Self-regulated professions are often accused of not doing enough to protect consumers. But a recent study by the Competition Bureau also finds that they are doing too much that inhibits competition and that undermines professional productivity. The report suggests that such professions, potentially including financial advisors, take steps to improve competition without creating risks for their clients.

The study focuses on five major self-regulated professions — lawyers, accountants, pharmacists, optometrists and real estate agents — chosen, the Competition Bureau says, based on the volume of complaints it receives about anti-competitive behaviour in these industries, as well as on the size of the industries.

But Commissioner of Com-petition Sheridan Scott suggests in the report that the same basic analysis can be applied to various self-regulated professions. For the financial services industry, beyond the many lawyers and accountants that work for business clients, the list of similarly self-regulated professionals would include investment dealers and mutual fund dealers, as well as traders.

Although the bureau’s research doesn’t address the state of these professions specifically, in the ones it did examine, it finds that regulators are unnecessarily restricting competition in a number of ways: through qualification barriers, mobility restrictions, advertising limitations, restrictions on the services professionals can offer, limitations on pricing and compensation, and business structure requirements — all of which serve to limit consumer choice and impede productivity.

The report stresses that the bureau is not advocating completely unfettered competition. It recognizes that there may well be good reasons for restrictions that, as a side effect, harm competition. For example, if the investment industry abandoned registration requirements altogether, that may well bring more competition to the business but consumers would be left dealing with utterly unqualified individuals.

The report emphasizes, however, that regulations that do little to improve consumer protection and serve largely to limit competition are inefficient and should be dismantled.

The report makes a number of recommendations that are specific to the five professions the study examined closely in each of the areas in which it has identified significant restraints on competition.

Broadly, the report advises that regulators impose the minimum qualification requirements necessary to ensure quality service and seek to ensure interprovincial and international mobility; that regulators consider allowing professions to expand the range of services they are qualified to provide; that restrictions on advertising, particularly comparative advertising, be reviewed with an eye to scrapping those that go beyond what’s necessary to prevent false and misleading ads; and that regulators look for alternative ways of protecting consumers other than prohibiting multidisciplinary practices (or other business structures).

“A number of common themes arose during the course of this study,” the report concludes. “Regulate only when necessary; keep the net public benefit in mind, weighing all the potential costs and benefits of regulation; and use regulatory tools that restrict competition to the minimum extent possible.”

These same basic themes should resonate with securities regulators. After all, the importance of ensuring competition does form one of the basic principles of securities regulation espoused by the International Organization of Securities Commissions.

IOSCO’s overarching principles recommend that regulation should recognize “the benefits of competition in the market place.” That includes not imposing unnecessary barriers to entry, considering the impact of regulatory policy and ensuring an equal regulatory burden on similar market players.

These same principles filter down to self-regulatory organizations. IOSCO says that in authorizing an SRO, regulators should require it to “avoid rules that may create uncompetitive situations and avoid using the oversight role to allow any market participant unfairly to gain advantage in the market.” This could include taking unfair enforcement action or adopting rules that don’t treat market players equally. And IOSCO advises regulators to ensure that SROs aren’t unreasonably creating barriers to entry.

Although the Competition Bureau’s research doesn’t tackle the quality of competition within the financial services industry specifically, it is not hard to identify areas in which industry regulation appears to inhibit a fully competitive playing field.

The lack of common rules and practices across the provinces has long been an issue for the Canadian investment industry. Not so much for some of the SROs, which have a single set of rules. But even they have different status and slightly different powers in some provinces. This situation leads to unjustified distortions, such as the uneven availability of personal corporations for advisors. Mutual fund dealers in certain provinces can use them, while dealers in other provinces cannot; investment dealers remain completely barred from using them.

@page_break@Securities regulators have recently been trying to err on the side of increased competition in certain areas, including the rules designed to accommodate alternative trading systems and the imposition of trade-through obligations and best execution requirements.

Also, last year, the securities regulators proposed a major reform of the registration regime that’s designed to eliminate some of the cross-country differences that appear to hinder efficiency needlessly. That effort deals with practices similar to those that the Competition Bureau study attacks.

In some cases, however, the registration reform project preserves the types of barriers that the bureau’s report says should be dismantled. For example, the RRP limits the number of clients that firms and reps can deal with in other provinces to just a handful. In a more competition-friendly regime, qualified advisors in any province would be able to serve clients in any other province without restriction.

Firms are paying a price for this barrier, not just in terms of lost or forgone business but also in regulatory sanctions. In early January, an Ontario-based firm agreed to a $74,050 settlement with the B.C. Securities Commission for the offense of providing ongoing advice to several clients after they moved to British Columbia.

Notwithstanding the registration reform rule’s shortcomings, the rule would eliminate some of these unnecessary barriers. It is somewhat behind schedule, however: when it was initially announced, the plan was to have the reforms implemented by the end of 2007.

The voluminous comments on the proposed new rules are driving changes that will require another comment period. That was supposed to occur before the end of 2007. Now regulators say revised proposed rules will be published early this year. Assuming this happens soon, it will still be some time before a new rule can be adopted.

There are other areas in the securities industry of competitive concern. Qualifications are one. For example, some have suggested that it should be easier for retail reps to be licensed to trade derivatives, as it is in the U.S.

The regulation of acceptable business structures has also been a long-standing issue in the securities business. That was most recently highlighted by the Portus Alternative Asset Management Inc. scandal, which got regulators worried about the use of referral arrangements and more lightly regulated affiliates to circumvent onerous restrictions. In this case, the focus for regulators has been on tightening their grip, not loosening it to allow greater competition.

One area in which securities regulators haven’t intervened much is compensation. Here, it’s the fund dealer industry that has failed to embrace competition, preferring instead to allow the fund manufacturers to dictate uniform compensation through the use of trailer fees. Regulators have considered the idea of interfering with compensation to ensure greater objectivity in reps’ advice — which could also lead to more fee competition — but they haven’t done so.

Securities regulators thus appear to have their fair share of competition-related issues to address. Indeed, the Competition Bureau wants them to remember that everything they do affects the industry’s competitive landscape. As its report concludes: “The purpose of this study is not to urge professions to deregulate. Rather, it is to promote strong, effective regulation by applying competition analysis to this vitally important sector of the economy.”

The report calls on regulators, both governments and SROs, to consider the competitive effects of their policies. And the report notes the bureau plans to revisit the subject in a couple of years to see whether any progress has been made.

With that in mind, the report proposes six basic principles: regulation should have clear, specific objectives; one of those objectives should be to promote open, competitive markets; the rules adopted should be the minimum necessary to achieve those objectives; the effects of regulation should be measurable; its effectiveness should be reviewed; and, perhaps most important, the regulatory process must be independent.

On that last point, the report says that in order for regulation to be most effective: “Professional organizations must ensure they have the best possible governance structure.”

That includes representing the viewpoints of all types of firms and the general public.

Without broad representation from both inside and outside SROs’ industries, the SROs may end up advancing the profession’s own interests rather than the public interest. “Since regulation of the professions is most commonly justified in terms of consumer protection,” the report notes, “it seems appropriate that the points of view of consumers be effectively represented in professional organizations.”

For the financial services industry, ensuring a diversity of views is often a challenge, as very large, well-resourced firms dominate the industry and are in a position to influence policy at the expense of their smaller competition. Additionally, the public view is rarely well represented.

But nurturing new players is a benefit for the everyone. IE