Speaking Notes for Richard Taylor Deputy Commissionner Civil Matters

Competition Bureau

The role of regulators in providing a fair, open and competitive real estate market

Canadian Regulators Group Conference Winnipeg

June 7, 2007

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Good morning,

I am here today to speak to you as an advocate for competition. Yes, the Competition Bureau is a law enforcement agency, but we are also in the business of speaking for and about competition in Canada. It is a role we take very seriously.

I am also here today to speak to you as a colleague. All of us are working for Canadians by helping to ensure that the economy is productive and competitive. In today’s global market, promoting competition is everybody’s job.

Every level of government can encourage open, competitive markets. Provinces can lower barriers to trade with other provinces. Every provincial regulator has the power to create or drop regulations in order to enhance competition in particular sectors. For example, your regulatory powers allow you to act when professional fees, advertising restrictions or barriers to entering a profession inhibit competition.

For the next 35 minutes or so, I would like to talk about how we can work together to ensure that the real estate industry not only remains competitive but also becomes more so as it changes, takes full advantage of the potential that new technologies offer, and grows. I would be happy to take your questions at the end of my presentation.

My message to you today—at the risk of killing the suspense—comes down to three points:

• First, we should all rely to the maximum extent feasible on market forces to achieve policy objectives.
  
  
• Second, as real estate regulators, you should look long and hard at existing and proposed regulations to ensure they do not hinder competition.
  
  
• Finally, you should be particularly careful about regulations that could frustrate the application of the Competition Act by bringing the regulated conduct doctrine, or as it is also called the regulated conduct defence, into play.

I would like to take a couple of moments to talk about this last point. The regulated conduct doctrine, or RCD, is a tool the courts use to resolve apparent conflicts between laws. In a number of cases, most of them criminal, Canadian courts have addressed the issue of the applicability of the Act to activity which, on the one hand, contravenes the Act, and on the other, is authorized by a statutory regulatory regime. In these situations the courts have concluded that conduct that is specifically authorized by a regulatory body exercising its authority under validly enacted legislation cannot be found in contravention of the Act. Simply stated, the RCD protects conduct which would otherwise be subject to the Act, if the conduct is specifically authorized by valid provincial or federal legislation. In practical terms, it means that a firm being charged with anti-competitive behaviour can argue that it had no choice but to act in such a manner to meet regulatory requirements. There is always a very real risk, then, that regulations could be used in court to take Canada’s fundamental competition law—the Competition Act—off the table and to allow what might otherwise be criminal conduct.

The RCD is complex and the Competition Bureau’s position on how it applies to competition law and the professions is evolving. Until relatively recently, the Bureau assumed that the regulated conduct defence would apply in most situations involving the regulated professions, and that our role would therefore be limited.

You may recall that we posted a technical bulletin on the RCD on our Web site some time ago and invited public comment on it as part of a broad policy review on the matter. This exercise resulted in an internal policy change. We are now open to taking civil cases involving regulated entities to the Competition Tribunal. We do not, of course, know how the Tribunal will respond, but we are eager to clarify our role in regulated industries, for our own guidance as well as that of the private sector.

I will return to the RCD later in my remarks.

But now, let me explore the role of regulation vis à vis competition. Regulation can be a good thing. Governments regulate for many good reasons. I am not here to recommend deregulation necessarily, and certainly not just for the sake of it. What I am here to do is to encourage regulators and policy makers to adopt approaches that rely to the greatest extent possible on market forces. When regulation is necessary, the Bureau advocates that regulatory measures be as circumscribed as possible.

A fundamental fact about competition is that it tends to happen unless someone makes it his or her business to stop it. Unfortunately, there is no shortage of incentives to do so. The same company that achieves dominance in a particular field by competing may be tempted to use its dominant position to stop others from competing effectively against it. A group of players in a given industry may conspire to prevent others from entering the industry. The group may even pass rules that effectively shut alternative business models out of the industry.

Our job at the Competition Bureau is to investigate and stop this type of anti-competitive behaviour. When we learn of an anti-competitive business practice, we investigate it. If we find that the conduct breaches the provisions of the Competition Act, we have a number of options available to us, including applying to the Competition Tribunal for an order to remedy the conduct or referring the matter to the Attorney General for possible criminal prosecution.

The Bureau, as I am sure you know, took an interest in potential anti-competitive behaviour in the real estate industry in the 1980s. Our investigations uncovered clear-cut evidence of considerable anti-competitive conduct:

• attempts to standardize commission rates and splits;
• unreasonable restrictions on advertising;
• prohibitions against using incentives to list or purchase property through a member; and
• unwarranted requirements for board membership.

Even before the investigation was completed, the Canadian Real Estate Association (CREA), recognizing that long and costly litigation would hurt the entire industry, approached the Bureau to resolve the issues. CREA and the Bureau agreed to a prohibition order that CREA's membership subsequently approved at its annual general meeting and a Federal Court judge signed.

The prohibition order came into effect almost 20 years ago now. It has benefited both consumers and the real estate industry. It serves as a reminder of the types of concerns we all have to keep in mind when examining competition issues in the real estate industry.

The famous Scottish economist Adam Smith was probably exaggerating for effect when he said that when two or three people of the same trade gather together they will probably end up “in a conspiracy against the public, or in some contrivance to raise prices.” But behind that hyperbole there is a real point. People who never use physical violence or steal, can often talk themselves into anti-competitive behaviour. They may even convince themselves that their actions are for the benefit of their customers.

Otherwise law-abiding real estate agents may come to believe that discount commissions or incentives could lead to reduced services. They may come to believe that advertising could confuse house sellers. They may come to believe that restrictions on membership would maintain the good name of the profession and keep charlatans out of it. Having convinced themselves, they may make powerful advocates for the industry and work to bring others on side.

As a consequence, you, as regulators, get to hear plenty of compelling arguments for restricting competition. Communications professionals, who are very good at making their case, troop into your offices and write you letters. You must remain objective and critically analyze these attempts to sway you. If you do not, you run the risk of serving the very groups you are supposed to be regulating. They may even convince you to pass measures sanctioning anti-competitive behaviour.

What is the antidote? There is no magic pill, I’m afraid. The only cure is vigilance and careful study. Hypothetical concerns, for example, should never be taken as sufficient. The possibility of confusion about advertising, for example, is not an argument for restricting practices that enhance competition. It will always be the case that some advertising will confuse some consumers. But before we even begin to think about measures that might restrict advertising practices, we should always insist on solid proof that real social harm is already occurring or very likely to occur.

What about protecting the good name of the profession? It is perfectly understandable that professional associations would want to preserve the good name they have worked hard to create for themselves. There would be little point in there being a professional association in the first place if it didn’t concern itself with such a thing.

One way for a profession to do this is, for its governing body to insist that members have minimum education requirements. This is a reasonable restriction to place on those wishing to enter the profession, particularly since the association can re-evaluate those requirements as the years go by. Of course, some education requirements could be barriers to entry possibly leading to artificial shortages in the profession and to artificially high prices. As a result, it is important for regulators to exercise vigilance in this area.

But what about other factors that may affect reputation, such as level of service? These are harder to measure and evaluate. And it’s precisely this vagueness that some professionals have capitalized on to justify restrictions on competition.

The argument in real estate for minimum service requirements is that different service offerings will confuse and anger customers and hurt the reputation of the profession. But why should we believe this? Are customers not capable of distinguishing between business models?

As an aside, most measures that aim to protect professional reputation do not work nearly as well as open markets and transparency. A profession that conducts itself in ways that are open to public scrutiny is a profession that builds trust. It will do so because transparency gives every member of the profession a powerful incentive to conduct its business in a way that is not only honest but is also seen to be honest. When individual members of a profession do not earn the public’s trust, they will lose business to their competitors.

Will restricting competition keep charlatans out? No. If anything, charlatans will be attracted to a profession that protects them from competitive pressures.

As I have said previously and will say again, as regulators you need to be constantly asking what effect your actions will have on competition. In fact, you may wish to consider the following questions when developing regulations:

• Does the regulation lessen competition?
• If so, does the public interest goal of the regulation outweigh the public interest in free competition?
• Is there another option that will meet your objective with less effect on competition?

Members of the real estate industry will approach you with all the arguments I have mentioned so far and a few new ones besides. In each case, you need to determine what the measurable effects of any proposed restrictions are, as opposed to the hypothetical risks.

I will go further and say that you should not allow self-regulating bodies to set rules in the name of consumer protection and maintaining the reputation of the profession that really only further the interests of individuals and firms in it. When issues such as service are in the hands of industry, you won’t be at the table to offer countering arguments to any restrictive measures they consider.

This kind of counterbalancing argument needs to be applied not only to proposed regulations but also to existing ones. Regulators should ask, for example, whether the concerns that led to a regulation being put into place still hold. Perhaps the public has a better understanding of the risks involved than was common when the need for regulation arose. Perhaps the industry has changed in ways that minimize past concerns. Most of all, regulators should regularly ask themselves whether existing restrictions outweigh the benefits that could be achieved by allowing competition to prevail.

Only last year, the Real Estate Council of Alberta acted to end restrictions on cash rebates and referral fees to make more vigorous competition among brokers possible. The council took this action after consultations with the Bureau, and it is a good example of how reviewing regulations can improve consumer choice.

As I mentioned previously, the regulated conduct doctrine, or defence, is a factor you should keep in mind when you review proposed and existing regulations. The RCD is of special concern in self-regulating industries such as real estate. Self-regulators are subject to competing interests. You should be very wary of giving self-regulators the power to mandate uncompetitive behaviour. To spell it out, you could have self-interested members creating rules that would protect their own anti-competitive actions. This leaves us with a situation in which the fox is guarding the henhouse.

I should add that the Competition Bureau believes that self-regulators are distinct from government regulators, precisely because self-regulators may have an interest in the decisions they make. As a point of law, associations and regulatory bodies are subject to the Competition Act; the RCD does not automatically exempt them. The Bureau does and will continue, therefore, to subject their decisions to scrutiny. But our powers are not limitless and it is always preferable that you, as provincial regulators, anticipate these issues before they arise.

The Bureau is always willing to consult with you should you wish to discuss any actions you are considering and to help you assess the impact of regulatory options on competition in order to find ones that achieve your policy objectives in the most competition-friendly way possible. We know that you share our interest in making the real estate industry more competitive, not less.

Competition is an effective way—most often the best way—to get products and services to Canadians at the lowest possible cost. It is unquestionably the best way to ensure the Canadian economy continues to be innovative and efficient. That is why we at the Competition Bureau welcome your explicit role, as regulators, in promoting competition.

To work together towards this goal, however, we need to recognize the primary role of competition and of Canada’s competition law. This law is an established part of the legal framework for businesses across Canada and, as I mentioned, it provides a set of disciplines for dealing with business practices that pose a significant threat to competitive markets.

Two closely related principles follow from this, that I suggest you keep in mind. First, avoid regulating market entry or price and other terms of sale in industries in which there is sufficient competition to protect the public interest. Second, remove existing regulations when costs outweigh the benefits that competition can deliver.

There are certainly many competition-related issues in the real estate industry. This is true now and it certainly will be in the coming years, because the very nature of the industry is changing. I am sure you are aware of these changes, since they are crucial to your responsibilities as regulators and advocates of competition.

I would like to draw your attention, in particular, to the alternative business models currently being developed in the industry. Quickly, however, let me make an important qualification. As a representative of the Competition Bureau, I have no opinion on the potential these alternatives have for success. My concern is that consumers, through an open and competitive market, should determine whether these models succeed or fail.

If we look at the American market, we can see the arrival in the real estate industry of companies that offer limited service for a low, flat fee. The companies might, for example, provide a listing, signs and some advertising. The service offering is, in effect, a promise of less service for a lower price.

Is this a good idea? I do not know. It might be in certain markets. In general, however, alternative business models offer consumers greater choice, which is a good thing. And Canadian consumers deserve the opportunity to decide for themselves about this new way of doing business.

Already, however, fear of competition has inspired real estate groups to lobby governments to try to prevent consumers from ever being able to make this choice for themselves. A good example of this is a minimum service requirement. Real estate associations present this option as a boon to consumers, since it promises them a certain level of service.

But, as I said before, consumers are fully capable of evaluating levels of service for themselves. If they believe that an alternative business model will suit their needs, they should be able to choose it. And full-service brokers who are worried that consumers who use such services will not be sufficiently informed are free to advertise the benefits they claim come with higher levels of service.

Service is not the only area in which real estate lobby groups have been seeking restrictions on alternative business models. Access to MLS, one of the fundamental features of the real estate business, is another bone of contention.

This is interesting, of course, because MLS is a textbook example of co-operation across the industry that has helped competition. And MLS has become an even stronger tool to encourage competition with the advent of the Internet. Once jealously guarded, listings are now available to everyone with a computer. This has greatly increased consumers’ knowledge of the market and, therefore, has improved their choices.

The risk we now face is that agents offering traditional service models may succeed in imposing rules on MLS users that effectively preclude innovators from getting access to that service. The Bureau is watching this with interest.

In fact, as you are no doubt aware, the Bureau has launched an investigation into whether CREA has restricted access to MLS in ways that are anti-competitive. The Bureau asked a court to issue a production order detailing how CREA and related boards operate with regard to MLS. The Bureau is also looking at whether the way CREA is interpreting some of its rules constitutes a violation of the civil or criminal provisions of the Competition Act. I would be happy to answer questions about this in a few moments, keeping in mind, of course, that this is an ongoing investigation, so what I am allowed to say is limited.

Another aspect of real estate transactions that may feel the effect of alternative business models is commission. Some commentators and business analysts have expressed concern that there is little price competition for real estate services in Canada, or for that matter in the United States. Our neighbours to the south just completed an exhaustive investigation of competitiveness in real estate. They found that while there is considerable competition among agents using the traditional business model, it tends to be based on service and reputation rather than on price.

Competition on price is a good thing. And new service offerings entering the market push existing providers to figure out how to be more productive. Higher productivity, in turn, produces a better deal for consumers and increases overall efficiency in the economy.

Of course, agents who are unable to improve the efficiency of their operations will see their profits decline under intense price competition. This provides an incentive to introduce measures to block competition on price from new service providers. Again, we will have to be vigilant in watching what happens in this area.

The trends we are seeing in real estate appear to one degree or another in other professions. As you probably know, the Bureau has decided to study issues of competition in professions that are self-regulated to greater or lesser extents. The study was announced in May 2006 and is focusing on real estate agents as well as accountants, lawyers, optometrists and pharmacists. The Bureau is looking into whether these professions are using anti-competitive restrictions that benefit industry members under the guise of protecting their professions and serving consumers.

This is a complex study and will take time to carry out. We will certainly make our findings known when we get them but, until then, we are not going to pre-judge the activities of professional associations and their members.

The European Commission and Ireland are also looking at these professions, in part because there is potential for considerable savings for consumers and efficiencies in the industry. Any economy that can make its professional workforce more competitive will see considerable gains in the entire economy. I don’t think that any jurisdiction in a global economy can afford to get behind the curve here.

In closing, let me end where I began.

I have been speaking to you today as a colleague, with an important message about what we can do together to ensure that Canadian consumers can trust real estate professionals to be working in their best interests in a market that is fair, open and competitive.

It is imperative that we do so. Real estate is a leading economic indicator. You can measure the health of neighbourhoods, cities, provinces and Canada as a whole by looking at our real estate markets.

Real estate also touches people where they live. A huge segment of the population buys and sells houses. For many Canadians, a house is the single largest capital investment they will make. Maintaining an open and competitive market for real estate makes the lives of ordinary Canadians better.

I have been talking today about the role you, as real estate regulators, have in furthering competition in this crucial sector of our economy. I would sum up the principles of competition as they apply in your work with four points.

First, a primary objective of the regulatory framework should be to promote open and effectively competitive markets.

Second, the regulatory environment should neither favour nor constrain the ability of particular market participants to compete in the market.

Third, regulations affecting the real estate industry should be subject to regular reviews to assess their effectiveness and their impact on competition.

Finally, to the extent that the industry is self-regulating, the regulatory process must be impartial and not self-serving. You can help ensure this is the case by taking care when delegating enforcement powers to self-regulating organizations, and insisting that self-regulatory activities be transparent and subject to a formal complaint-handling process.

My colleagues and I at the Competition Bureau, while always prepared to act against anti-competitive behaviour when we find it, also want to work with you to advocate for competition as a benefit to consumers and the economy as a whole.

Thank you for your time and attention. We have a few minutes left. I’d be happy to take your questions.