetting effects: first, that the profit from each sale will decrease because the price has fallen and, second, that the number of sales will increase because the price has fallen. Restrictions on advertising may have the effect of muting the demand response to price decreases by making it difficult for professionals to inform enough consumers that their prices have, in fact, gone down. As a result, the increase in sales resulting from the price decrease may not be sufficient to offset the decrease in profitability from each sale, so that the contemplated price decrease is unprofitable.

In addition to enhancing competition by increasing consumers' price responsiveness, advertising may also enhance competition by facilitating the entry of new professionals and by increasing the returns associated with offering high‑quality services. Potential entrants may find it difficult to establish a client base of sufficient scale to be financially viable, especially in professions in which consumers rely on experience or word‑of‑mouth when choosing service providers. Advertising enhances competition by allowing potential entrants to inform consumers of their presence and of the price and quality of their service. Advertising may also enhance competition by providing professionals offering high‑quality or innovative services with a mechanism to distinguish themselves from competitors, much as it does for professionals offering lower prices.

Evidence of the effect of advertising restrictions

There is a substantial body of empirical evidence on the effect of advertising restrictions on the price and quality of professional services, as is summarized in the following table. 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. Studies of the effect of advertising restrictions on quality show that it is small, except that the restrictions may result in fewer consumers using the service.

Note: Full bibliographic citations for the studies listed in this table may be found at the end of this chapter (see page 35).

Pricing and compensation

Professions may regulate the fees their members charge or publish suggested fee schedules. Specific restrictions may set minimum or maximum fees, or prohibit certain types of payments (for example, payment on a contingency basis).

In unregulated markets, price is typically the primary factor on which firms compete, resulting in lower prices and higher output to the benefit of consumers. Price restrictions could inhibit this competition, resulting in prices that are above the competitive level and output that is below it.

Regulators most commonly justify price restrictions as reducing instances of asymmetric information, and thus preventing adverse selection and moral hazard.

In the case of adverse selection‑consumers basing decisions on price rather than quality because they cannot assess the quality‑fixed prices or a regulated price floor may preserve quality by preventing the exit of high‑quality professionals from the market.

Setting maximum fees may assuage the problem of moral hazard (consumers not being able to assess their preferred combination of price and quality due to incomplete information). In such circumstances, a price ceiling may reduce the perverse incentive for professionals to offer higher quality and higher price services than consumers require.

Suggested fee schedules may provide information to consumers about reasonable fees, which may be of particular value when it is difficult or costly for consumers to compare prices. Suggested fee schedules may also benefit members of the profession by guiding new entrants when they set their fees or reducing the transaction costs associated with negotiating fees for complex services.

By contrast, price restrictions can have a significant negative effect on competition, innovation and consumer welfare. The potential anti‑competitive effect of minimum price regulations is particularly noticeable. When the minimum price for a service is set above the unregulated market price, the market price rises to the regulated level, which results in reduced output, since consumers are willing to purchase fewer services at the minimum price. In general, price restrictions that fix fees or set a price floor significantly reduce competition between service providers and thus deny consumers the low prices of a freely competitive market.

Conversely, restrictions that set a maximum price may, on their face, seem beneficial to consumers. However, they too have the potential to deny consumers the full benefits of unrestricted price competition. Maximum price restrictions can result in competitive harm by reducing professionals' willingness to supply their services. When the maximum price is set below the unregulated market price, the market price decreases to the regulated level, which results in reduced output, since professionals are willing to supply fewer services at the maximum price. In particular, high‑quality service providers who charge higher prices may exit the market, resulting in an overall decrease in service quality. Moreover, prices may end up converging on the maximum price, such that it ends up effectively functioning as a fixed price, thus limiting price competition.

Suggested fee schedules facilitate collusion by helping professionals decide on the prices they will charge. Under tacit collusion, those prices could range from competitive prices to those a monopolist would charge, but agreeing on exact prices could be difficult, particularly when professionals offer multiple services. A suggested price list could serve as a focal point for this determination, resulting in higher prices than would have prevailed in a competitive market.

Many of the consumer protection benefits of price restrictions may be realized through other methods than regulated or suggested fees. For example, publishing survey data on the average prices may reduce asymmetric information and search costs for consumers, provide guidance for new entrants, and reduce transaction costs associated with pricing complex services, without necessarily raising competition concerns. ^{Footnote 5}

Business structure

Restrictions on business structure include limits on the ownership of professional services firms, restrictions on multidisciplinary practices and restrictions on firm location. Regulators typically justify these restrictions as ensuring high‑quality service; however, they may also have the anti‑competitive effect of lowering the returns associated with engaging in the profession, inhibiting firms from developing innovative services and limiting the locations at which consumers can access services.

Ownership

Restrictions on ownership structure generally comprise requirements that only members of a profession may own businesses engaged in providing certain professional services or that set out whether members may form limited liability partnerships or corporations. Regulators typically justify such restrictions as helping professionals maintain independence and avoid the risk of commercial pressures compromising their conduct.

These restrictions may force owners to bear more of the risks associated with professional malpractice than they otherwise would. For example, in professional service partnerships, partners bear some personal liability for their own negligence and may also be liable for the negligent acts of other partners or employees. The assumption of personal liability may act as an increased deterrent against professional malpractice, although the presence of a market for professional malpractice insurance may limit this.

Pro‑competitive benefits may also result from restricted ownership structures, by limiting the conflicts of interest between consumers, professionals and owners that arise when the interests of professionals do not align with consumers'. For example, professionals may recommend higher quality service than consumers actually require. Some firm ownership structures may reduce this misalignment. For example, partnership earnings accrue directly to professional members of the firm rather than to non‑employed shareholders, which eliminates shareholder pressure on professionals to provide a level of service that is not in consumers' best interests. (At the same time, such an ownership structure may lead professionals to oversupply their services.)

On the other hand, the same ownership structure may affect the supply of entrants into the profession by changing the returns associated with engaging in the profession and increasing the liability risks, although the effect is likely to be small compared to that of entry restrictions. Restrictions on ownership may also constrain firms from achieving economies of scale and limit the availability of capital to expanding firms. ^{Footnote 6}

Multidisciplinary practices

In multidisciplinary practices, members of different professions can work together and take advantage of economies of scope and scale by allocating overhead or fixed costs across a larger employee base, benefit from a pooled advertising and marketing budget, and share resources and knowledge across professional practice areas.

The economies of scope and scale resulting from inter‑professional collaboration can benefit consumers by reducing firms' costs and prices. Moreover, they can enhance the ability of firms to offer high‑quality and innovative services. Consumers may also benefit from the convenience of purchasing a range of professional services from a single firm. This convenience may also reduce consumers' search costs and transaction costs. Multidisciplinary practices may also offer lower prices to consumers who buy a number of professional services from a single practice.

Proponents of restricting inter‑professional collaboration argue that multidisciplinary practices may produce conflicts of interest to the detriment of consumers. For example, accountants may be more likely to recommend obtaining unnecessary legal opinions on the interpretation of tax law when they work for a firm that also employs lawyers. Regulators also commonly justify restrictions on collaboration as enhancing service quality by requiring all professionals working for the same firm to meet the same professional standards or conduct requirements.

Restrictions that prohibit professionals from being involved in multidisciplinary practices might limit innovative and cost‑efficient business structures, to the detriment of consumers, who are deprived of the resulting benefits of lower prices and increased convenience.

Firm location and size

Restrictions on the number of locations at which professionals may offer their services result in pro‑competitive benefits when they counter the tendency for service quality at individual branches to standardize downwards across multiple branches, assuming that consumers find it difficult to evaluate service quality. These restrictions may also facilitate entry into the profession by limiting the geographic scope of incumbents' practices, thereby providing new entrants with a greater choice of geographic locations in which to establish their practices.

Restrictions on firm size may enhance competition and, by so doing, ensure that no firm is able to gain market advantage. This may be desirable; however, overly prohibitive restrictions limit the ability of large firms to take advantage of efficiencies associated with their size.

Contrasting with the potential pro‑competitive benefits of restrictions on firm size and location are the potential anti‑competitive consequences of consumers not having a service provider near them and professionals being unable, when the geographic area they serve is small, to operate near their competitors.

Restrictions on firm size and location likely also affect the returns and risk associated with engaging in the profession: restrictions on additional locations may prohibit profitable expansion that would allow professionals to diversify their risk. A decrease in the supply of professionals as a result of these restrictions would likely lead to an increase in prices, although the effect is likely to be secondary to that of education and training requirements , as was the case with restrictions on ownership structure.

Conclusion

This chapter has reviewed the potential consumer protection and anti‑competitive effects of restrictions self‑regulated professions impose. Regulators typically justify such restrictions as addressing market imperfections related to asymmetric information or externalities by increasing the quality of the services members of the profession provide.

Restrictions may have anti‑competitive effects by serving as barriers to entry, facilitating collusion or raising members' costs, any or all of which could result in consumers paying higher prices for services, and firms reducing the supply of services they provide and being less likely to develop innovative services. Regulators should balance the consumer protection benefits of any restrictions against these potential anti‑competitive effects, particularly since professions may have an incentive to impose restrictions that are stricter than is necessary to ensure service quality or protect consumers.

Restrictions may be broadly categorized as market entry restrictions and market conduct restrictions. The former includes restrictions on entering the profession, such as having to meet education and training requirements, restrictions on mobility, and restrictions on the ability of members of other professions to offer overlapping or complementary services. Market conduct restrictions include restrictions on advertising, pricing and compensation, and business structure.

When confronted with an instance of market failure, regulators may be inclined to look to regulation of some sort to address it. In this situation, it must be clear that regulation can improve upon the freely competitive market outcome. Determining this requires regulators to first identify and assess the type and degree of market failure and then look at existing non‑regulatory measures that could solve the problem. When regulation is the best solution, then regulators should choose the regulatory tool that directly targets the market failure and has the least effect on competition. A more detailed discussion of a framework for this analysis follows in Chapter 2.

Full bibliographic citations for studies cited in the tables

Table 1

Anderson, G., Halcoussis, D., Johnston, L., and Lowenberg, A., "Regulatory Barriers to Entry in the Health Care Industry: The Case of Alternative Medicine," The Quarterly Review of Economics and Finance 40, 2000, pp. 485‑502.

Kleiner, M. and Ham, H., Regulating Occupations: Does Occupational Licensing Increase Earnings and Reduce Employment Growth? prepared for the Federal Trade Commission, Washington D.C., June 2005.

Kleiner, M., "Occupational Licensing," Journal of Economic Perspectives 14(4), Fall 2000, pp. 189‑202.

Muzondo, T.R., and Pazderka, B., "The Consumer Costs of Professional Licensing in Canada and Some Policy Alternatives," Journal of Consumer Policy 6, 1983, pp. 55‑75.

Nicholson, S., Barriers to Entering Medical Specialties, National Bureau of Economic Research, September 2003.

Pagliero, M., What is the Objective of Professional Licensing? Evidence from the US Market for Lawyers, University of Turin, Italy, March 2005.

Table 2

Benham, L., "The Effects of Advertising on the Prices for Eyeglasses," The Journal of Law and Economics 15(2), 1972, pp. 337‑352.

Benham, L., and Benham, A., " Regulating Through the Professions: A Perspective on Information Control," Journal of Law and Economics, 18(2), 1975, pp. 421‑427.

Haas‑Wilson, D., "Strategic Regulatory Entry Deterrence, An Empirical Test in the Ophthalmic Market," Journal of Health Economics8, 1989, pp. 339‑352.

Love, J., and Stephen, F., "Advertising, Price and Quality in Self‑Regulating Professions: A Survey," International Journal of the Economics of Business 3(2), 1996.

Muzondo, T.R., and Pazderka, B., "Occupational Licensing and Professional Incomes in Canada," Canadian Journal of Economics, November 1980.

Muzondo, T.R., and Pazderka, B., "The Consumer Costs of Professional Licensing in Canada and Some Policy Alternatives," Journal of Consumer Policy 6, 1983, pp. 55‑75.

Schroeter, J., Smith, S., and Cox, S., "Advertising and Competition in Routine Legal Service Markets: An Empirical Investigation," The Journal of Industrial Economics, September 1987.

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. ^{Footnote 7} 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. ^{Footnote 8}

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.

3. Accountants

Overview

Role and function

Accountants measure, disclose and provide assurance about financial information to help managers, investors, tax authorities and others make decisions about resource allocation. Accountants participate in a wide range of business activities, such as tax preparation, auditing, financial planning, business valuation, forensic investigation, strategic planning, financial management, operations, sales and marketing, and information technology and human resources management. Some accountants are also involved in ensuring corporate accountability and help organizations maintain their long‑term competitive advantages.

For the purposes of this chapter, one important distinction to make is between public accountants and other types of accountants. In general, public accountants do independent audits or reviews of organizations' financial statements to ensure they are correct, fair, complete and reasonable, so that a third party will be able to rely on them . ^{Footnote 9} These services contrast with those other accountants, acting as internal auditors or management consultants, for example, provide.

How the profession is regulated

While there are generally no legal restrictions on who may practise accounting in Canada, some jurisdictions regulate public accounting. In addition, all accountants are subject to the rules and regulations of their respective designations. While there are numerous accounting designations worldwide, only three are generally recognized by provincial and territorial statute in Canada: Chartered Accountant (CA), Certified General Accountant (CGA) and Certified Management Accountant (CMA).

Provincial and territorial law gives a professional organization for each designation the power to govern the profession in that jurisdiction. ^{Footnote 10} For example, the Institute of Chartered Accountants of British Columbia may make bylaws on the following:

• standards of professional conduct, competency or proficiency for students or a class of members;
• qualifications and procedures for admission as a member, election as a fellow or enrolment as a student;
• investigations and practice reviews;
• insurance against professional liability claims; and
• authorization of members to provide public accounting services through limited liability partnerships. ^{Footnote 11}

In addition, three national organizations—the Canadian Institute of Chartered Accountants (CICA), the Certified General Accountants Association of Canada (CGA‑Canada) and the Society of Management Accountants of Canada (CMA Canada)—represent their members at the national level, conduct research and advocate for the profession. These groups also develop educational programs and examinations. For example, the CICA and the provincial and territorial accounting organizations jointly developed the CA qualifying evaluation, known as the Uniform Evaluation. ^{Footnote 12} Similarly, CGA‑Canada developed the CGA Program of Professional Studies, which comprises an educational program and the Professional Applications and Competence Evaluations. ^{Footnote 13} CMA Canada developed the CMA entrance examination, Strategic Leadership Program and other accreditation programs. ^{Footnote 14}

Overlapping services

There is considerable overlap in the services accountants within the three designations provide. In addition, since most accounting services in Canada are not regulated, other service providers, such as bookkeepers, certified financial planners and tax attorneys, may provide services that overlap to some extent with those of accountants. These service providers face varying levels of regulation. For example, lawyers are more regulated than bookkeepers, who do not appear to have to be members of the Canadian Bookkeepers Association in order to practise. ^{Footnote 15}

Entering the profession

Individuals seeking to become accountants in Canada must have a university degree, pass the required professional education courses and accumulate a certain amount of work experience. Prospective accountants must also be accredited by the provincial or territorial accounting organization for their designation before they may use their professional designation. Registration typically involves submitting an application, with proof of qualifications, and paying a fee.

Individuals wishing to be licensed to provide public accounting services must fulfill the education and work experience requirements set by the regulator.

Market

Demand

The geographic market for accounting services depends on the client and the services being requested. For example, the market for the audit services large public accounting firms provide is national or possibly international, whereas it is likely more limited for the accounting services small businesses and individuals need.

Several factors affect the demand for accountants, particularly public accountants, including fluctuations in the business cycle, changes in legislation affecting tax and audit policy, new regulation (whether implemented by the profession itself or mandated by law), and changes in per capita wealth.Demand for public accounting services, such as preparing audited financial statements, increases in the first quarter of the calendar year, since the fiscal years of the majority of incorporated entities and trusts end on December 31.^{Footnote 16} Demand for other accounting services in Canada is seasonal and peaks in March or April each year in anticipation of the April 30 deadline for filing personal income tax returns. ^{Footnote 17}

Across Canada, the demand for accounting services appears to have fluctuated slightly in recent years, with accountants' operating revenues ranging in real terms between 2000 and 2004 from a low of $8.42 billion to a high of $9.06 billion. ^{Footnote 18}

Supply

CICA, together with the provincial and territorial CA organizations, represent approximately 72,000 CAs and 10,000 students in Canada and Bermuda, approximately 40 percent of whom work as public accountants. ^{Footnote 19} National, and provincial and territorial CGA organizations represent approximately 68,000 CGAs and students in Canada, Bermuda, the Caribbean, Hong Kong and China. ^{Footnote 20} CMA Canada represents 38,000 CMA and 10,000 students in Canada and around the world. ^{Footnote 21} Even though CGA and CMA have not historically been allowed to offer the full extent of public accounting services in every province, there are more than 3,500 CGA and 1,000 CMA practising public accounting in Canada. ^{Footnote 22}

There are other accounting designations in Canada that, if recognized by provincial and territorial statute, could increase the supply of public accountants. For example, the Association of Chartered Certified Accountants (ACCA), which was founded in the U.K. in 1904 and established in Canada in the early 1970s, has 110,000 members and 260,000 students in 170 countries, of which 30,000 are in public practice. ACCA membership in Canada has increased approximately 25 percent over the last four years, bringing the number of members and students to 1,700. ^{Footnote 23}

In 2006, there were approximately 191,200 financial auditors and accountants in Canada's 10 provinces and 19,390 accounting offices across all the provinces and territories. ^{Footnote 24} More than three quarters (77 percent) of all accountants are located in Ontario, Quebec and British Columbia. ^{Footnote 25} According to Statistics Canada, 19 percent of all accountants are self‑employed and 77 percent work full time. Table 1 shows the number of accountants by province in 2006.

Restrictions and recommendations

Market entry restrictions

Entering the profession

To become designated as a CA, CGA or CMA, individuals must have a university degree. ^{Footnote 27} In addition, all of the provincial and territorial accounting organizations require some amount of professional education. Professional education programs range in length from less than one year to more than two years, depending on the designation and the province or territory. For example, the professional programs for CAs in western Canada are generally more than two years long, while the corresponding programs in the Atlantic provinces are about a year shorter. ^{Footnote 28} Although some accountants complete their professional education in less time then others, all accountants within the various professional designations are considered competent. For this reason, it would be worthwhile for each jurisdiction to benchmark their professional education program against those of jurisdictions whose requirements take the least time to complete. Proof that these jurisdictions still ensure quality in the delivery of accounting services should provide incentive to those with lengthier requirements to shorten them.

Individuals wishing to be designated as accountants in Canada must also pass an examination either to gain entry into the professional training course or to successfully complete it. The length and content of the examination are different for each accounting designation. However, within each designation, they do not vary across the provinces and territories.

The final requirement for becoming a designated accountant in Canada is work experience, with candidates generally having to accumulate two to three years experience in accounting or a related field. The length and nature of the work experience required varies by designation, and province and territory. For example, CA candidates generally must accumulate three years of work experience but in Quebec only require two. ^{Footnote 29} CMA and CGA candidates also need a minimum of two years of work experience. ^{Footnote 30} Again, jurisdictions where accountants are able to reach the desired level of competence in less time should be viewed as good models to emulate for the jurisdictions whose requirements take longer to meet.

All the accounting designations also require their members to pursue continuing professional development. The requirements are comparable across the three designations.

The standards outlined above for education, training and experience that the provincial and territorial accounting organizations impose on individuals wishing to become designated accountants exist to ensure a level of competency and quality of service to the public. However, entry requirements increase prospective accountants' direct and opportunity costs. For this reason, the requirements that go beyond ensuring an acceptable level of quality may act as an unnecessary barrier to entry, thus potentially limiting the supply of accountants.

The requirement for candidates to demonstrate a certain level of competence before being admitted into a professional designation is legitimate. However, some jurisdictions succeed in achieving the desired competence level in substantially less time than others. Since all accountants from the same designations are presumed competent, there is no reason why the amount of time needed to complete each element of the qualification process should vary by jurisdiction.

Recommendation

The provincial and territorial accounting organizations should, when establishing or reviewing regulatory requirements, set the lowest acceptable time requirements for completing elements of the qualification process. In doing so, the organizations should benchmark their requirements against those in jurisdictions with the lowest time requirements that are still achieving the desired level of competence.

Mobility

Interprovincial mobility

The Bureau did not find in any of the provinces or territories any residency requirements for accountants, other than for those who work as public accountants. This means that many accountants may practise in provinces and territories where they do not live. Furthermore, CAs, CGA and CMA each have a mutual recognition agreement, which facilitates members moving between provinces and territories. Section 5 of the CGA mutual recognition agreement, for example, states that there are no residency requirements for practising as a CGA in Canada. ^{Footnote 31}

These mutual recognition agreements, along with national standards for accounting designations, have increased mobility between provinces and territories; however, restrictions in some jurisdictions on who may practise public accounting can impair movement of accountants, which potentially renders the mutual recognition agreements meaningless for public accountants in some parts of Canada (see “Overlapping services and scope of practice,” below).

International mobility

Foreign accountants who wish to register as CAs, CMA or CGA in Canada face requirements ranging from passing an examination to completing a professional program and additional work experience, depending on whether they are members of recognized foreign accounting bodies.

CICA's International Qualifications Appraisal Board (IQAB) assesses the admission standards of foreign accounting bodies and recommends to the provincial and territorial CA organizations in Canada whether and under what conditions members may be designated as Canadian CAs. ^{Footnote 32} Regardless of which foreign accounting body they belong to, all foreign accountants wishing to be designated as Canadian CAs must pass the CA Reciprocity Examination and may be required to complete additional practical training.

Members of foreign accounting bodies that have standards and requirements similar to those of CGA‑Canada who wish to register in Canada must be members in good standing of those bodies and have achieved their designation by passing the required examinations (rather than through mutual recognition or otherwise). CGA‑Canada has classified foreign accounting bodies into two groups, and the requirements for admission depend on the classification. Nonetheless, all applicants must complete studies equivalent to the CGA educational requirements, pass two or three examinations, meet a minimum requirement for professional experience and meet degree requirements, unless certified in their home country prior to 1998. ^{Footnote 33}

In December 2006, CGA‑Canada and the Association of Chartered Certified Accountants signed a global mutual recognition agreement. It provides a route for qualified members of either body to become members of the other, as long as they meet initial admission requirements. As a result, members of both designations benefit from increased international recognition and mobility.

Members of the some 160 professional accounting bodies that belong to the International Federation of Accountants may be eligible for accelerated entry into the CMA designation in Canada through the Professional Advance Standing Program. ^{Footnote 34}Depending on the requirements of the provincial and territorial accounting organization applicants wish to join, they may be eligible for various exemptions, based on their academic history and other professional studies. ^{Footnote 35}

Ensuring quality is a legitimate reason for having minimal restrictions to international mobility. Accounting standards are not globally uniform, and the quality of the work of the members of other accounting designations is not necessarily equivalent to that of members of Canadian accounting designations. These restrictions on entry help protect the public interest by ensuring that individuals who present themselves to the public as designated accountants in Canada are qualified to do so. That is why ongoing assessment of foreign accounting designations is of such importance. Each additional foreign accounting designation that is classified as a qualified designation can increase mobility of qualified foreign accountants, while ensuring the quality of the services they provide. The result is ultimately healthy for effective competition. However, once another designation is recognized as equivalent, all further requirements, including examinations, should be kept to a minimum.

Recommendation

The provincial and territorial accounting organizations should continue to review foreign accounting designations in order to expand the list of qualified foreign accounting designations, while minimizing all barriers to the accreditation process.

Despite the various mutual recognition agreements, other restrictions can limit international mobility. For example, although foreign accountants wishing to be designated as accountants in Canada are generally not required to reside in the province or territory in which they intend to work, some provinces require that public accountants be permanent residents in Canada. ^{Footnote 36} Such restrictions can unnecessarily impede qualified foreign public accountants from doing business in Canada and therefore limit competition.

Recommendation

Regulators should consider removing residency requirements for foreign‑trained accountants who wish to be public accountants in Canada.

Overlapping services and scope of practice

In some of the jurisdictions where public accounting is regulated, not all accounting designations are permitted to offer the full extent of this service. This is the case in Quebec, where provincial legislation only allows CGA and CMA to practise public accounting in limited circumstances. ^{Footnote 37}

The CGA of New Brunswick challenged Quebec's restrictions on public accounting, alleging that Quebec law and regulation restricted interprovincial mobility of workers, thus contravening Chapter 7 of the Agreement on Internal Trade. ^{Footnote 38} The complaint also alleged that Quebec's regulations on the licensing, certification and registration of accountants from other jurisdictions do not principally concern those individuals' competence to practise public accounting, as required by the agreement. ^{Footnote 39}

An internal trade panel noted that “…as a party to the Agreement [on Internal Trade], the Respondent [Quebec] is required to recognize equivalent competencies in the occupation of public accounting acquired by accountants in other provinces.” ^{Footnote 40} The panel went on as follows:

…to require that a non‑CA accountant qualified to practice public accounting in his or her province simply apply to be a CA in Québec in order to practice public accounting in that province does not recognize the occupational qualifications of a worker from any other jurisdiction where those qualifications have already been recognized, nor does it give adequate recognition to the fact that the competencies required to practice public accounting can be acquired through a variety of combinations of training, education and experience. There does not appear to be any mechanism in Québec for recognizing the occupational qualifications of a non‑CA accountant from another jurisdiction where those qualifications have already been recognized, nor for assessing the qualifications of non‑CAs from other jurisdictions that would recognize that competencies can be acquired by different means. Without such mechanisms in place, it is difficult to conclude that Québec's public accounting measures relate principally to competence.

Accordingly, the Panel finds that the Respondent's application of the CA occupational standard for public accounting to non‑CA accountants from other jurisdictions where those qualifications have already been recognized does not relate principally to competence and is inconsistent with Articles 707(1)(a) and 708 of the Agreement. ^{Footnote 41}

The panel went on to conclude that “public accounting measures that restrict access to the practice of public accounting by non‑CA accountants recognized in other jurisdictions as qualified to practice public accounting have impaired internal trade and have caused injury.” ^{Footnote 42} In October 2005, the Quebec government made a public commitment to work with all three accounting designations to resolve this conflict. ^{Footnote 43} On December 14, 2006, it tabled a Bill in the National Assembly that would allow CGA and CMA to practise the full extent of public accounting in Quebec, but it died on the order paper on February 21, 2007, when the legislature was dissolved for the March 2007 election. ^{Footnote 44} On November 13, 2007, the Quebec government tabled Bill 46, which, if passed, could resolve this issue. ^{Footnote 45}

Limiting who can perform public accounting effectively limits competition among accountants for this important service. Given the observed opening of the market to other designations in some jurisdictions, it appears that it is possible to do the same in Quebec without jeopardizing the public interest.

Recommendation

Provincial regulators should give all members of accounting designations who have the appropriate level of competence the right to practise the full extent of public accounting.

In Ontario, CGA and CMA were not permitted to practise public accounting until November 2005, when the Public Accounting Act, 2004 , came into effect. ^{Footnote 46} This legislation is the result of the work of a 2001 panel established under the provisions of the Agreement on Internal Trade to consider a complaint by the CGA of Manitoba. The panel found that Ontario's public accountant licensing system operated as a barrier to mobility because it effectively prevented qualified CGA who practised public accounting in other jurisdictions from being licensed in Ontario. ^{Footnote 47}

Once the Public Accountants Council has set standards and the CA, CGA and CMA organizations have shown they can meet them, they will be authorized to license and govern their members as public accountants in Ontario. ^{Footnote 48} Members of the Association of Chartered Certified Accountants will also be given a chance to demonstrate they meet the standards, but the association will first need to apply to the Attorney General of Ontario to become a designated body. ^{Footnote 49} It remains to be seen whether adopting these standards will fulfill the intent of the Public Accounting Act and abolish unnecessary barriers to entry for competing accounting designations.

Although limiting who may perform public accounting is intended to maintain professional standards, some Canadian and international jurisdictions have been able to protect the public and still open the market to allow members of other designations to offer public accounting services. ^{Footnote 50}

The maintenance of high accounting standards does not require imposing one accounting body's detailed mandatory curriculum on others in a manner that raises the costs of entry to members of those bodies and effectively excludes members of other designations from competing. Doing so would effectively limit competition from other designations.

Recommendation

The Ontario Public Accountants Council should be flexible when applying the new standards under the Public Accounting Act in order to give members of all designations who have the equivalent training and education the right to practise public accounting.

Market conduct restrictions

Advertising

Each accounting designation has its own set of advertising restrictions, although many similarities exist among them, including, in most cases, provisions forbidding the following:

• false or misleading advertising; ^{Footnote 51}
• declarations that cannot be substantiated; ^{Footnote 52} and
• soliciting for engagements in a persistent, coercive or harassing manner. ^{Footnote 53}

These restrictions are similar to ones in the Competition Act and could be seen as duplication. However, the Bureau recognizes that the designations' accounting‑specific expertise is of added value in protecting the public from false and misleading advertising. Moreover, restrictions of this type are considered to be consumer protection measures and, as a result, do not pose any competition problems.

However, other types of advertising restrictions, such as those that set parameters on firm names and limit the information accountants may put on their business cards, stationery and business signs, do not appear to be necessary to protect consumers. ^{Footnote 54} The same can be said of restrictions on extravagant or self‑laudatory advertising and restrictions that limit the media in which advertisements may appear. ^{Footnote 55}

Although some restrictions on advertising are designed to maintain the good reputation of the profession and to protect the public from false or misleading claims, the provincial and territorial accounting organizations should remember that, in general, there are great benefits to be gained from professionals freely advertising their services. Advertising can result in better‑informed clients and, therefore, reduce instances of asymmetric information, as well as give accountants incentive to innovate and offer better quality services to the public.

Recommendation

Provincial and territorial restrictions on advertising by accountants should start from the premise that all advertisements are permitted except those that mislead or misinform the public. Provincial and territorial accounting organizations should consider removing any restriction that does not explicitly serve this purpose.

In the course of this study, the Bureau found other restrictions on the way accountants may solicit clients. For instance, many provinces and territories have restrictions that prevent members from soliciting clients from other member or non‑member accountants or that limit the services they provide to clients of other accountants. ^{Footnote 56}

There are benefits to be gained when professionals aggressively pursue clients, including, ultimately, lower prices. The elimination of solicitation restrictions could result in increased price competition between professionals, which would not necessarily result in a loss of professional integrity, particularly since all accounting designations have a strict code of conduct to which their members must adhere.

Recommendation

The provincial and territorial accounting organizations should consider eliminating all solicitation restrictions that go beyond protecting the public from persistent, coercive or harassing solicitation.

Pricing and compensation

Rules limiting specific pricing practices generally vary by accounting designation rather than by province and territory. Some rules were put in place to discourage accountants from lowering the quality of their services for the sake of competing on price. This is the case with Rule 204.4(34) of the CA Rules of Professional Conduct and Related Guidelines , which states that CAs may only perform engagements for a significantly lower fee than what their predecessors charged when qualified members do the work in accordance with professional standards. While this type of restriction may be justified on the grounds that it helps protect the public, it can discourage competition based on price and therefore restrict competition by cost‑efficient firms. Eventually, such a restriction can lead to members of the profession charging the highest price recorded in the market, which ultimately results in less price competition. Given these effects on competition, it is important for regulators to consider whether there are other policy responses that would protect the public but do less harm to competition.

Recommendation

All Chartered Accountant organizations should consider eliminating Rule 204.4(34) of the CA Rules of Professional Conduct and Related Guidelines , which gives conditions as to when CAs may perform engagements for a significantly lower fee than that charged by predecessors.

While each accounting designation has its own set of rules, many of these rules are similar. For example, all three recognized accounting designations prohibit members engaged in the practice of public accounting from offering or receiving compensation for referrals. ^{Footnote 57}

Although this type of restriction may serve to protect the public by ensuring the independence of public accountants, some jurisdictions have found it possible to protect the public without such a restriction. For example, in countries where members of the Association of Chartered Certified Accountants are authorized to practise public accounting, members are allowed to offer or receive compensation for referrals when they have established safeguards to eliminate threats to compliance with principles of professional conduct or reduce them to an acceptable level. ^{Footnote 58}

Recommendation

The provincial and territorial accounting organizations should consider whether restrictions on compensation for referrals are needed to maintain and preserve public accountants' independence. If so, the organizations should consider whether this restriction could be replaced with self‑imposed safeguards.

Business structure

The following three tables, which were provided by the three national accounting organizations, set out various restrictions on business structure in a number of provinces and territories.

A close look at the tables above reveals a wide range of restrictions on business structure by the three accounting designations and across the provinces. It is reasonable to ask whether the variation brings any benefit, not only to consumers but also to individual accountants and the industry as a whole. It is also reasonable to suggest that there may be instances when the jurisdiction with the least restrictions in a particular area has just as solid a track record of protecting the public interest as the jurisdiction with the most.

Recommendation

Given the variance in business structure restrictions between provinces, each regulator should consider whether its current rules on business structure and ownership are necessary. Those that go beyond the minimum necessary to achieve a clearly defined public interest objective should be removed.

A notable set of restrictions are those on the business structure of professional services firms, including rules about who may form public limited companies, limited liability partnerships, private companies and multidisciplinary partnerships. For example, limited liability partnerships are forbidden for CAs only in Newfoundland and Labrador, while public limited companies are generally forbidden for CAs in all provinces, except Quebec. In addition, many provinces impose restrictions on who may own accounting practices. For example, when members of an accounting designation wish to set up a professional corporation they must ensure that one or more members own all the voting shares. ^{Footnote 59}

The CICA states that restrictions on business structure maintain the proper balance between reasonably protecting public accountants against liability (except when they commit negligent or wrongful acts or omissions) and protecting the public interest. Specifically, restricting multidisciplinary partnerships enables CA organizations to discipline member firms for misconduct, whereas they would not necessarily be allowed to discipline the members of another profession in a multidisciplinary firm. ^{Footnote 60}

From a competition standpoint, restrictions on firms' business structure do not allow accounting firms to profit from the possible efficiencies that stem from multidisciplinary firms. These restrictions can also discourage the entry of new accountants into the market and may act to protect higher cost firms from competition from newer, more cost‑efficient firms.

Recommendation

Regulators should look at ways to allow public accountants to work with non‑accountants without jeopardizing the public interest.

Conclusion

In Canada, although the market entry and conduct restrictions that provincial and territorial accounting organizations have put in place are similar in many regards, significant differences exist among them.

One of these discrepancies is the limit that certain provinces put on who may perform public accounting, which hinders the mobility of accountants and limits competition in this market. To facilitate competition in public accounting services, the regulators in each province and territory should consider establishing the minimum necessary competencies that public accountants should have and allowing the members of all domestic and foreign accounting designations that meet this standard to offer public accounting services.

Advertising regulation also varies depending on the province and territory, and some specific restrictions appear unnecessary to protect the public. If professionals were free to advertise their services and aggressively pursue clients, consumers would benefit from increased competition for accounting services.

In addition, the Bureau questions why certain provinces have business structure restrictions but others do not. If the restrictions are not necessary, and the public interest is protected, they should be eliminated.

Even though these discrepancies exist, accounting designations have made many strides in standardizing their rules and bylaws. However, the provincial and territorial accounting organizations should review them regularly and take into consideration the track record of jurisdictions with fewer restrictions in maintaining service quality and protecting the public. This will help lower the cost of entry for future accountants and ensure more competition in this market.

4. Lawyers