Investment policy

Third OECD Workshop on Professional Services

 

20-21 February 1997

Services provided by accountants, lawyers, engineers and architects are among the fastest-growing sectors in OECD economies, but international trade and investment in these professional services remain hindered by complex domestic regulations.

Representatives of the four professions, senior officials and regulators from OECD Member countries met on 20-21 February 1997 to consider concrete policy options for advancing liberalisation through regulatory reform, while maintaining high standards for consumer protection. Representatives of the WTO, experts from non-OECD Member countries, business and trade union advisory committees to the OECD, and consumer organisations also attended.
Participants at the Workshop identified a clear set of general principles and specific policy recommendations to promote liberalisation of international trade and investment in professional services, thereby contributing to higher efficiency and greater choice and lower costs to consumers. Policy recommendations included inter alia the removal of restrictions on: the forms of business available to professional service 91iders, partnership of foreign professionals with locally licensed professionals, market access based on nationality and prior residence conditions; as well as the relaxation of restrictions on foreign participation in ownership of professional services firms and of local presence requirements.
General principles and specific policy recommendations identified by participants at the Workshop are contained in the Chair's closing remarks.

In his closing remarks, the Chair also proposed that another workshop should be considered to explore further: the scope for facilitating access to local practice for foreign professionals, including recognition; reform of domestic regulations in light of competition policy principles; and the needs and perspectives of consumers.

This work will continue to provide input in support of ongoing activities in the World Trade Organisation on professional services, and will contribute to the OECD Regulatory Reform project.

 

Introduction

Thank you, Chairman. And thank you as well to the Secretariat for organizing another excellent workshop on professional services. Each has made an important contribution to understanding how the professions can better adapt to the forces of globalization.

It goes without saying that it's an honor to have been asked again to serve as one of the rapporteurs, and it's a special honor to share the job with my friend, Rhonda Piggott. Rhonda and I had even considered preparing an interactive report -- she would say "on the one hand" and I'd say "and on the other" -- but we decided that this would only add to the confusion of messages we heard yesterday!

So, I'm going to offer some personal observations on the presentations and discussion of the past day and a half, and I hope that they at least are not inconsistent with what Rhonda has to say. But before I start, let me put in my one disclaimer: these are my own thoughts and I would not pretend to claim that they represent a consensus view among the professions present here. I hope that my colleagues on the other side of the room will feel free to add their ideas during the discussion.

Let's keep our objective in mind

Being in Europe, I'd like to make my first point with a quotation from an eminent European, Niccolo Machiavelli. You know, Machiavelli was an adviser to kings and princes, and many of us would consider them the Medieval equivalent of our modern-day regulators! But his words, I assure you, apply equally to the professions. Machiavelli said, "The innovator has for enemies all those who have done well under the old conditions."

Our challenge, it seems to me, is to avoid being captivated by the old conditions under which we've done well and grown comfortable. Our clients' interests and the public interest are changing under relentless pressures of competition and internationalization. We need to make sure that we -- both professionals and regulators -- are keeping pace with those changes. Or, as Soren Prahl said yesterday, "...our work will be of only historical interest."

The theme of our workshop is "Liberalization through Regulatory Reform." Yet, it seems to me that we've spent an awful lot of time justifying what we do and how we do it now. I'm not suggesting that liberalization and regulatory reform are ends in themselves, or that everything we do now should be abandoned; only that change is a constant in today's world, and that we need to change if we really intend to serve well the consumer's and the public's changing interests. And change means giving up, to some degree, the old ways.

What is the public interest?

This leads me to my second point. I agree with Mrs. Olgaard, who said yesterday that she was delighted to hear how many times the interests of consumers and the public at large were invoked during the workshop. My question is, "Do we really know what the consumer's or the public's interests are?" Or do we just routinely invoke them to justify what we do? I would note that we really haven't heard much at this workshop from the consumers of professional services, and specifically not from the consumers of the services provided by the professions represented here.

"The consumer interest", "the public interest". Those are very broad and encompassing terms. Our discussion might have benefited from a more careful delineation of what we mean and a clearer definition of the least restrictive ways of protecting them. And here's a novel thought: maybe, we should test out our ideas on "consumers" and "the public" to make double-sure we're actually serving their needs.

Change is a learning process

One of the fundamental issues underlying all our discussions is the issue of "trust", which is my third point. Can professionals educated, trained and experienced in one national and institutional environment be trusted to perform to the professional requirements and public expectations of another national and institutional environment? From this fundamental question flow others related to our topic of liberalization and regulatory reform:

  • What are the essential safeguards that must be in place?
  • Should they be directed at the individual professional, the professional firm or the specific service?
  • How can we encourage a convergence of standards and regulation that would give us more confidence?

I like the idea that Dr. Nicolaidis put forward in her paper on mutual recognition, although I think it goes well beyond the topic of MRAs. That is, that we should look at this entire exercise as a dynamic process, that learning effects through increased cooperation and mutual knowledge between and among professional bodies and regulators will allow us to extend the degree to trust and liberalization over time. Regulatory change, in other words, depends upon a learning process that builds confidence and thereby allows innovation.

A differentiated approach may be necessary

The tenor of our discussion, I must admit, stands in relatively stark contrast to this plea for increased cooperation. As one of the participants in this workshop said to me, "For a forum dedicated to liberalization, an awful lot of professionals have said, 'we're special,' and an awful lot of countries have said, 'we're different.'" My fourth point is really a question: "Can we ever find common approaches to regulatory change among the professions?"

This, of course, has been a debating point in this forum and it's now an essential issue before the WTO's Working Party on Professional Services as it attempts to devise disciplines on domestic regulation. Should we seek cross-cutting rules or separate prescriptions for each of the professions? The former approach runs the risk of turning into an empty exercise with little effect beyond tidying up some regulatory procedures. The latter approach risks at least being messy and time-consuming.

I would argue, however, for building up to a horizontal approach, rather than trying to impose one from above. The reason is simple; if the disciplines from the outset apply to everyone, the least liberal is likely to set the standard and determine the pace of liberalization. A better approach, in my view, is to let those who are ready to commit to a more liberal regime lead the way. The next in line can borrow from that experience, and the next in line after that can borrow from both previous experiences. It's like the scientific method; rather than impose a theory and try to make the facts conform, let the facts reveal the theory and make adjustments as we learn more. In the end, this is likely to be a more successful, more meaningful process.

There are some exceptions

While I favor the approach just outlined, this doesn't mean we haven't found any common ground. So let me try to summarize some areas of agreement, as I see them emerging from the discussions.

  1. Nationality Requirements . Michelle Slade did an excellent job on this subject, but I think she was excessively polite in posing the question, "Do nationality requirements serve any purpose that cannot be addressed by measures that a priori are not restrictive?" I didn't hear any response to that question, or any defense of nationality requirements. In fact, there isn't any, so let's just get rid of them. They're an anachronism. They're an embarrassment to the liberal professions.
  2. Residency Requirements. The consensus seems to be that we should keep them to a minimum, recognizing that there probably should be some flexibility to accommodate the needs of some professions.
  3. Legal Form . Give the professions more choice, recognizing that some parallel safeguards may be necessary to ensure professional responsibility and the consumer's ability to seek redress of grievances.
  4. Ownership . Some degree of ownership can be divorced from local licensing, once again with appropriate safeguards.
Some final thoughts

Finally, Chairman, I recognize that the vast body of regulation that has built up around the professions was motivated by fine intentions. But circumstances have changed over the years, and the velocity of change affecting the users of professional services is increasing. We ought not to be citing the consumer interest or the public interest to simply justify what we do; we should be actively seeking ways to better serve those interests in a changing world.

Let's also be honest with ourselves. Every profession in every country has its problems -- its cases of failure, malpractice, fraud and the like -- in spite of well-intended regulatory protections. And each of those protections, no matter how effective, imposes a cost. But ultimately, the best guarantees of high-quality professional performance are not restrictive regulations, the erection of trade barriers and the absence of competition. They are a true spirit of professional integrity, backed by:

  • A clear assignment of where the liability lies for unprofessional behavior;
  • Tough and toughly enforced disciplinary measures; and
  • The discipline of the marketplace.

After all, nothing focuses the mind like the threat of losing your assets, the threat of losing your means of livelihood, and the threat of becoming irrelevant to the needs of society.

 

The following report is made on my own responsibility.

Increasing international trade in professional services is being driven by market demand. The pace has been aided by governments' efforts, with agreements such as the General Agreement on Trade in Services (GATS) and regional arrangements . We have heard references over the past day and a half to "modern practices", "globalisation" and the need to review "past practices".

The point is the market is demanding a response to the traditional frameworks for the delivery of professional services and requires a response from both government and professions.
The question is: "How should we react?"

What has seemed clear from participants at this workshop is the need to keep assessing regulations and their rationales. This responsibility falls on both governments and professional associations, as regulators and self-regulators.

We have heard examples of differences in the extent to which assessment of regulations are considered necessary. Possibly the clearest example of differences was evident in the discussion on the worth of multi-disciplinary practices. Architects and engineers seemed to accept multidisciplinary delivery, albeit in some instances with caution. Greater differences were evident in the idea of multi-disciplinary practices combining legal and accountancy services. The argument was put that independence was critical to legal practice and hence incompatible with multi-disciplinary approaches. Nevertheless, we heard that Germany and Australia accept multi-disciplinary practices in professional partnerships. We heard of a challenge to regulations prohibiting multi-disciplinary practices in the Netherlands and that elsewhere in the EU, and in Japan, multidisciplinary practices are not permitted.

This range of circumstances emphasises the need to revisist presumptions on the desired regulatory responses. If less burdensome regulatory responese exist in some OECD members, without negative effects, but not in others, what lessons could this provide to all of us? The fact is globalisation is affecting traditional styles of supplying professional services. The times are a changing and none of us will benefit by missing the boat.

The OECD survey prepared for this Workshop indicated a range of regulatory responses. We heard, for example, that 18 of 25 OECD members have prohibitions on incorporation in accountancy and law. It would be useful to learn how those countries without regulation have sustained protection of the public interest. Case studies could illustrate options and reflect the advantages of flexibility in country responses.

Purpose of reviewing regulatory frameworks

The aim of work in the OECD, and the World Trade Organisation (WTO), is to enhance international trade in professional services. This is not to do away with differences in culture or to diminish protection of the public interest, but to permit professionals to supply services overseas if they wish to do so. How to enhance international trade in professional services is a real and current issue, as providers of such services in each of our countries follow firms overseas and more generally expand their operations from within national borders to international markets.

So, what were the measures identified by participants at this Workshop as being particularly burdensome? And what was the relationship of those measures to quality assurance of service delivery and protection of the public interest?

The first session dealt with prohibitions on incorporation and sought alternative approaches. Participants considered that incorporation prohibitions should be done away with and that the OECD should set the right example. Again, the need for flexibility in the delivery of alternative approaches was stressed. Noting possible disincentives for firms to move to incorporation, participants agreed incorporation should be permitted as an option for firms.

The second session raised issues dealing with ownership restrictions and investment and sought alternative approaches.

This session focused on two issues:

  • should non-professional ownership be permitted; and
  • should ownership limitations apply to non-locally qualified professionals?

On the first issue, opinion was divided. I referred earlier to differences of opinion as to the appropriateness of multi-disciplinary practices. It is interesting to note this difference of opinion applied to the question of non-professional ownership by nationals and foreigners alike.

On the second issue, the response, again, was not clear. Participants considered there was a need to look on a case-by-case basis. Interestingly, most debate on this issue came from amongst the professions, rather than governments. This is not to say governments have no interest in the issue. The level of local ownership is often quite political. I think that Vincent Sacchetti (Canada) reflected the views of many in saying that 75%-100% local ownership rules are too high. The point here was that quality of service concerns could be met through less trade-restrictive means.

The next session dealt with restrictions on partnerships between foreign and locally qualified professionals and sought to identify alternative approaches. Under this item, differences of approach were again evident. Those differences applied both to the nature of regulation and to the profession concerned. Joint ventures in partnerships were suggested. Fewer restrictions were evident in the engineering and architecture professions than in accountancy and law. The jury is still out on alternative approaches to this question.

The fourth session looked into local presence and nationality requirements. As Bill Small (accountancy profession) said in his address, nationality has little to do with service delivery. Participants considered that subject to reasonable proportionate measures safeguarding quality of service and consumer protection, there doesn't seem much room for residency and nationality requirements. The goal is to find less restrictive measures to meet the objective. Here, we should note the words of caution, expressed in the paper prepared by OECD consultant Tim Eskey and noted by Michelle Slade (New Zealand), against turning to residency requirements as an alternative to nationality requirements.

The fifth session focused on liberalisation and consumer protection. There was no disagreement with the view that liberalisation of international trade in professional services should not advance at the expense of consumer protection and public interest. The two are not necessarily in conflict. Liberalisation efforts would be assisted by identifying who is the consumer in the delivery of professional services. They could also be guided by the principles enunciated by Philip Evans (Consumers' Association, UK): a) access to services; b) choice; c) independent and effective redress.

It seems to me these principles equate to the fundamental principles of multilateral trade rules, including openness of markets; transparency and redress if commitments are not kept. By no means, does this resolve the practical application of consumer protection but it does serve to clarify that consumer protection and liberalisation of international trade in professional services are not in conflict.

In the sixth session, we discussed promising approaches and principal obstacles to mutual recognition. This session highlighted the importance of mutual recognition in facilitating access to local practice. What came out was that a number of approaches exist, including:

  • Convergence, which can be built up little by little through a series of bilateral mutual recognition agreements. This can be a long and tedious, but fruitful, exercise.
  • Competency-based assessment where the focus of quality assurance is on the end product.
  • Temporary licensing.

The OECD might look at assessing which options might be most cost-efficient as facilitators of access to local markets, and highlight areas where mutual recognition is feasible.
The final session covered the internationalisation of higher education. The primary points made here were the emerging nature of the dialogue on the internationalisation of higher education; the implications of that internationalisation for the development of universal education standards for professionals; and an invitation to the professions to become more involved in the dialogue.

Where to now?

We are all conscious of the mandate of the World Trade Organisation and ongoing work there and its potential to address unnecessary barriers to international trade in professional services. It is important that any future work by the OECD complement work in the WTO.

What some of the papers prepared for the Workshop have raised is the benefit of domestic jurisdictions getting together and reforming/reviewing regulations, to assist in reaching common positions on approaches to the liberalisation of international trade in professional services. There is an angle to this that is sometimes overlooked. I would like to illustrate my point by reference to the agreement known as the Trans-Tasman Agreement on Mutual Recognition of Goods and Registered Occupations, recently signed between Australia and New Zealand. Before Australia could open negotiations with New Zealand on recognition of registered occupations, it was required to put its own house in order. As a federation, Australia's state jurisdictions hold responsibility for various matters related to occupations over which the Commonwealth has no say. The negotiations with New Zealand required the six state jurisdictions, together with the Commonwealth, to come together and review their own regulations. A spin-off of the Trans-Tasman Agreement was that it facilitated the movement of professionals within Australia, and therefore provided a benefit to Australian nationals by permitting movement across domestic state borders which had hitherto not existed.
There are obvious linkages between the liberalisation of international trade in professional services and competition policy. Arguably, if domestic regulatory environments were open and efficient, this would assist the preparedness of countries to participate in and respond to the challenges of international trade in professional services. An analysis of the linkages here might be an area for future work for the OECD.

Some comments have been made about questionnaire fatigue. I would make a plea for no further questionnaires. This is not to say there aren't other ways of gathering further information. Nor is it to deny the fact that the OECD surveys on professional services have added to the transparency of service delivery within the OECD.

In summary, to complement the need to regularly review domestic regulatory regimes and increase transparency through the exchange of information, it is important for governments and professions to talk at a domestic level. The representative of FIDIC (International Federation of Engineers) mentioned the value of FIDIC's annual get-together as aiding familiarity and promoting the exchange of information. We are aware that each of the professions represented at the Workshop has their own domestic and international organisations. The OECD survey has assisted the exchange of information about the practices of member countries. It is equally important for governments, within their own jurisdictions, to exchange information with the professions, and jointly try and address the demands of international trade in professional services. In doing so, it is essential to keep an open mind and evaluate whether domestic regulatory measures continue to meet their original objectives in the least trade-restrictive manner.

One final point. Bearing in mind the desire to complement and assist work in the WTO, it might be useful to forward survey responses to the WTO, if that were acceptable to participants. Consultants papers might also be of interest.

General impressions

I have been impressed by the lively exchange of views which has taken place between the professions and between governments and the professions the debate has been richer and more animated than ever before. Clearly, the world has moved on since we last met: we've had discussions on multidisciplinary considerations and innovative ideas for reform.
I believe that we now share a common frame of reference for analysis and I also think concrete, workable policy options are beginning to emerge. The view expressed in earlier Workshops that there is room for reducing barriers to trade in professional services without compromising the interest of consumers and public interest has been clearly confirmed by the discussions at this Third OECD Workshop on Professional Services. The challenge to regulators and the professions alike is to maintain this momentum, to further explore common ground and to keep pace with developments in the world economy.

I am also aware that with regard to specific circumstances in particular professions, concerns have been raised with respect to consumer protection, country specific environments, cultural aspects and labour issues. These concerns are understandable and need to be addressed in any programme for regulatory reform.

In light of experiences from different professions and regulatory reforms carried out in a number of OECD Member countries, I feel that there is a convergence of views among most participants with regard to the following general principles and policy recommendations:

General principles
  • The aim of domestic regulation should be to maintain quality of service and to protect consumers by means that are not more burdensome than necessary to achieve legitimate policy objectives and that do not unnecessarily impede domestic and international competition.
  • Discrimination against foreign professionals and investors should be avoided.
  • Market access should be based on transparent, predictable and fair procedures.
Specific policy recommendations

To advance liberalisation of international trade and investment in professional services, participants made the following recommendations:

  1. Professional service 91iders should be free to choose the form of establishment, including incorporation, on a National Treatment basis. Alternative measures are available to safeguard personal liability, accountability and independence of professional service 91iders.
  2. Restrictions on partnership of foreign professionals with locallylicensed professionals should be removed, starting with the right to temporary associations for specific projects.
  3. Restrictions on market access based on nationality and prior residence requirements should be removed.
  4. Restrictions on foreign participation in ownership of professional services firms should be reviewed and relaxed.
  5. Subject to availability of professional liability guarantees or other mechanisms for client protection, local presence requirements should be reviewed and relaxed.
  6. National regulatory bodies should cooperate to promote recognition of foreign qualifications and competence and develop arrangements for upholding ethical standards.
Short-term follow-up

I suggest that a synthesis Report on the results of the Workshop, including the reports of the rapporteurs and these conclusions, be made publicly available.

I am also pleased that Member countries have agreed that their replies to the OECD questionnaires for this workshop be transmitted without delay by OECD to the World Trade Organisation (WTO) for distribution to all WTO Members.

The results of this Workshop will be used as input to the May 1997 report to OECD Ministers on Regulatory Reform.
As for the last two Workshops, the complete proceedings of this Third Workshop will be published.

Future work

Promising avenues for future work to be done by the OECD include the following areas.

  1. The scope for facilitating access to local practice for foreign professionals, including recognition, should be further explored. This analysis should take into account the growing internationalisation of higher education.
  2. Reform of domestic regulations which are not formally discriminatory (such as rules on advertising or fee setting, but which may de facto constitute barriers to market access) should be further considered, especially in light of competition policy principles.
  3. The needs and perspectives of consumers, including corporate consumers, should be explored, based on a case study approach relying on contributions by Member countries, rather than on centralised questionnaires.

I propose that these issues should be the subject of further analysis and that another workshop at the OECD should be considered to discuss these issues.

This work should continue to be complementary to, and supportive of, the activities of the WTO Working Party on Professional Services. It would also provide useful input to the work of OECD Committee on Capital Movements and Invisible Transactions and to the follow-up to the OECD Regulatory Reform study.

 

 

 

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