According to the updated Memorandum of Understanding, Cyprus should intensify its efforts of (partial) deregulation and modernization of professional services in order to ensure compliance with the European internal market and competition rules.
The limitations that exist in the service sector and which are indicated in the Memorandum of Understanding are divided into two basic categories. The first category refers to restrictions on the exercise of the profession (e.g. minimum required qualifications, enrollment or participation in a professional body), while the second refers to restrictions on the behavior of professionals (e.g. pricing and fees, a ban on advertising).
The need for the existence of the first category of constraints is widely and generally accepted. The regulations that deal, for example, with the determination of the necessary qualifications and competence of the members of a profession as well as professional ethics, may be necessary in the specific context of a profession, regardless of whether these regulations restrict the entry of young professionals in the market, e.g. lawyers, architects, driving instructors.
In general, there are three reasons why the full liberalization of certain professional services can harm users-consumers but also society in general.
The first reason is that professional services are credence goods, the quality of which cannot be controlled or evaluated easily in advance – sometimes not even afterwards. The asymmetry of information between consumers and professionals, due to the technical skills and knowledge of professionals, makes it difficult to assess the quality of these services by consumers. Therefore, it can lead to suboptimal choices, which makes state intervention imperative to alleviate the asymmetry of information, and, ultimately, ensure the quality of services offered by professionals.
The second reason is that some professional services produce goods that have the characteristic of a public good that is beneficial to society, e.g. proper exercise of justice. Without the appropriate regulation in place there is a risk that some markets of professional services might not meet the necessary quantitative requirements or/and quality standards on the supply of these public goods.
The third reason is that the provision of certain professional services may also have an impact on the welfare of other third parties and not only on the actual user or consumer. Therefore, in this case, the public interest may exceed the private interest. This is something that in most cases the free market does not take into account.
On the other hand, there are serious doubts as to whether the existence of regulations that restrict the behavior of professionals is necessary. Examples of regulations that restrict the behavior of professionals are the prohibition of advertising (e.g. veterinary doctors) and the determination of prices and wages outside the market (e.g. architects, dentists).
One of the main arguments of these types of professionals is that the pre-determined or recommended prices provide a mechanism to ensure low prices and also that they ensure the high quality of services they provide. However, it can be argued that restrictions on behavior could harm the development of healthy competition between them and, thereby, weaken the incentives to improve their performance or to reduce prices or to expand their business opportunities through innovation and, thus, reducing their costs. At the same time, it is very likely to act as a focal point, facilitating collaboration among them, resulting in the relaxation and the weakening of competition between them.
It can thus be argued that the lifting of restrictions on advertising of professional services could help consumers to make more informed decisions as they will become more aware of other available alternative options. Advertising, including comparative advertising, is an important information channel for consumers in relation to the quality and prices offered by the market.
Undoubtedly, the presence of the Troika in Cyprus creates several limitations as to the way economic and social policy is conducted and, hence, as to the direction of economic policy. However, its presence provides the opportunity to proceed with important changes which will deliver long term benefits for society, changes that were not possible, for various reasons, to be carried out in the past. The lifting and abolishment of certain restrictions relating to the professional services sector are pointing to the right direction and will contribute to the improvement of the competitiveness of the economy.
(Published in the magazine “Accountancy Cyprus”, No 113, December 2013, Journal of the Institute of Certified Public Accountants of Cyprus)
