Regulation of Professional Services

1. Regulation of Legal Services Iain Paterson[1] presented at the Staff Training Course on Elements of Judicial Reform World Bank, Washington DC. January 11-13, 2005 [1] Department of Economics and Finance, Institute for Advanced Studies IHS, Vienna. email: paterson@ihs.ac.at

2. Regulation of Professional Services(Lawyers, notaries, also accountants, architects, engineers, pharmacists) • IHS Study: April 2002– January 2003: • Published on EU Commission website since March 2003 • Commission undertook Stocktaking exercise in 2003 - an invitation to comment from professional associations, consumer groups etc. • Commission discussions with national competition authorities in 2003 • Competition Directorate-General hosted a Conference, October. 2003 • Commission Report on Professional Services, February 2004 • After the accession of 10 new Member States, the fact-finding of the IHS study has been extended by the Commission to these countries.

3. This talk covers... • Introduction to (Self)-regulation as is common in Legal Services • concepts, theories • Our IHS study of Professional Services in EU 15 • Indices of Regulation, results of analysis of economic data • The subsequent developments in the EU • dialogue Commission – member states • Commission Report • Application of approach to Central and Eastern Europe • the new member states since May 2004

4. 1. Self-Regulation • as found in Professions like lawyers, notaries denotes • some degree of collective restraint , other than that emanating directly from government, to engender outcomes that would not be reached by individual market behaviour alone • There is a large spectrum between government regulation and unconstrained behaviour, often S-R is delegation of state powers • Efficient, appropriate self-regulation would be a function of transaction costs (Coase) • Licensing of professionals, limiting their supply, (barriers to entry) confers monopoly rights over services • Less stringent are certification models (voluntary, competition between associations)

5. Answers to the question “Why regulate professional services?” • according to Public Interest theories • asymmetric information between the agent (lawyer, accountant, architect, pharmacist etc.) and the less-informed principal (the customer/client) is manifest • meaning that consumers may not be able to assess the quality of the service provided before purchasing, or even after consumption, due to the information/knowledge deficit, (also lack of experience in making repeat purchases) • Claim of Adverse Selection leading to • ‘downward spiral of quality and price on offer” (Market for Lemons) • Claim of Moral Hazard leading to • over-supply of service (higher prices / quality than consumer would need

6. Remedies • First line of defence is quality control through • degree qualifications, training periods, professional examinations, years of experience before licensing or certification • But are price restrictions justified ?? • Are advertising bans justified (quality signalling) ?? • form of business ? • inter-professional cooperation • . . .

7. Answers to the question “Why is there too much regulation of professional services?” • Economic question: Does regulation decrease welfare by more than would be necessary to obtain otherwise acceptable market outcomes • according to Private Interest theories • professional bodies will advance their (members’) interests to the detriment of consumers – i.e. rent-seeking behaviour occurs. • Restrictions on using advertising and of the restrictions on tariffs are regarded as deleterious to the beneficial effects of competition for services. (Empirical studies of US optometrists) • Restrictions on forms of association (lawyers with accountants, for example) are also seen as imposing a burden on consumers, ( benefit from economies of scope and ‘one-stop shops’). • Pubic Choice argument: professional bodies are in a strong position to lobby governments in order to influence the outcomes of regulations and statutes

8. 2. IHS study: scope and methods • Comparative study of legislation, regulations, codes of practice in EU 15 • Liberal Professions: legal services (lawyers, notaries) • also accountancy services (accountants, auditors, tax advisers) • technical services (architects, consultant engineers) • pharmacy services (community pharmacists) • No existing knowledge base, so • Fact-finding Survey of each field in all 15 member states • all professional bodies (e.g. law societies) • all European umbrella organisations • many government departments • PLUS 17 CASE STUDIES

9. Comparability of data achieved by development of Regulation Indices • Compendium of regulations, laws, etc for each of EU15 • Comparability of data achieved by development of Regulation Indices • 17 case studies • Benchmarking and analysis of economic statistics relating economic outcomes with the degree of regulation (indices) • PLUS review of theory previous empirical studies • This study is first of its kind

10. Compendium of Legal Services (Lawyers*): General Broad categorisation into: * also for Notaries (latin notary, notary public)

11. Legal Services (Lawyers*): Qualification Requirements * also for Notaries (latin notary, notary public)

12. Legal Services (Lawyers*): Scope of Activities * also for Notaries (latin notary, notary public)

13. Legal Services (Lawyers*): Conduct * also for Notaries (latin notary, notary public)

14. Comparability of data achieved by development of Regulation Indices • Two broad categories of regulations • Market Entry • formal qualifications (univ. degrees, length of service, professional examinations etc) • quotas / economic needs tests • areas of reserved practice (licensing of exclusive rights) • Each variable assessed on a scale of 0 - 6 • Weighting of variables (or sub-variables)

15. Market Entry Regulation Index

16. Comparability of data achieved by development of Regulation Indices • Two broad categories of regulations • Conduct = Market Behaviour • reguln. of prices / fees (fixed, min., max., recommended) • reguln. of advertising / marketing • reguln. of location / diversification • restrictions on business form (incorporation allowed) • restrictions on inter-professional co-operation • Each variable assessed on a scale of 0 - 6 • Weighting of variables (or sub-variables)

17. Conduct Regulation Index 1

18. Conduct Regulation Index 2

19. Legal Services (Lawyers): IHS regulation indices • High level of Regln. • Low level of Regln.

20. Notaries: IHS regulation indices • High level of Regln. • Low level of Regln.

21. Regulation Scale Total IHS regulation indices for different professions ; OVERALL INDEX

22. Regulation and economic efficiency: evidence found • Lower numbers of practising professionals in the most regulated states • Legal examples – Austria, France • Lower levels of turnover in the most regulated states • (but high turnover per professional!) • Productivity (volume per person employed) is negatively correlated with level of regulation in the legal profession • Market “shake-out” of moderate concentration processes in countries with lower levels of conduct regulation • Legal examples – Netherlands, Denmark • Excessive regulation leads to lower employment and lower wealth creation

23. Volume per firm vs. Regulation Index

24. 3. EU Commission‘s view of IHS Study (EU15) and their own Stocktaking Exercise (e.g. of Bar Associations) • agreement on existence of appropriate entry requirements and “core values” • disagreement on price fixing, recommended prices, advertising prohibitions and restrictions on inter-professional co-operation • a number of professionals argued that consumers would be better served within a more flexible regime • UK’s Consumer Association, suggests that fee regulation can have the same effects as a pricing cartel and that advertising prohibitions can dampen competition to the detriment of consumers.

25. The Legal Professions: main results • A large majority of respondents considered price regulation to be inappropriate for legal services. A number of professional bodies argued that fixed and recommended prices were not in the interests of consumers. • [There are fixed or regulated prices for legal services in Germany, Greece and Italy. There are recommended prices in Austria, Portugal and Spain.] • A significant number of respondents were in favour of some regulation of advertising of legal services. However, most believed that lawyers ought to be able to advertise their services. Only a small minority was in favour of highly restrictive rules. • [There are strict prohibitive rules on advertising in Austria, Greece, Italy and Portugal.] • A large number of respondents were in favour of regulation of inter-prof. co-operation between lawyers and other groups. (“CCBE core values” i.e. restriction) However, some respondents in favour of the development of multi-disciplinary practices.

26. Notaries • A large number of respondents suggested that notaries are not commercial service providers and that they should be exempted from normal competition rules. They argued that stringent regulation of entry and prices are essential to the good functioning of the profession. • The respondents did not, in general, discuss the scope for or potential benefits of greater competition in the notary profession.

27. Entry Qualifications and exclusive rights - broad agreement • A large number of respondents commented on the need to maintain appropriate entry requirements for members of the legal professions. - necessary to ensure that lawyers have appropriate knowledge and competencies and to ensure that they are aware of the profession’s ethical rules • Many respondents suggested that new entrants to the profession should be required to hold an appropriate academic qualification and to complete a period of training within a law firm. In certain cases, they also suggested that lawyers should be required to pass a professional entrance examination • Few respondents commented on the extent to which lawyers should have exclusive rights to provide legal services. The Austrian Federal Economic Chamber, commented that lawyers. exclusive rights should be limited to the profession.s core tasks and suggested that other professional groups could provide a wider range of legal services. A suggested that German lawyers. exclusive right to provide legal advice and representation in court should be abolished

28. Contingency fees – European consensus? • Deutscher Anwaltverein • Österreichischer Rechtsanwaltskammertag • Council of the Bars and Law Societies of Europe (CCBE) • a prohibition of contingency fees is necessary to avoid situations where the lawyer.s interests might conflict with those of his client. • Netherlands Bar Association • lawyers ought to be allowed to link the price of their services to results to a limited degree. • Athens Bar Association and Athens Lawyers. Association • agreements whereby 20% of the total fee for a legal service depends on the outcome of the action. They suggest that this mechanism helps consumers with limited financial resources to access legal services. • Likewise Conseil National des Barreaux and the Barreau de Paris

29. Business structure - lone voices? • Only a small number of respondents commented on rules governing the structure of legal services companies. The Law Society of Ireland, for example, suggests that rules prohibiting Irish solicitors from forming limited liability partnerships are unnecessarily restricting competition. • The Law Society of England and Wales, meanwhile, comments that its members may practice in corporate form, subject to compliance on specific rules. The purpose of these rules is to ensure that certain legal services can only be delivered by independent professionals who are subject to the same client protections as solicitor practices. They argue that solicitors should be allowed to provide any legal service, using any business structure, providing that appropriate safeguards are put in place.

30. Commission Report 1 • “Ultimately, in the Commission’s view, in all scrutiny of professional regulation a proportionality test should be applied. Rules must be objectively necessary to attain a clearly articulated and legitimate public interest objective and they must be the mechanism least restrictive of competition to achieve that objective. Such rules serve the interests of users and of the professionals alike.” • “From an enforcement perspective from May 2004 onwards, the national competition authorities and the national courts will have a more prominent role in assessing the legality of rules and regulations in the professions. To the extent that competition restrictions have their centre of gravity in a Member State, administrative enforcement of the EC competition rules in the liberal professions will then be mainly the task of national competition authorities.”

31. Commission Report 2 • Against fixed prices and minimum prices • holistic approach needed for Latin notaries removal of price restriction + relaxation of quantitative entry and advertising restrictions • Recommended prices can be replaced by consumer organisation surveys, for example • Against bans on advertising • Non-excessive qualitative entry restrictions OK, if ensure quality of service • scope for reducing reserved tasks (liberalised conveyancing in Australia, UK; real estate agents in Netherlands led to lower prices)

32. Commission Report 3 • Against quantitative entry restrictions • are there less restrictive to mitigate detrimental effects on notaries’ services in remote areas (e.g. public service compensations) • Business structure regulations appear to be least justifiable in cases where they restrict the scope for collaboration between members of the same profession. Collaboration between members of the same profession would appear less likely to reduce the profession’s independence or ethical standards. • (e.g. branches, franchises, chains)

33. Extension of IHS Study to 10 new EU member states • Advocates generally have exclusive right of representation of parties in court • The legal professions in new Member States enjoy ample exclusive rights • High entry requirements (education, practice, compulsory membership after examination) • Price regulation – not completely free • Advertising is heavily regulated • Business structure (opening of branch offices, creation of corporations and other types of business entity) - Low regulation • Inter-professional co-operation – restricitions in only a few member states

34. Regulation in the new Member States, (EU15 regulation indices for reference)