National Competition Policy Review of the Professional Standards Act 1994


4. The Market and regulatory options

4.1 Concept of a “market”

4.1.1 The Australian Competition Tribunal has endorsed a standard definition of a market as:

….the area of close competition between firms or the field of rivalry between them (if there is no competition there is of course a monopolistic market). Within the bounds of a market there is substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be competition, at least in the long run, if given a sufficient incentive.

4.2.1 For some pieces of legislation, identification of the market is a relatively straightforward matter because the legislation deals with a single occupation, profession or industry. The Professional Standards Act affects markets for services provided by members of occupational groups. Under the Act, “occupational group” includes a professional group and a trade group.

4.2.2 The Act defines an “occupational association” as a body corporate that represents the interests of persons who are members of the same occupational group, the membership of which is limited principally to members of that occupational group. Any occupational group may form an association and register under the Associations Incorporation Act 1984. The association could then apply for approval of a scheme under the Professional Standards Act.

4.2.3 In these circumstances, it is difficult to identify the “market”, given that the Act does not operate in a single market for occupational services but affects many disparate markets for occupational services. Any anti-competitive effects of the Act need to be considered across a range of markets because services provided by one occupational group cannot be readily substituted for another.

4.2.4 Occupational groups covered by schemes under the Act may compete with each other in some circumstances (eg. solicitors compete with accountants in some areas of work). However, competition is more likely to occur between members of a particular occupational group, including members who have joined a scheme and members who have not.

4.2.5 The Act potentially affects a large number of individuals providing occupational services. In its Annual Report for 1999, the Professional Standards Council estimated that over 11,000 individuals are subject to schemes approved under the Act. Services provided by occupational groups covered by these schemes are significant to the economy. There is potential for growth within current schemes and potential for other occupational groups to submit schemes to the Council.

4.2.6 The “market” may also be viewed in terms of the problem the Act was designed to address. The Act may be seen as a tool to address a failure in the market for members of occupational groups to obtain insurance (or adequate insurance) against liability arising from the practice of their occupation.

Issues

4(a) What is the “market” affected by the Act? If there is more than one market, how may they be identified and what are their characteristics?

4.3 Characteristics of markets for occupational services

4.3.1 An underlying assumption of Competition Policy is that in general competitive markets will result in the provision of the quantity and quality of products and services that maximise the benefits for society. Competition generally promotes efficient markets and gives incentives for innovation. Intervention may be justified to correct market failures or to take account of equity considerations.

4.3.2 Different forms of market failure exist. Two that are relevant to markets for occupational services are spill-overs and information asymmetry.
4.3.3 A spill-over refers to a situation where social costs and benefits of an activity exist but are not reflected in the market transaction. For example, when an engineer erects a faulty building or an accountant conducts a flawed audit, there is far more at stake than just the interests of the direct client.
4.3.4 Information asymmetry refers to a situation where consumers do not have the same knowledge about products or services as providers of those products or services, resulting in an inequality of bargaining power and consumer choices based on incomplete or inaccurate information. Providers of occupational services generally possess far greater knowledge than their clients, given their specialist training. Spill-over and information asymmetry may be seen as two of the justifications for the Professional Standard Act.
4.3.5 In an imperfect market, some restrictions on competition will have both negative and positive effects. For example, restrictions on entry into an occupation may inhibit competition and drive up prices, but they also exclude unqualified persons who may be a risk to the public. Additionally, controls on conduct may stifle creativity and innovation, but they also minimise the likelihood of malpractice and provide redress for consumer complaints. The cost and benefits of restrictions must therefore be carefully weighed.

Issues

4(b) What market failure is the Act attempting to address? Is the Act successful in addressing the failure?

4(c) What effect do schemes under the Act have on the competition in, and the operation of, markets for occupational services?

4.4 Regulatory options

4.4.1 New South Wales and Western Australia are the only two states with professional standards legislation. The Western Australian Act is based on the New South Wales Act. Other states do not have legislation which allows the introduction of schemes that would see the capping of liability.

4.4.2 The Terms of Reference require the review to consider whether there are alternatives to the Professional Standards Act.

4.4.3 One option is to keep the Act as it stands. To justify this option under Competition Policy, it must be demonstrated that the benefits of the restrictions on competition to the community as a whole outweigh the costs, and the objectives of the legislation can only be achieved by restricting competition.

4.4.4 An alternative is to repeal the Act. This alternative must be considered if the costs of restrictions on competition to the community outweigh the benefits. It may also be a consideration if the objectives of the Act are no longer relevant.

4.4.5 A third alternative is to retain the Act, but with some amendments to reduce the restriction on competition. Such amendments may include increasing the minimum cap, removing some of the exceptions, or making schemes apply to all classes within an occupational association.

4.4.6 Other alternatives include the introduction of licensing schemes for occupational groups; reviewing the law of tort; reviewing the law relating to joint and several liability; or allowing members of professional groups to incorporate. It could be argued that where a licensing scheme already exists, as in the case of solicitors, any cap on liability should form part of the licensing scheme, rather than be set under the generic provisions of the Act.

4.4.7 Non-legislative alternatives may also exist. For example, self-regulation in the form of an industry code of practice, or an information and education campaign to alert professionals and consumers to the need for insurance.
4.4.8 Mandatory industry codes of practice may also be prescribed under the Fair Trading Act 1987. These mandatory codes outline minimum standards of legal behaviour in respect of industry or sector-specific practices, and clarify the rights, obligations and expectations of the consumer/trader relationship to create greater certainty. However, such codes have limitations. In Murphy & 112 Ors v Overton Investments [1998] NSWSC 425, the Court of Appeal considered the effect of mandatory codes in relation to the retirement village industry. In a unanimous judgement the Court held that an industry code does not override private duties and obligations created in contract between individual parties within that industry.

Issues

4(d) Are there any features of the market(s) for professional services in New South Wales that warrant the existence of professional standards legislation, compared to jurisdictions that do not have similar legislation?

4(e) What has been the experience of jurisdictions that do not have similar legislation, particularly in relation to:

• negligence claims against professionals and other occupational groups?
• insurance premiums for professional indemnity insurance?
• professional standards generally? For example, is the implementation of risk management practices less widespread?
• processes for resolving consumer complaint and disciplining members of occupational groups? For example, do these processes exist in other jurisdictions?
• competition, consumer choice and the price and quality of services in markets for services provided by occupational groups?

4(g) If the Act is retained, are there ways in which it could be improved?

4.5 Occupational licensing

4.5.1 While the Act is voluntary in that it does not impose a requirement to establish a scheme or to belong to a scheme, the Act can be compared to statutes that directly regulate and license a particular profession, for example, the Legal Profession Act. The Legal Profession Act contains provisions relating to various aspects of the legal profession, including admission as a legal practitioner, practising certificates, business structures for legal practice, insurance requirements, legal professional and advisory bodies, trust accounts, and complaint and disciplinary mechanisms.

4.5.2 While the objects of the Act do not include the creation of occupational licensing regimes, schemes under the Act have similar features to such licensing regimes. Licensing regimes generally cover all members of an occupational group (eg. solicitors and barristers), or all persons offering a particular type of service (eg. taxation). This ensures the public receives services that are uniform, predictable and comply with minimum standards. Schemes under the Act do not necessarily guarantee uniformity, predictability or minimum standards because schemes may only apply to some classes of members within occupational associations and because members can be exempted from schemes.

4.5.3 Nevertheless, the similarities between occupational licensing regimes and the schemes raises the issue of whether a duplication of regulation exists, that is, whether schemes under the Act duplicate to a degree, occupational licensing regimes. It also raises the issue of whether the main difference between schemes under the Act and occupational licensing regimes, is a statutory cap on liability.

Issues

4(h) Do schemes under the Act duplicate to some extent, occupational licensing regimes?

4(i) If the cap on liability is justified from the public interest perspective, should it be incorporated into the occupational licensing regime?

4(j) Should schemes under the Act apply to members of occupational groups that are already subject to licensing schemes established by other legislation?

4(k) Do other arrangements or pieces of legislation duplicate some of the same areas as the Act (eg. industry self-regulation schemes, licensing schemes, consumer protection and trade practices legislation)?

FOOTNOTES:

8. [1998] NSWSC 425