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Rivalry in professional services
June, 21st 2007
Restricted service fields can gain the most through freer rules for competition


The institutional structures of a modern economy owe much to the learned professionssuch as the accountants, lawyers, engineers and architects. Upon these professions rest our systems of corporate accounts and finances, our understanding and implementation of laws,
and the erection and stability of our industrial plants and buildings. We rely on these professional services because of the high level of education and skills that go into their making, in addition to the oversight exercised by the regulatory bodies that prescribe appropriate standards of qualification and professional conductsuch as, in India, by the ICAI, ICWAI, Bar and Medical Council.

Thus, when we use the services of an accountant, lawyer, engineer or architect, we are assured of the credentials of the service provider and his/her personal accountability in providing the service. In the event of a violation of the code of conduct, we have an avenue for redress. The regulation of these professions, therefore, has a wholesome purpose, and it is practised in almost all countries. It usually covers areas like entry requirements such as the qualifying examination and/or practical training, granting exclusive rights to perform certain services only to qualified members of the profession, and prescribing a code of professional ethics. But when the regulation extends beyond such areas, contentious issues can arise. This articlein two partsis about the growing awareness worldwide for maintaining a fine balance between regulation and competition in the learned professions, generally.

Competition, free and fair, in any economic activity is in the interest of the individual consumer and society as a whole. Competition maximises consumer welfare by ensuring adequate availability of goods and services (in this case, professional services) at affordable prices, lowering prices, and expanding choice. It also leads to greater efficiencies and innovation.
Competition should therefore be restricted only if it serves a clear public purpose. This is the economic principle that underlies the competition law.

From the competition perspective, regulatory rules that inhibit competition amongst professionals, but whose justification (usually related to quality maintenance) is tenuous, need to be reviewed. For example, the rules that prevent price competition, control forms of
business structures, and restrict advertising. Some professional regulators/associat ions prescribe the level of fees/charges, or lay down floor rates or price caps. In respect of business structures, some regulators/associat ions allow only partnership firms but not
limited liability companies. Some rules prohibit advertising, including the truthful kind. In the eyes of competition authorities, such restrictions adversely affect consumers by restricting choice, raising prices and inhibiting innovation. These serve the interests of established members of the profession more than the consumer of these services. Fortunately, advocacy by competition authorities is getting a hearing, and recently reforms have been undertaken in
several countries, principally in four areas:

Some rules prohibit advertising, including the truthful kind. In the eyes of competition authorities, such restrictions harm consumers by restricting choice, raising prices and inhibiting innovation
1) Entry and access restrictions: Licensing requirements are often also used to restrict fresh entrants. In Japan, in the late 1980s, no more than 500 lawyers were admitted to the bar each year. In Germany, lawyers from one region who were until recently not allowed to associate with lawyers from another region are now permitted to practice nationwide. In France, and some common law countries, the distinction between the barristers (who alone can practice in court) and solicitors is progressively being diluted.

2) Fee control: Mandatory fee scales are being challenged as anti-competitive and detrimental to consumer interest. Fee regulation is being relaxed in many countries.

3) Advertising prohibition: The informational role of advertising, especially in easing the way for new entrants, is being recognised globally, and restrictions are being lifted on non-deceptive
advertising that has been observed by some studies to lower fees, improve services and enhance consumer access.

4) Forms of organisation: The importance of maintaining fiduciary responsibility of a profession has been the justification underlying controls over the types of organisation that professionals are allowed. In Japan, a lawyer was allowed only a single office, and that too, within the area of the bar association to which the lawyer belonged. This is changing. In some European countries now, law firms are allowed to operate as corporate entities. In the US, attorneys are permitted to form `professional corporations', though with some restrictions. The relaxed rules are said to have resulted in the appearance of new forms of delivery of services`walk- in
clinics', for example, in the US, and low-cost legal advice booths.

Competition in professional services can clearly do plenty of good.

(To be continued)
Vinod Dhall
The author is member & acting chairman, Competition Commission of
India. These are his personal views.
 
 
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