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I.Regulation of professional services in its context
I.1.Political context
A deeper and fairer internal market is one of the 10 priorities of the Commission. The European Council considers that ‘delivering a deeper and fairer Single Market will be instrumental in creating new jobs, promoting productivity and ensuring an attractive climate for investment and innovation’.[1]
In its Single Market Strategy for goods and services of 28October 2015,[2] the Commission announced that it would issue guidance to Member States on reform needs in professional services. This measure is one of the actions and strategies on the Single Market for which the European Council has called for speedy implementation by 2018.[3] The European Parliament endorsed the Commission’s initiative in its Report on the Single Market Strategy.[4]
The regulation of professional services is a prerogative of the Member States. It aims at ensuring the protection of general interest objectives. The particular way Member States regulate a profession stems from a number of factors such as: the importance that society puts on specific general interest objectives to be protected; the efficiency of different administrative and judicial supervisory arrangements; economic situations; the relative economic importance of the sector for the country in question and the strength of vested interests.
A combination of these factors and the resulting policy assessments has led to the adoption of different regulatory models. The existence of various models is not an issue. The aim, therefore, is not to impose directly or indirectly any particular regulatory model throughout the EU.
No matter which regulatory framework is chosen, regulation creates obstacles for the functioning of the Single Market and holds back the potential for growth and job creation in the EU economies. Removing such barriers opens up opportunities and has a positive impact on the productivity and competitiveness of the EU economy. Irrespective of the model applicable in each country or region, where restrictions may be eliminated or be rendered more proportionate, this task should be undertaken to the benefit of the citizens, consumers and professionals. For this purpose, experience drawn from other Member States on the best way to proceed will be helpful.
Obstacles for growth and trade may originate in seemingly less important restrictions, whose cumulative effects may be pernicious. The objective of this Communication is not only to assist Member States with the removal of specific unjustified substantive restrictions, but to create a ‘virtuous’ regulatory awareness by Member States.
The reform recommendations in this Communication address a broad range of requirements and do so by way of a comparative analysis following the spirit and the work carried out in the mutual evaluation exercise with Member States during the past 3 years.[5] The recommendations aim at supporting Member States in creating a regulatory environment that is conducive to growth, innovation and the creation of jobs. They are not limited to cases of violation of Union law even though some of the requirements referred to might constitute such a breach.
A number of recent studies demonstrate that there is a significant untapped potential in the development of professional services. One such recent study from the World Bank suggested that productivity could be raised by an estimated 5% if services barriers were reduced.[6] Another study showed that entry and exit of firms have a significant effect on the profit rates and allocative efficiency for the professional services sector (legal, accounting, architectural and engineering).[7] A 2015 European Commission assessment of the economic impact of selected barriers in four business services (architects, civil engineers, accountants and lawyers) confirmed a significant economic impact on intensity of competition, sector profitability and efficiency of resource allocation.[8]
Even more, due to the nature of service provision, the sector has strong inter-linkages with other economic sectors, such as manufacturing.[9] Given the importance of the EU services market for the overall EU economy, a well-functioning services market is a key component in the Commission’s focus on boosting job creation, growth and investment.
This Communication identifies possibilities for improving the regulatory environment for a number of economically important groups of professional services. Reform recommendations are formulated for each Member State taking into account the specific regulatory environment in place. Given the different regulatory approaches, not all Member States have the same need to review and modify the regulation. As a consequence, recommendations differ from country to country and some Member States may not receive recommendations for one or several professional services. Also, some of the reform needs identified might have more serious and even legal implications in cases where an infringement of EU law might be established.
The Commission will monitor the implementation of the recommendations in this Communication together with the Member States and propose, where appropriate, measures to address remaining barriers. This could include enforcement action as regards possible violations of Union law or legislative proposals to address remaining burdensome requirements.
This Communication and its reform recommendations complement the Commission’s broader Annual Growth Survey by providing a comprehensive and in-depth analysis covering all the Member States in the selected sectors and groups of professions, and identifying concrete reform possibilities across all Member States in these sectors. It provides a more specific approach in a significant area for structural reforms and, where relevant, complements and supports the Commission's analysis and the country-specific recommendations under the European Semester.
I.2. Legal context
Professional services constitute a very important element in the economy of Member States and the EU. Many of them provide essential input for other market operators and the economy as a whole and many of them are active in sensitive domains, often characterised by asymmetry of information and considerations related to broader policy objectives such as the functioning of the judicial system, safety of the built environment, etc.
It is up to each Member State to decide whether there is a need to intervene and to impose rules and restrictions for the access to or exercise of a profession, as long as the principles of non-discrimination and proportionality are respected. Member States determine the public interest objective they want to protect and choose the most appropriate way to achieve this.
Requirements imposed on professional services have been the subject of European Court of Justice jurisprudence. The Court has repeatedly held that, even if applied without any discrimination, national regulations of professions including requirements concerning qualifications are liable to hinder or make less attractive the exercise of the fundamental freedoms by EU citizens and companies, guaranteed to them by the Treaty.[10] The Court also stated that the fact that one Member State imposes less strict rules than another Member State does not mean that the latter’s rules are disproportionate and incompatible with EU law. It is for the Member States to assess whether it is necessary to place restrictions on professional activities on a case-by-case basis and taking into account the entirety of the regulatory context.
In many cases, regulation is justified, e.g. when it comes to health and safety issues. However, for regulation to be fit for purpose, it has to be reviewed regularly in order to take account of changing environments, e.g. technical innovation, better educated consumers, etc. Established rules may no longer be the most appropriate ones and might have lost their justification because of technological, societal or market developments. The latter may also create the need for regulatory responses, for instance in the area of tax avoidance and evasion. However, the appropriate response does not necessarily consist in regulating a particular profession and may rather be broader, such as mandatory disclosure rules imposed on any intermediary in tax matters.
Already in 2013 the Professional Qualifications Directive[11] was amended and introduced a transparency and mutual evaluation exercisein whichthe Member States reported which professions they regulate and examined the respective barriers limiting access to certain professions.[12] The objective of this exercise was to review all regulated professions in each Member State in order to achieve a regulatory environment that is proportionate and adapted to the real objectives of protecting general interests. In this context, a number of professions have been discussed as examples to illustrate different regulatory approaches among Member States in order to get a better view and understanding about regulatory solutions in professional services of other Member States.[13]
One of the conclusions to be taken from the discussions in the mutual evaluation exercise is that differences between regulatory concepts as such do not necessarily indicate a need for reform. However, while public interest objectives that regulation is supposed to protect are similar, the level of regulation might be so different that it raises questions as to why the level of state intervention is particularly high in one or more countries. Restrictions might also exist in Member States not regulating a profession, for instance where certification systems play an important role on the market.
The mutual evaluation exercise culminated in a requirement for Member States to submit national action plans (NAPs) to the Commission by 18January 2016 outlining and justifying any decisions they had taken as a result of this analysis to maintain or amend professional regulations.[14]
To date there are still sevenMember States, namely Cyprus, Greece, Hungary, Ireland, Malta, Slovenia and Spain which have not transmitted their NAP. Looking at the content of the NAPs which were submitted, the level of ambition is very different, with some Member States describing a comprehensive approach to reviewing legislation or targeted reforms in specific professions, while others showed a rather limited intention for reforms. For some Member States, actions mentioned in their plan refer to past measures because they had already been through a reform process, although this does not necessarily mean that there is no scope for further reforms. In other cases, there seems to be a lack of political will to engage in a serious and open review of the current situation.
The Commission’s Single Market Strategy announced a number of actions[15] to improve the national regulation of professions, namely:
- a services passport/card;
- an improved notification procedure under the Services Directive;
- guidance on specific reform needs per country and per profession;
- the introduction of an analytical framework for proportionality analysis (‘proportionality test’).
The guidance on reform recommendations and the proportionality test can be considered as complementary: while the present Communication aims at prompting Member States to make concrete adaptations to the existing regulatory framework of specific professions, the proportionality test aims at acting pre-emptively through providing a general set of criteria assisting Member States in a thorough assessment of justifications and needs for future regulation of professions in all sectors before they adopt new legislation or make any changes to their existing rules. Both the reform recommendations and the proportionality test aim at refining Member States’ approaches to regulation, not by dictating them, but rather by ensuring better regulatory practices to guarantee that regulation is proportionate and that negative economic consequences are avoided.
These actions constitute the initiatives to be presented by the Commission on the basis of Article 59(8) and (9) of the Professional Qualifications Directive. The rationale of these two initiatives was endorsed by the European Parliament[16] and Council[17] in 2016. In its conclusions of 29February 2016 the Council welcomed country-specific guidance on professional services and emphasised the need for more consistent proportionality assessments of regulatory requirements regarding professions.[18]
I.3.Economic context
A better functioning of the Single Market gives EU Member States advantages at the national as well as global level. Total services account for 71% of GDP, representingslightly more than, EUR10 trillion and 68% of total employment, i.e. roughly 150 million people[19] However, it is broadly acknowledged that the full potential of a Single Market in services remains unfulfilled.
At present, based on what Member States notified in the regulated professions database, there are over 5500 regulated professions across the EU.[20] There are large variations between countries, ranging from Lithuania, which reported only 76, to Hungary with 545.[21] However, these numbers tell us little about the intensity (or proportionality) of the regulation, its economic impact or the characteristics of people affected by it.
The regulation of professional services aims at ensuring the protection of a number of general interest objectives. A multitude of methods and models have been developed, based on market particularities, national and political preferences. Regulation tends also to be comprehensive, covering a broad range of regulatory issues, and often contains numerous restrictions ranging from more or less wide exclusivities on the exercise of certain activities (reserves of activities)[22] and the protection of professional titles[23] to restrictions on corporate forms or who controls the ownership or management of companies that provide professional services. Even when such regulations fully achieve their policy aim, it is undeniable that they have a significant economic impact.
Measuring the precise economic impact of regulation for professional services is difficult and until recently no figures even existed regarding the prevalence and effects of occupational regulation on the EU labour market. In response to this lack of figures, the Commission contracted the first ever EU-wide representative survey to provide the data necessary to measure the prevalence of regulated professions.[24] Conducted during the first quarter of 2015, the survey contacted over 26600 European citizens and concluded that 22% of the European labour force, or over 47 million citizens, are directly affected by regulation. Its prevalence varies across the Union, from 14% of the workforce in Denmark to 33% in Germany (see Chart 1).
Chart 1: share of regulated professions in total labour force, 2015
Source: TNS survey, 2015.
The analysis of the economic effects of regulation shows that depending on the occupation, there could be between 3 and 9% more people working in a given profession if access requirements were made less stringent. The study estimates also that regulation implies an aggregate wage premium of about 4% but with considerable variations depending on sectors (up to 19.2% in some areas).[25] This could translate into higher prices of services for consumers. This is reflected in significant differences in wages across professional groups and suggests that regulation by way f reserves of activities may significantly distort relative wages. It also suggests that professional regulation contributes to wage inequality in the European labour market, particularly benefiting those at the top of the income distribution.
Further, a number of studies recently contracted by the Commission show that making regulation more proportionate and adapted to market reality, e.g. by relaxing the most restrictive and unjustified requirements, resulted in improved market dynamics, specifically leading to more market openings, more start-ups and new innovative services brought to market by new entrants.[26] It would also lead to benefits for consumers in terms of lower prices as a result of reduced profit rates.
Finally, the analysis confirmed that lower barriers would lead to better performing sectors characterised by a stronger allocative efficiency.[27]Case studies of reforms at national level show the impact reforms of the conditions to access and exercise regulated professions can have on the sector. In Greece, reforms resulted in lower prices for consumers of services such as legal professions, accountants and tax consultants, which were liberalised by the reform enacted in 2011. The number of tourist guides and chartered valuers more than doubled in 2014 compared with the yearly average before the liberalisation.[28] In Poland the reform of regulation of legal services which took place between 2005 and 2014 has led to there being more than double the number of active lawyers and legal advisers, accompanied by a lower than average increase in the price of legal services. Similarly, the reform of the real estate agent and real estate manager professions has led to a net creation of businesses in the sector.[29]
I.4.Analysis and guidance: new restrictiveness indicator
Analysis and guidance for professions in key economic sectors
This Communication and its annexes provide a detailed analysis of the regulations which apply to architects, civil engineers, accountants, lawyers, patent agents, real estate agents and tourist guides. These seven groups of professions were selected because they belong to four key economic sectors (business services, construction, real estate and tourism). The mobility in those professions is relatively high and the professions are regulated in a majority of Member States, albeit with divergent regulation. This means that there is considerable potential for meaningful and economically relevant reforms.
A new indicator on the restrictiveness of occupational regulation
An indicator on the restrictiveness of occupational regulation has been designed in order to support qualitative analysis of the barriers and take into account the accumulated burden of multiple requirements rather than focus on measures in isolation from their wider ramifications. This indicator provides an objective and measurable basis for comparing Member States’ performance in the seven groups of professions selected.
The following groups of restrictions are covered by the restrictiveness indicator:[30]
(1) regulatory approach: exclusive or shared reserved activities, and protection of title;
(2) qualification requirements: years of education and training, mandatory state exam, continuous professional development obligations, etc.;
(3) other entry requirements: compulsory membership or registration in professional body, limitation of the number of licences granted, other authorisation requirements, etc.;
(4) exercise requirements: restriction on corporate form, shareholding requirements, restrictions on joint exercise of professions, incompatibilities of activities, etc..
The restrictiveness indicator builds in part on a Commission assessment of barriers in business services published for the first time in 2015,[31] but goes beyond this by for example also covering educational requirements not covered previouslyto provide a holistic comparative understanding of the different regulatory requirements in place spanning the whole course from education and training to exercise restrictions and incompatibilities between professions. It covers the same groups of professions as the OECD Product Market Regulation (PMR)[32] adding namely patent agents, real estate agents and tourist guides. Other than the OECD PMR indicator, this indicator takes into account the range of professions and activities covered which exist and vary between Member States in each of the areas covered, it contains a weighting of every restriction as to its impact and it includes up-to-date information, as derived from the mutual evaluation exercise, making an extensive use of the EU regulated professions database. The new indicator therefore reflects the most recent regulatory changes in the Member States, such as France's law on growth, activity and equal economic opportunities adopted in 2015. This inevitably leads to results which may be different from previous assessments, which were based on the OECD PMR indicator.