TOWARD A BORDERLESS MARKET FOR PROFESSIONAL SERVICES

Apr 26 2004
Commentaries

by Bernard Ascher*

For years, the European Union has been working toward free movement of goods, services, capital and labor among its Member States to achieve a truly common market. Will its latest efforts help it reach that goal for services? And what are the implications for the United States?

Removing EU Member State Restrictions

The European Union is moving on two fronts to improve conditions of competition for professional services and other services supplied within its market. On one front, through its Competition Directorate General (DG), the EU is pressing Member States to remove restrictions, such as price-fixing arrangements and advertising curbs, that prevent competition in professional services; on the other front, through its Internal Market DG, the EU is proposing a Directive to cut administrative burdens and excessive red tape that prevent EU businesses and professional service providers from offering their services across borders or from opening premises in other Member States. These are significant efforts to move the European Union closer to a truly unified market for services and, considering the forthcoming expansion of the European Union to 25 countries in May, these programs take on even greater significance. Although the present efforts are directed essentially toward improving competitive opportunities for EU professionals and businesses, they also have implications for American (or other non-EU) service providers engaged in Member State operations. Along with their EU competitors, these service providers are likely to benefit from removal of restrictions undertaken by the Competition DG. Under the Internal Market DG proposal, however, the situation of U.S. professionals qualified in one Member State would not change, whereas their EU competitors will benefit from the facilitation process. Here’s what’s happening.

Competition in Professional Services

Following a review process initiated by the Competition DG, which included an extensive, one-year study of Member State regulation of the professions, the Commission concluded that the existence of regulatory restrictions “is preventing the delivery of benefits to the economy and to consumers in particular.” Thus, on February 9, the Commission announced that it is calling for Member States to abolish such restrictions unless they are “clearly justified by public interest.”

The study, covering six professions (lawyers, notaries, accountants, architects, engineers, and pharmacists), acknowledges that regulation may be necessary to protect consumers from unsafe buildings, misleading publicity, inaccurate audits, and to satisfy other legitimate public interests, but points out that restrictions need to be carefully weighed to assess whether these objectives can be met by less anti-competitive means.

The study (including a stocktaking exercise based on research by the Vienna Institute for Advanced Studies) identifies the existence of numerous restrictions, which often lack objective justification. For example, minimum prices apply to architects in Italy and Germany, but the experience in countries which have abolished price regulations (e.g., France for legal services and the United Kingdom for conveyance and architectural services) “indicates that price controls are not an essential instrument for ensuring high quality standards.” (Examples of Member State restrictions applicable to pricing, advertising, number of professionals, exclusive rights, and business structure for the six professions are shown in Attachment A.)

Although the study is limited to six professions, Member States may also examine regulations applicable to other professions, notably medical and health care professions. The study does not deal with qualification requirements and licensing requirements for the professions, which are treated separately by the Internal Market DG. Although EU citizens have the right to settle and work in any Member State, differences in national requirements tend to inhibit movement of professionals within the EU.

In announcing EU adoption of the competition recommendations, Commissioner Mario Monti emphasized that the service sector is “the main motor of growth in the European Union” and that the improvement of competitive conditions in professional services would help the EU achieve its goal of the Lisbon Agenda of 2000--- to make Europe the most competitive and dynamic knowledge-based economy in the world.

The Commission concluded that the restrictions are best dealt with at the national level, in line with decentralized enforcement of EU competition rules. When these rules take effect in May 2004, the national competition authorities will have a more prominent role in assessing the legality of rules and regulations in the professions. The Commission, however, will continue to play an active role, tackling those restrictions where action is appropriate, monitoring the professions and consumers’ opinions, consulting with national authorities, and broadening its fact-finding advocacy role to the 10 new Member States. The Commission will report in 2005 on progress in eliminating restrictive and unjustified rules.

Administrative Burdens and Barriers for Services

Separately, on a broader basis, the EU Internal Market DG is proposing a Directive to boost competition by removing administrative burdens and excessive red tape. The Directive would apply not only to regulated professional services (including medical and health care), but to all services provided to businesses and consumers other than services provided directly by government authorities for no remuneration, and those services already covered by a comprehensive EU, policy, such as financial services and transport. In addition, telecommunications are covered only as far as they are not dealt with by the EU telecommunications package. Services would be covered whether they are provided in person or at a distance, including via the Internet.

The objective of the Directive is to stimulate more cross border activity within the EU and to provide new opportunities for efficient businesses to grow and create more jobs. Under the Directive, Member States would commit themselves to removing barriers which prevent or discourage operators from other Member States from setting up on their territory. Such barriers include: requirements based directly or indirectly on nationality, or place of a registered business; requirements for directors or staff of companies to be of specific nationalities, along with requirements to have their principal place of establishment in the Member State where the service is provided; and requirements for “economic needs tests,” which prevent the establishment of a new business if regulatory authorities decide that demand can be satisfied by existing businesses.

The Directive is designed to end complex, lengthy and costly authorization and licensing procedures. A single point of contact would be established within each Member State so that businesses would not have to deal with a multitude of different authorities. Simplified and common national procedures would be encouraged as well as electronic means of application and registration.

The proposed Directive would establish a systematic screening exercise by the Member States, together with the European Commission, to identify and eliminate other restrictions to establishment, such as quotas or other limitations on the number of companies allowed to operate.

Internal Market Commissioner Frits Bolkestein calls the proposed Directive “potentially the biggest boost to the Internal Market since its launch in 1993. We need to set our service businesses free, so that they can grow and create the sustainable jobs Europe needs.” Further, he states: “…we need to be coherent, pragmatic and cooperative. The proposed Directive would involve Member States jointly screening and modernizing their regulatory regimes so that a spirit of cooperation and mutual trust is built. That is the best way to ensure that service providers no longer have to jump over unnecessary regulatory hurdles.”

For the regulated professions, the proposed Directive takes account of the need to maintain ethical standards. Thus, while it would lift “outdated and disproportionate bans” on advertising professional services, it also would stipulate that such advertising would have to respect European codes of conduct drawn up by professional associations. Nationality and residence requirements for licensing in Member States would be eased by removal of duplicative national regulations and administrative requirements, but this would be augmented by greater cooperation of national authorities, including improved cross-border supervision and enforcement by the Member State of origin and the host Member State. Service providers would continue to have to respect the law of the destination country, particularly with regard to minimum wages and other working conditions.

The proposed Directive will now go forward for adoption by the European Parliament and the EU’s Council of Ministers. The EU Commission hopes that the proposed Directive will be adopted in time to enter into force in 2007.

None of the existing or proposed Directives will give EU professionals an unfettered right to operate throughout the EU on the basis of qualifications in a single jurisdiction. EU professionals wishing to establish in another Member State are still required to apply for recognition in that Member State and may be subject to compensatory measures in the form of an adaptation period or an aptitude test where requirements of the two Member States differ.

Under EC law, professionals legally established in a given Member State, may, in principle, provide services on a temporary and occasional basis in another Member State under their original professional title without having to apply for recognition of their qualifications. This right is confirmed again and highlighted in a separate proposed Directive of March 2002.

In the case of lawyers, recognition of the authorization to practice will continue to be the subject of specific Directives insofar as the nature of recognition is different. It concerns the authorization to practice and not the professional qualifications.

Implications for American Professionals

The reform efforts by the EU only target the beneficiaries of the single market, i.e., EU nationals and EU juridical persons. Although American and other non-EU professionals qualified and licensed in Member States will, however, likely benefit from the removal of restrictions to competition undertaken by the Competition DG, the new rules proposed by the Internal Market DG do not alter their situation. American architects and other professionals licensed in France, for instance, will still need a separate license to operate as licensed professionals in Germany, and unlike EU professionals, will not benefit from the facilitation in the EU system of recognition of licenses.

Extension of the single market rules to American and other non-EU professionals qualified and licensed in Member States will require specific legislation to that effect. Although such a possibility has been mentioned in a Commission Communication of June 3, 2003 on immigration and employment, the Commission has not submitted any legislative proposal so far. In this context, non-EU professionals might only be able to engage in European-wide services on the basis of mutual recognition agreements with the EU. As a matter of fact, representatives of the architectural professions of the United States and the European Union are currently engaged in discussions to establish mutual recognition. Such an arrangement, if implemented by the regulatory jurisdictions, would make it easier for U.S. and European architects to provide services in each other’s markets. The initial work plan calls for completion in 2004, but requires adoption by members of the respective architectural organizations.

With the expansion of membership to 25 countries in May, the new rules will become more important to non-EU professionals, as well as EU professionals. (Current Member States and the newly acceding Member States are listed in Attachment B).

Europeans have long recognized the advantages of the U.S. market with free movement of goods and services and a uniform currency. The EU has been working toward that goal for Europe. By the same token, development of a more unified market for professional services in the EU could set an example for countries with multiple regulatory jurisdictions, such as the United States, Australia and Canada, to review and assess their own regulations and procedures in a systematic way, on a national level.

In the World Trade Organization, regulation of professional services has been considered in working parties established by the Council on Trade in Services. The Working Party on Professional Services developed guidelines for the negotiation of mutual recognition agreements on accounting (in 1997) and disciplines for regulation of the accounting profession (in 1998), which have been adopted by the WTO. The Working Party on Domestic Regulation, its successor, is considering whether to establish similar disciplines for additional professions, as well as for other services. In the current negotiations, which began in 2000, most countries’ proposals on services refer to regulatory issues.

Article VII of the WTO General Agreement on Trade in Services (GATS) permits negotiation of mutual recognition agreements on a bilateral or regional basis, as long as the Parties to the agreement afford adequate opportunity for other WTO Members to enter into that agreement or a similar agreement.

The EU Commission seeks mutual recognition agreements which would be signed by WTO Members, as described in Article I of the GATS. Thus, for example, to implement an arrangement by representatives of the EU and U.S. architectural professions, the EU would sign on behalf of the EU and its Member States and would expect the United States to sign on behalf of the 50 U.S. States. Although U.S. professions are Parties to several mutual recognition arrangements with their counterparts in other countries, the United States government has not undertaken any commitments to enforce the agreements inasmuch as licensing and regulation of the professions are a function of the States, and not the federal government. Under existing bilateral recognition arrangements concluded by U.S. professionals -- for example, with architects in Canada and with accountants in Canada, Australia, and Mexico-- implementation is by the regulatory authorities in the States through their national associations. Nearly all States are implementing these agreements.

Prospects

American professionals, qualified and licensed in a Member State, stand to benefit, along with European professionals, from removal of restrictions by the Competition DG. However, the proposed Directive of the Internal Market DG will maintain unequal conditions of competition for non-EU professionals who will not receive the same benefits as EU professionals. This situation will remain among the differences between the transatlantic trading partners. Although negotiation of mutual recognition agreements could serve as a means of bringing about equal treatment for American professionals operating in the EU, it is unrealistic to expect that the U.S. Government will undertake commitments to enforce such agreements in light of States rights issues.

These ambitious endeavors to remove barriers that restrict competition will be challenging indeed for the expanding European Union. National regulations of the professions and other services are deeply rooted in the history and traditions of each country. Changes are difficult to accomplish, let alone sweeping reforms on the scale contemplated in the EU programs. Nevertheless, efforts by the European Commission will provide a focal point for regulatory authorities to examine the issues associated with requirements. Enlargement of the European Union will provide further incentive to work toward this common goal, but at the same time will compound the difficulties by adding ten new countries to the process in 2004 (with additional Members scheduled to join in later years). New technology and the speed at which modern business is conducted will add to the pressures for change. The Commission has stated a clear, common goal and has set forth a pragmatic program for change. This will be a time-consuming, long term process. The goal can be attained-- perhaps in the distant future-- but only with the development of great understanding, cooperation and, above all, patience.

*Bernard Ascher, formerly Director of Service Industry Affairs at the Office of the U.S. Trade Representative, Washington, D.C., retired from the U.S. Government in May 2003. He is currently a research fellow at the American Antitrust Institute in Washington, D.C.

References

European Union

http://europa.eu.int/comm/competition/liberalization/conference/libprofc... IP/04/185 - February 9, 2004 Commission calls for abolition of unjustified restrictions of competition in professional services.

http://www.europa.eu.int/comm/internal_market/en/services/services/index... IP/04/37 and MEMO/04/3 - January 13, 2004 Commission proposes Directive to cut red tape that stifles Europe’s competitiveness

IP/02/1180 - July 31, 2002 Internal Market: barriers to the free movement of services mean businesses and consumers still get a raw deal

IP/02/393 and MEMO/02/52 – March 12, 2002 Recognition of professional qualifications: Commission proposes to simplify EU rules

World Trade Organization

Document 98-5140 – December 17, 1998 Disciplines on Domestic Regulation in the Accountancy Sector- Adopted by the Council on Trade in Services on December 14, 1998

Document 97-2295 – May 28, 1997 Guidelines for Mutual Recognition Agreements or Arrangements in the Accountancy Sector

Developments in WTO Services Negotiations: http://www.wto.org/english/tratop_e/serv_e/s_negs_e.htm

Services Negotiating Proposals: http://www.wto.org/english/tratop_e/serv_e/s_propnewnegs_e.htm

National Council of Architectural Registration Boards (NCARB)

Press Release – February 2003 Architects Take Lead in Setting Standards for Transatlantic Mutual Recognition

Press Release – December 2002 U.S. and European Architects Work Toward Mutual Recognition

ATTACHMENT A

EXAMPLES OF MEMBER STATE REGULATIONS: SELECTED PROFESSIONS

Pricing regulation includes: · fixed prices for accounting and statutory auditing in Greece and Portugal and for tax consultants in Germany. · minimum prices for public accounting in Italy; for architects in Italy and Germany; for engineers in Italy, Germany, and Luxembourg; and for notaries in Belgium, France, Germany, Spain, and Greece. · recommended prices for accounting and auditing in Austria, Portugal and Greece; for architects in Austria, Belgium, Denmark, Ireland, Germany, and Spain; for engineers in Austria and Luxembourg; for lawyers in Austria, Portugal, and Spain; and for notaries in Austria and Belgium.

Advertising regulation includes: · effective advertising prohibition for accountancy in France; for auditing in France, Luxembourg, Portugal and Spain; for architects in Italy and Luxembourg; for engineers in Luxembourg; for lawyers in Greece, Portugal, and Ireland (barristers); for notaries in France, Italy, Spain, and Greece; and for pharmacists in Ireland, Portugal, and Greece. · significant advertising restrictions for accountancy in Belgium, Germany, Italy, Luxembourg and Portugal; for auditing in Belgium, Germany, Greece, and Italy; for architects in Ireland, Germany, Netherlands, Austria, and Greece; for notaries in Austria and Germany; and for pharmacists in Austria, France, and Luxembourg.

Other restrictions include: · regulation of the number of professionals as for notaries in all of the continental Member States other than the Netherlands, and for pharmacists in most of the Member States. · exclusive rights to provide a range of services as for qualified accountants in Austria, Belgium, France, and Germany; notaries in all of the continental Member States; and for pharmacists in selling “over the counter” (non-prescription drugs in a large number of Member States. · regulation of business structure as for accountants in Italy, who may not incorporate in the form of a limited liability partnership, private company or public limited company, but may only work with other accountants in partnerships known as associazioni professionali, and throughout the Member States where majority ownership of audit companies must be by qualified accountants; lawyers in Luxembourg, Greece, Belgium, and Germany are not allowed to open branch offices, and for lawyers in at least eight Member States where lawyers are not permitted to form corporations; for notaries who are forbidden from forming corporation in all of the continental Member States, except the Netherlands, and in most Member States where they must operate as sole practitioners; and for pharmacists in a large number of Member States which prohibit incorporation by pharmacists, ownership by non-pharmacists, and formation of pharmacy chain stores.

Source: Drawn from Stocktaking Exercise on Regulation of Professional Services, March 2003 (available on the DG Competition website at http://europa.eu.int/comm/competition).

ATTACHMENT B

MEMBER STATES OF THE EUROPEAN UNION

Member States (Prior to May 1, 2004)

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom

New Members (Effective May 1, 2004)

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia