Joint Session with Group on Services

��

The Professions and Competition Policy and Law

Presenter: Hank Spier

Australian Competition and Consumer Commission

��

��

INTRODUCTION

It is a pleasure to be here today to discuss the issue of the professions with special reference to Australian competition policy and laws.

I have confined this presentation to the professions and competition law as Professor Fels' paper to the APEC Regulator Reform Symposium yesterday covered the philosophical arguments of professional regulation and deregulation.

Services account for an increasing proportion of output in most mature economies. In particular, the professions are a very important part of the economy of most countries plus becoming more important in a trade context. Hence deregulation and competition policy are now more relevant to the professions both internationally as well as domestically. However, many professions have had, and some still have, anachronistic rules and structures covering issues such as conduct, advertising and entry.

These types of rules and structures limit the ability of professionals to compete with each other in the provision of professional services to consumers. In fact in some professions, competition itself is positively frowned upon. This means that the consumers of professional services are denied the potential benefits of competition, such as lower prices and improved quality of service. At the same time, it must be acknowledge that regulation of the professions also has an important role to play in protecting consumers, particularly, as is often the case, where there are significant information asymetries between the professional and the consumer. This point was outlined in Professor Fels' address to the symposium yesterday.

The purpose of the Australian competition laws, and of the enforcement of those laws in the professional services sector, is to ensure that competitive forces will be allowed to stimulate the development of products and services desired by consumers.

Generally speaking, Australian competition policy is based on the premise that consumer choice, rather than the collective judgement of sellers, should determine the range and prices of goods and services that are available. Or in other words that competitive suppliers should not pre-empt the working of the market by deciding themselves what their customers need, rather than allowing the market to respond to what consumers demand.

��

The Australian Background

Australia is a federation and until 1991 only the Federal Government had competition law and as a result there were serious jurisdictional gaps.

In 1991 the Commonwealth, State and Territory Governments agreed to examine a national approach to competition policy. A National Competition Policy Review Committee was established. On the completion of his committee's report in 1993 and after extensive public consultation on the reports recommendations, the various governments, as part of the Council of Australian Governments ("COAG") agreed to implement the recommendations.

The two major recommendations agreed to by the COAG and relevant to the professions were ��

To achieve the former recommendation the Australian State and Territory Governments had to pass legislation to allow the competition provisions of the TPA to be applied to all business in Australia �� previously this part of the TPA applied mainly to incorporated business in trade. Most professional services businesses in Australia are unincorporated businesses. This means that the anti-competitive provisions of the TPA did not apply to them prior to the amendments to the Act. I will speak more about the application of Part IV to the professional services sector shortly.

The latter recommendation, the regulation review, imposed an obligation on all governments to review all legislation and regulation and remove anti-competitive regulation not in the public interest. The governments have until the year 2000 to complete this review and they will determine if anti-competitive regulation in the professional area on issues such as restrictions on advertising, restrictions on employers, ownership restrictions and the often anti-competitive stance of many

statutory professional boards can be justified in the public interest.

Australian competition law did not deliberately exempt the professions. It was an accident of Federation, although much professional regulation did effect the application of competition policy and law.

��

Australian Competition Law

I now intend to briefly run through the major issues underlying the Australian Trade Practices Act (TPA).

Parts IVA and IVB of the TPA prohibit unconscionable conduct in relation to both consumers and business.

Part V of the TPA safeguards the position of consumers of goods and services in their dealings with producers and sellers. For example, it is a contravention of the TPA to engage in conduct which is misleading or deceptive or is likely to mislead or deceive. The provisions in Part V apply to all businesses as they are mirrored in State and Territory fair trading legislation.

Part VII of the TPA is headed "Authorizations and Notifications in Respect of

Restrictive Trade Practices". This Part allows the Australian Competition and Consumer Commission (ACCC) to review some forms of anti-competitive conduct. If authorized by the ACCC, it gets immunity from court action.

The related provisions in Part IX of the TPA provide a mechanism for people affected by an ACCC determination to seek independent review of that determination by the Australian Competition Tribunal.

��

The Role of the Regulator

The role of the ACCC is to perform the functions conferred upon it by the TPA and Prices Surveillance Act. Among other things, the TPA provides the ACCC with the duty to enforce compliance with some of its provisions.

Enforcement takes place in the Australian court system. The ACCC has no law-making role �� this belongs to federal, state and territory legislatures. The ACCC cannot fine those who breach the Act - that is the role of the courts. It is important for you all to release or remember that the ACCC shares its right to take legal action under the TPA with the private sector.

The ACCC's role as an enforcer depends upon what is and is not prohibited by the Act. Broadly speaking Part IV of the Act aims to prevent anti-competitive conduct, thereby encouraging competition and efficiency in business with the result of greater

choice for consumers in price, quality and service. In the architectural sector, this could mean looking at professional conduct to determine whether it promotes or hinders clients' interests in being able to choose among a variety of service and price options according to their needs.

��

Anti-competitive practices

The anti-competitive practices which are prohibited are:

For example, two or more competing professionals which agree on a market sharing arrangement may be in breach of the TPA if the agreement results in a substantial lessening of competition.

For example, if competing professionals in a market area agree not to sign contracts with particular clients in the market area they will be in breach of the TPA.

For example, if professionals collude on price, they are deemed to be in breach of the Trade Practices Act.

This provision is often used in industrial disputes but has wider implications, For example, in the health sector it may well be that two or more anaesthetists who act in concert to prevent a surgeon from supplying services to a patient may breach this section if the conduct can be shown to substantially lessen competition.

For example, if a supplier with a unique piece of equipment demands as a condition of supply that an architect of architectural business purchases further products from its range, this conduct would be a breach of the TPA if it could be shown that is resulted in a substantial lessening of competition. If the same supplier demanded as a condition of supply that the buyer purchased other products from a third manufacturer, that conduct is known as third line forcing and is deemed to be a breach of the TPA. So, in that case, a substantial lessening of competition would not need to be established.

For example, if equipment suppliers specify a minimum price below which goods cannot be sold or advertised they will breach the TPA. The supplier may recommend a resale price, provided that the document setting out the suggested price makes it clear that it is a recommended price only and the supplier takes no action to influence the reseller not to sell or resupply below that price.

��

The Commission and the Professions

I would now like to turn to the involvement that the Australian competition regulator (the ACCC) has had, and is having, with the professional services sector. Many of the examples will relate to the health sector, which is currently a priority area for the ACCC as far as the professions are concerned but not the only priority area.

The provisions of Part IV of the TPA did not apply to unincorporated businesses (including many professional service business) prior to the 1993 .

However, the ACCC has still been involved in numerous investigations and litigation relating to professional service providers since the current Act was proclaimed in 1974 (to the extent that the law has covered the professions).

One of the ACCC's earliest investigations in relation to the professions involved a boycott of Canberra hospitals by Canberra doctors.

A few years ago the ACCC took Court action against five health funds for an alleged anti-competitive arrangement to attempt to stop private hospitals from discounting their fees for Commonwealth patients.

The ACCC has been to point out to businesses in the professional services sector that, now that coverage of the TPA has been extended, it is very important that all involved in the sector understand their obligations, rights and responsibilities under the Act.

However, the ACCC has also made it clear that participants should not be uneasy about the effects of the extension of the Act to the professions.

The Act is not designed to harm business or prevent fair and fierce competition �� in fact it protects both consumers and business from unlawful anti-competitive conduct and unfair market practices.

The ACCC has also alleged that the anaesthetists involved in the agreement threatened to boycott one of the three hospitals involved. The ACCC has alleged that such a boycott would be anti-competitive and in breach of Part IV of the Act.

The ACCC takes the type of conduct that is alleged in this matter very seriously Price fixing is per se illegal under the Act and the ACCC will investigate any allegations of this type of conduct very rigorously. The same applies to any form of boycott conduct. The penalties that are now in operation for any breach of Part IV are very severe �� up to $10 million per breach for companies and $500,000 for individuals.

��

Accreditation

A further matter in the health sector that is currently being investigated by the ACCC is the accreditation process commonly used by the medical profession. The ACCC is aware that certain hospitals will only accredit doctors who are Australian Fellows - and in some cases, also belong to the specialist society or association. Both criteria may involve a per-se breach of the TPA (third line forcing).

It is common practice for applications for accreditation to be given to the relevant hospital department for advice and recommendation. The ACCC has noted that these competitors often, and in many cases without reason, reject the proposed accreditation. Some rejections are based on the earlier mentioned reasons. i.e., the applicant is not an Australian Fellow and not a member of the relevant society.

I understand that the department, i.e. the group of competitors at the hospital, often enforce their rejection by threatening a boycott of the hospital. The message the ACCC has attempted to convey to the participants here is:

  1. Competitors should not have control over who practices at any hospital.
  2. Third line and threats of boycotts are serious anti-competitive conduct.
  3. Professionals of the same craft group must see themselves as competitors and the "club" spirit attaching to competition issues has to be eliminated.

��

Authorization

The ACCC is able to authorized anti-competitive conduct that would otherwise be prohibited with the exception of the misuse of market power. Authorization is available where the conduct in question can be shown to result in a public benefit that outweighs its anti-competitive effect (benefits must be public not private). That is, the authorization process is a balancing exercise �� between public benefits and anti-competitive detriment.

Decisions of the ACCC, in relation to authorization applications, can be reviewed by the Australian Competition Tribunal.

For authorization to be granted the applicant must satisfy the ACCC that the conduct in question will result in a benefit to the public that outweighs any anti-competitive effect. Thus public benefits are the key in the authorization process and their articulation should be given careful consideration. Also the benefits must be public, not private.

The ACCC and the Tribunal have in previous cases recognized the following as public benefits: (It is noted that many economic and social criteria have been taken as public benefits. Its is not simply an economic efficiency Act.)

The ACCC has considered authorization matters covering the following professions or quasi professions:

��

Compliance

I would also like to state that the ACCC's approach to the professions is not solely based on enforcement of the anti-competitive provisions of the TPA. The ACCC also places a significant degree of importance on encouraging compliance with these provisions.

The ACCC has been pushing a self-regulatory approach (based around compliance programs) as the most cost-effective means, for businesses in all sectors of the economy, of achieving the objectives of the TPA. The Australian Courts have shown an increasing prevalence to treat the existence of an effective compliance program as an important factor in determining penalties for breaches of the TPA.

The ACCC approach to dealing with the professions has focussed very heavily on compliance. In this regard, ACCC representatives have made a lot of educational presentations to professionals and professional organizations.

It is also true that the ACCC has some discretion in the manner in which it enforces the TPA. In this regard, the ACCC has shown a degree of flexibility in its approach to the administration of the TPA in the professional services sector. The ACCC recognizes that the professions, such as health service providers, are not necessarily facing the same issues and dynamics as, say, telecommunications companies or other types of businesses.

��

Competition and the professional services sector

Some commentators have questioned the appropriateness of applying the TPA to the professional services sector.

This is on the basis that things like quality of service, ethical matters and the professional/client relationship are peculiarly important to this sector. It has also been suggested that there may be possible economic distortions in the markets for professional services �� caused by things like supplier induced demand (i.e. professionals creating additional work for themselves by encouraging clients to seek additional services) and distortions in the health sector caused by the existence of health insurance, both private and public insurance.

However, these issues do not have an impact on the matters looked at by the ACCC.

This is because the sorts of issues that the ACCC deals with in relation to the professional services sector usually do not raise these high level considerations. The issues where the ACCC usually becomes involved in relation to the professions are similar to the issues that the ACCC becomes involved in other sectors �� i.e. generally the use of market power to increase income.

In this context, I understand that the Federal Trade Commission (the American antitrust enforcement agency) spends a high proportion of its time (maybe 25%) on professional services matters. Most of these cases do not raise the sort of high level issues alluded to earlier.

Some have also argued that increased competition in the professional services sector would be a bad thing as the focus would be on price competition which would be likely to lead to a decline in the quality of the service being provided. However, I would point out that a well functioning market will aim to provide consumers with what they want. In the markets for most professional service, consumers want a quality service first and a good price second. As a consequence, increased competition in the professional services sector will manifest itself in competition over the quality of the service being provided.

Experience in other sectors of the economy would not support the claim that service quality would be likely to decline as competition has been shown to lead to an increase in quality.

��

Conclusion

The ACCC believes that deregulation and the encouragement of competition in the professions calls for a dual approach of education and enforcement. It also requires an effective adjudicative approach, in order to exempt issues where there is clear public benefit.

The ACCC is happy to acknowledge that some professions are trying to embrace necessary change in terms of the encouragement of competition to the provision of services. The legal profession in some states, for example, has made significant progress in reducing anti-competitive practices through the reform of various regulations and structures. I would hope that this trend will continue in the legal profession in the future and also be embraced by other professions.

In conclusion I would like to say that I am confident that in a few years consumers will be much benefited from the extension of the TPA to the professions. As well ethical traders will not be constrained by rules and regulations which inhibit their growth and success and protect the inefficient.