Enhancing Regulatory Cooperation

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comprehensive approach—one that looks at other sectors and regulatory cooperation more broadly than is currently offered under the AFAS.

countries may take place, usually in the form of information exchange and collaboration among regulators, which may help service providers. This can be the case of financial services industries, where regulators can exchange information on financial services institutions operating in their jurisdiction. In this case, the impact on the reduction of the regulatory burden is indirect and may be limited. In ASEAN, where harmonization may be limited, regulatory cooperation is being done through mutual recognition arrangements, phased-in participation based on readiness, collaboration, and information exchange that may help services providers.

12. Countries regulate similar issues differently, including in some cases opting not to regulate.

For example, in the context of the EU, Mustilli and Pelkmans (2013a) find that despite significant liberalization progress among EU countries, a high level of regulatory heterogeneity among countries remains (box 5.1). In this case, regulatory heterogeneity is purely about differences among regulations, not their intensity or impact on restricting competition, and only alters the fixed costs of entry, which may be disproportionately high for small and medium enterprises. As has been shown by the empirical literature, regulatory heterogeneity may have a strong negative impact on service flows (in this case integration; see Kox and Lejour 2005). In the context of the EU, mutual recognition has a positive impact in three dimensions that affect heterogeneity: regulatory and administrative opacity, the area of explicit barriers to trade and investment, and the area of barriers to competition (Brujin, Kox, and Lejour 2006). Box 5.1 presents lessons from the EU’s efforts to accelerate implementation of services integration through its services directive of 2006 and then introducing a mutual evaluation process.

Box 5.1 Lessons of Experience from the European Union’s Implementation and Evaluation of Services Integration

Although the ASEAN Economic Community goals do not refer to the creation of a common market, the EU’s experience of integrating services markets may offer relevant insights. The EU has highlighted the role of regulatory barriers to trade as major obstacles to the common market in the services sector. In an assessment of the internal market for services, conducted in 2002, the European Commission concluded that the internal market for services was far from being a reality, due to the persistence of legal barriers and the increasing challenges posed by “nonlegal” barriers. The European Commission characterized “legal barriers” as those deriving directly or indirectly from a legal constraint and that may prohibit, impede, or render less advantageous the provisions of services. Main sources of such legal barriers were found to be divergent national regulations, problems relating to the behavior of national authorities, and the legal uncertainty caused by the complexity of some cross-border situations. In addition, nonlegal barriers arise from the behavior of administrations, including the use of discretionary powers or heavy and nontransparent procedures that favor domestic operators, as well as lack of access to regulation and inconsistent administrative practices (European Commission 2002).

In this context, the EU issued Services Directive 2006/123 to help accelerate services integration, and two unusual approaches were followed to support its implementation. First, a detailed handbook for implementation was published, and second, a multiyear cooperation effort in several joint implementation committees (Member States and the Commission) was established. In the EU-27,^a about 35,000 service provisions were checked. This domestic screening was bound to uncover many illegitimate restrictions that had gone unnoticed, all of which have been removed. In addition, art. 39 of the directive imposed a “mutual evaluation” among Member States of the implementation and screening in 2010, again a uniquely cooperative exercise. The mutual evaluation report (European Commission 2011) reveals in great detail how much has been achieved by this joint exercise among the Member States. The upshot is that the removal of barriers, including hidden discrimination, has been far more rigorous and extensive than anyone could reasonably have expected. It is also clear that the mutual evaluation among the EU Member States has given rise to numerous discussions about the regulatory rationale of lingering restrictions. These discussions have included topics such as the justification and scope or boundaries of market failures, and the assessment of the proportionality of the tools of government intervention. In other words, the evaluation has had a “better regulation” effect, as well. Intra-EU market access has improved considerably, and EU enforcement will be less problematic than initially feared.

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Box 5.1 Lessons of Experience from the European Union’s Implementation and Evaluation of Services Integration (continued)

Another innovative mechanism of “mutual evaluation” has been included in the current EU Services Directive. Article 39 of the directive provides for a review process of Member States in two different contexts and with two different objectives (European Commission 2007). First, a review of authorization schemes and certain establishment-related requirements is mandated. The aim is to assess these requirements in light of the directive. In this context, unjustified or disproportionate authorization schemes and other requirements should be abolished or amended. Second, a review of the requirements applied to establish service providers in another Member State to provide services is mandated. In this case, an assessment of the consistency of the application of these requirements with the provisions of the directive is required.

In addition, Member States are mandated to report any changes in the requirements, including new requirements they apply or are planning to apply. The aim of this provision is to achieve transparency and legal certainty for service providers, in particular small and medium enterprises wishing to provide cross-border services. A report and subsequent updates are communicated to the other Member States, and the European Commission produces on an annual basis “analysis and orientations on the application of these provisions in the context of this Directive.”

The principles recognized in the Services Directive are further supported by a regime harmonizing the conditions for the establishment of firms. These rules are embodied in the framework of EU Company Law.

The ultimate goal of this framework is to ensure that regulatory heterogeneity among EU Member States does not prevent companies from establishing themselves in the territory of other EU Members States to provide services. While the rules on company law go beyond the services sector, since they apply to firms on any economic activity, they are particularly relevant to the integration of the services market, since the establishment of a commercial presence remains the main mode of supply for service suppliers. Since the 1960s, the EU has advanced toward the freedom of establishment through the development of a regime on company law oriented to harmonizing the main regulatory requirements applicable to firms from an EU Member State that wishes to establish itself in any other Member State, while recognizing each Member State’s ability to maintain substantial authority to safeguard legitimate domestic policy concerns. The EU experience offers valuable guidance on the kind of issues that need to be addressed in order to reduce regulatory heterogeneity; in particular, EU directives and regulations address key issues of company law such as company formation requirements and procedures, corporate governance, capital maintenance, mergers and acquisitions, accounting and audit, and market regulation.

Source: Mustilli and Pelkmans 2013a, 2013b.

Note: a. EU-27: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

13. International cooperation, more broadly, can take place in other forms, as well. One of the recommendations of this report is consideration by all ASEAN Member States of adopting basic good regulatory practices, as discussed in Chapter 3. One of the guiding principles of good regulatory practices is transparency, including through providing sufficient opportunities for comments for interested parties and sharing information with counterparts. In the context of an economic community, this may also mean allowing trading partners to participate in the regulatory process. For example, the EU services directive mandates a list of essential information that Member States must make easily accessible through the “points of single contact” to service providers and service recipients. In addition, this directive obliges Member States to give each other mutual assistance, in particular to reply to information requests and to carry out, if necessary, factual checks, inspections, and investigations. It also requires creating a communication network among regulatory and supervisory authorities with the aim, primarily, of mutual assistance. In such cases, regulatory cooperation can facilitate agreement and common understandings of the issue or on underlying technical or scientific issues, and contribute to informing all phases of the rulemaking process. In addition, cooperation can address existing regulatory differences and help avoid future regulatory differences (see Rubalcaba 2007; Davies 2012; GAO 2013).

154 ASEAN Services Integration Report

154 ASEAN Services Integration Report

14. Further integration in the services market can be pursued through regulatory cooperation among ASEAN Member States, for example in the area of company law, so as to facilitate cross-border mobility of service providers. Following the EU experience, ASEAN Member States may wish to consider addressing basic requirements for the establishment of companies, including areas like compulsory disclosure of information, and power of representation of company organs. Requirements on disclosure, in particular, may include the harmonization of information requirements and the establishment of an official company register accessible by all Member States.