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Competition in professional services

Competition in professional services

Outline of the Community (European Union) legislation about Competition in professional services

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for services

Competition in professional services

Document or Iniciative

Commission communication of 9 February 2004 entitled “Report on Competition in Professional Services” [COM(2004) 83 final – Not published in the Official Journal]

Summary

Professional services have an important role to play in improving the competitiveness of the European economy with the result that their quality and competitiveness have important spill-over effects. The disappearance of anti-competitive regulatory restrictions in this sector would mean that consumers could be offered more competitive and better-quality services on advantageous terms.

TheCommission report shows the need to take action in the field of the professions from a competition policy perspective, to provide information on what the Commission has done so far and to present its interim findings on key restrictions and their alleged general interest justifications and on the Community legal framework within which those restrictions have to be analysed. Finally, it proposes a future course of action aimed at encouraging the elimination of unjustified restrictions.

Restrictive regulation of professional services

At present, the professional services sector is characterised by either state regulation or self-regulation by professional bodies.

The Commission has analysed the markets in which lawyers, notaries, accountants, architects, engineers and pharmacists operate in the European Union and has identified five main categories of national legislation or self-regulation that restrict competition. These are:

  • Fixed prices: These are probably the regulatory instrument likely to have the most detrimental effects on competition, eradicating or seriously reducing the benefits that competitive markets deliver for consumers, particularly in terms of price choice. In most Member States, fees for professional services are negotiated freely between practitioners and clients. However, in a small number of cases the Commission has observed the existence of fixed prices (e.g. in Germany for tax consultants), minimum prices (e.g. in Italy and Germany for architects) and maximum prices (e.g. in Italy for lawyers). Although in some cases maximum prices might protect consumers from excessive charges, the Commission considers that less restrictive mechanisms (such as improved information on the services provided) could be put in place.
  • Recommended prices: These have a significant negative effect on competition since they may facilitate the coordination of prices between service providers and/or mislead consumers about reasonable price levels. The Commission found that in a minority of Member States (e.g. in Austria and Belgium) recommended prices are published for certain legal, accountancy, architectural and engineering services.
  • Advertising restrictions: Advertising may facilitate competition by informing consumers about different products and allowing them to make better-informed purchasing decisions. It is also widely recognised that advertising, and in particular comparative advertising, can be a crucial competitive tool for new firms entering the market and for existing firms wanting to launch new products. However, a large number of the EU professions are subject to sector-specific advertising regulation. In some cases (e.g. in France for notaries), advertising of any kind is prohibited. In others, specific media or advertising methods such as radio advertising, television advertising, “cold calling” or specific types of advertising content are prohibited. In certain cases, there is a lack of clarity in existing advertising regulations, and this, in itself, may deter professionals from employing certain advertising methods.
  • Entry restrictions and reserved rights: Excessive licensing regulation is likely to reduce the supply of service providers, with negative consequences for competition and quality of service. The professions are subject to qualitative entry restrictions in most Member States. These can take the form of minimum periods of education, professional examinations and minimum periods of professional experience. In many cases, entry restrictions are coupled with reserved rights to provide certain services. In some Member States the pharmacist and notary professions are even subject to quantitative entry restrictions based on demographic or geographical criteria. Entry restrictions, combined with reserved rights, ensure that only practitioners with appropriate qualifications and skills can carry out certain tasks. The EU is currently putting the finishing touches to a proposal for a directive designed to reform the system for recognising professional qualifications. The purpose of this reform, which is aimed at pharmacists and architects, among other professions, is to create a single legal framework to further liberalise the services sector and facilitate the recognition of qualifications in Europe.
  • Regulations governing business structure and multidisciplinary practices: Business structure regulations may have a negative economic impact if they prevent providers from developing new services or cost-efficient business models. For example, these regulations might prevent lawyers and accountants from providing integrated legal and accountancy advice for tax issues or prevent the development of one-stop shops for professional services in rural areas. Certain ownership regulations can also reduce access to capital in professional services markets, hindering new entry and expansion. A number of professions in the EU are subject to sector-specific regulations on business structure. These regulations can restrict the ownership structure of professional services companies, the scope for collaboration with other professions and, in some cases, the opening of branches, franchises or chains.

There are essentially three reasons for this regulation of professional services:

  • “asymmetry of information”, i.e. the difference in the information available to consumers and service providers: a defining feature of professional services is that they require practitioners to possess a high level of technical knowledge. Consumers may not have this knowledge and therefore find it difficult to judge the quality of the services they purchase.
  • “externalities”: the provision of a service may have an impact on third parties. Rules are therefore needed to ensure that both service providers and purchasers take proper account of these external effects.
  • the concept of “public goods”: certain professional services are deemed to be in the public good since they are of value for society in general, for example, the correct administration of justice or the development of high-quality urban environments.

While the Commission acknowledges that some regulation in this sector is justified, it believes that in some cases more pro-competitive mechanisms can and should be used instead of certain traditional restrictive rules.

Possible application of the EC competition rules

From the perspective of Community competition law, a distinction must be made between the liability of professional bodies and that of Member States.

Regulations adopted by professional bodies are decisions of associations of undertakings that may be caught by Article 81 of the EC Treaty. However, regulations that are objectively necessary to guarantee the proper practice of the profession, as organised in the Member State concerned, fall outside the scope of the prohibition.

Article 81 is, in itself, concerned solely with the conduct of undertakings and not with laws or rules emanating from Member States. Nonetheless, read in conjunction with the second paragraph of Article 10 (prohibiting measures by Member States which could jeopardise the attainment of the objectives of the Treaty) and with Article 3(1)(g) of the Treaty (which justifies intervention by the Community in order to ensure that competition in the internal market is not distorted), Article 81 prohibits Member States from introducing or maintaining in force measures, even of a legislative or regulatory nature, which may render ineffective the competition rules applicable to undertakings.

Where a State delegates its policy-making power to a professional association without sufficient safeguards, i.e. without clearly indicating the public interest objectives that must be complied with, without retaining the last word and without exercising control of implementation, the Member State can be held liable for any resulting infringement. Measures adopted by professional associations and legislative or regulatory instruments adopted by public authorities may therefore give rise to the liability of the members of the professions and of their associations under Article 81 of the Treaty and of Member States under Articles 10 and 81 of the Treaty.

Position of the Commission and proposed actions

A significant body of empirical research shows the negative effects that excessive or outdated restrictive regulations may have for consumers. Such regulations may eliminate or limit competition between service providers and thus reduce the incentives for professionals to work, in a cost-efficient manner, to lower prices, to increase quality or to offer innovative services.

The Commission therefore acknowledges that some regulation in this sector is justified, but it believes that in some cases more pro-competitive mechanisms can and should be used instead of certain traditional restrictive rules. There are a variety of less restrictive mechanisms to maintain quality and protect consumers. For example, measures to improve the availability and quality of information about professional services could help empower consumers to make more informed purchasing decisions.

The Commission is therefore inviting the regulatory authorities of the Member States to review the national legislation restricting professional services. They should consider whether the existing restrictions pursue a clearly articulated and legitimate public interest objective, whether they are necessary to achieve that objective, and whether there are no less restrictive means to achieve this. The Commission is also inviting all professional bodies to undertake a similar review of their rules and regulations. They should apply the same proportionality test as the regulatory authorities of the Member States and, where necessary, change existing rules or propose changes.

With the entry into force of Regulation (EC) No 1/2003 in May 2004, 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. In so far as competition restrictions are imposed within Member States, administrative enforcement of EC competition rules in the professions should be mainly the task of national competition authorities, although the Commission will continue to carry out casework where appropriate. The Commission also proposes discussing with national regulatory authorities whether the existing regulations are necessary, proportionate and justified.

In 2005 the Commission will report on the progress achieved in eliminating the restrictions identified above or on the factors justifying these rules. To this end, it will contact the regulatory authorities by the end of the year to ask them to report on any measures they have adopted that fall within the scope of this report. Any explicit justification of the restrictive rules which they wish to maintain should then be communicated to the Commission.

Background

Reform of the restrictive rules in the professional services sector was initiated in 2003 with the publication of a study commissioned by the Directorate-General for Competition on the economic impact of regulation of the professions in the different Member States. Commission action on this front complements the directive on services in the internal market. The Commission presented a further progress report [COM(2005) 405 final] in 2005.

Related Acts

Commission communication to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions of 5 September entitled “Professional Services – Scope for more reform”: Follow-up to the Report on Competition in Professional Services (COM (2004) 83 of 9 February 2004), [COM(2005) 405 final – Not published in the Official Journal]

In its communication the Commission makes a first assessment of the reform of unjustified restrictions in the professional services sector. It welcomes the progress made in some of the Member States but is concerned by the all too frequent persistence of unjustified regulation which seriously impedes competition in many others. The analytical work underway in most of them, which should lead to substantive reform, is encouraging. But some countries report no reform activity as yet.

The Commission consequently urges the Member States to step up their efforts to increase pro-competitive reform, advocating a more refined analysis of the markets concerned in order to arrive at a clearer definition of the general interest and to ensure better targeted regulation. Occasional users (individuals) of professional services may have a greater need of carefully targeted regulatory protection than the main users (business and the public sector). The position with respect to small business users is not entirely clear and needs to be analysed further.

Strong political backing at national level and greater input from the professions are essential to the reform process. The Commission will continue to act as a facilitator in this exercise, helping to spread best practice.

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Statutory audits of annual accounts and consolidated accounts

Statutory audits of annual accounts and consolidated accounts

Outline of the Community (European Union) legislation about Statutory audits of annual accounts and consolidated accounts

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Businesses in the internal market > Company law

Statutory audits of annual accounts and consolidated accounts

Document or Iniciative

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC [See amending acts].

Summary

This Directive aims to reinforce and harmonise statutory audit procedures throughout the EU. It clarifies the duties of statutory auditors and establishes ethical principles to guarantee their objectivity and independence.

Approval, continuing education and mutual recognition

A statutory audit may be carried out only by statutory auditors * or audit firms * which are approved by the Member State requiring the statutory audit.

The Directive updates the course of studies auditors must follow. An auditor may be approved to carry out a statutory audit only after having attained university entrance or equivalent level, then completed a course of theoretical instruction, undergone practical training and passed an examination of professional competence.

Audit qualifications obtained by statutory auditors on the basis of the Directive should be considered equivalent by the Member States. The knowledge of auditors should be tested before a statutory auditor from another Member State can be approved.

The regulatory arrangements of Member States must respect the principle of home-country regulation and oversight by the Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office.

Registration

The Member States must ensure that all approved statutory auditors and audit firms are entered in a register which is accessible to the public and which contains basic information concerning statutory auditors and audit firms. They must also ensure that statutory auditors and audit firms notify the competent authorities in charge of the public register without undue delay of any change of information contained in the public register.

Professional ethics, independence, objectivity, confidentiality and professional secrecy

All statutory auditors and audit firms are subject to principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care.

Member States must ensure that, when carrying out a statutory audit, the statutory auditor and/or the audit firm is independent of the audited entity and is not involved in the decision-taking of that entity. A statutory auditor or an audit firm must not carry out a statutory audit if there is any direct or indirect financial, business, employment or other relationship between the statutory auditor, audit firm or network and the audited entity.

All information and documents to which a statutory auditor or audit firm has access when carrying out a statutory audit must be protected by adequate rules on confidentiality and professional secrecy.

Auditing standards and audit reporting

The Commission may decide on the applicability of international auditing standards * within the EU. Member States must require statutory auditors and audit firms to carry out statutory audits in compliance with international auditing standards adopted by the Commission.

Where an audit firm carries out a statutory audit, the audit report must be signed by at least the statutory auditor carrying out that audit on behalf of the audit firm.

Quality assurance

Member States are obliged to organise a system of quality assurance for statutory audits that must meet the criteria laid down in the Directive. These cover, for example, the independence of those responsible for ensuring public oversight, secure funding and adequate resources for the system and the selection of reviewers for specific quality assurance review assignments.

Investigations and penalties

There must be effective systems of investigations and penalties to detect, correct and prevent inadequate execution of statutory audits.

Public oversight and regulatory arrangements between Member States

Member States must organise an effective system of public oversight for statutory auditors and audit firms. All statutory auditors and audit firms must be subject to public oversight, governed by non-practitioners * who are knowledgeable in the areas relevant to the statutory audit.

Regulatory arrangements of Member States must respect the principle of home-country regulation and oversight by the Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office.

The statutory audit of public-interest entities

Each public-interest entity must have an audit committee, responsible, among other things, for:

  • monitoring the financial reporting process;
  • monitoring the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems;
  • monitoring the statutory audit of the annual and consolidated accounts;
  • reviewing and monitoring the independence of the statutory auditor or audit firm, and in particular the provision of additional services to the audited entity.

International aspects

The competent authorities of a Member State may approve a third-country auditor as a statutory auditor if that person has furnished proof that he or she complies with requirements equivalent to those laid down in the Directive. The competent authorities of a Member State must register every third-country auditor and audit entity that provides an audit report concerning the annual or consolidated accounts of a company incorporated outside the EU.

Member States may allow, in accordance with the Directive, the transfer to the competent authorities of a third country of audit working papers or other documents held by statutory auditors or audit firms approved by them.

Key terms used in the act

  • Statutory auditor: a natural person who is approved in accordance with the Directive by the competent authorities of a Member State to carry out statutory audits.
  • Audit firm: a legal person or any other entity, regardless of its legal form, that is approved in accordance with the Directive by the competent authorities of a Member State to carry out statutory audits.
  • Non-practitioner: any natural person who, for at least three years before his or her involvement in the governance of the public oversight system, has not carried out statutory audits, has not held voting rights in an audit firm, has not been a member of the administrative or management body of an audit firm and has not been employed by, or otherwise associated with, an audit firm.
  • International auditing standards: International Standards on Auditing (ISA) and related Statements and Standards, insofar as relevant to the statutory audit.
  • International accounting standards: International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related Interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, and future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).

References

Act Entry into force – Date of expiry Deadline for transposition in the Member States Official Journal

Directive 2006/43/EC [adoption: codecision COD 2004/0065]

29.6.2006 29.6.2008 OJ L 157 of 9.6.2006
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2008/30/EC [adoption: codecision COD 2006/0285]

21.3.2008 OJ L 81 of 20.3.2008

Related Acts

Commission Recommendation of 5 June 2008 concerning the limitation of the civil liability of statutory auditors and audit firms (notified under document number C(2008) 2274 – Official Journal L 162 of 21.6.2008].
The Commission notes that the increasing volatility of market capitalisation has led to much higher liability risks for statutory auditors and audit firms that carry out statutory audits for listed companies. At the same time, access to insurance against these risks has been reduced. The Commission considers that this situation may deter auditors from entering the international audit market for listed companies in the Community and reduce the prospect of new actors emerging in this sector. Consequently, the Commission recommends limiting the civil liability of auditors and audit firms, except in cases of intentional breach of professional duties. In view of the considerable variations between civil liability systems in the Member States, the Commission considers that each Member State should be able to choose the method of limitation which it considers to be the most suitable for its particular case. The Commission invites Member States to inform it of actions taken by 5 June 2010. The Commission adds that the limitation of the liability of auditors should not however prevent injured parties from being fairly compensated.