1 Services Directive notification procedure

Committee’s assessment Legally and politically important Committee’s decision Not cleared from scrutiny; further information requested Document details Proposal for a Directive of the European Parliament and of the Council on the enforcement of the Directive 2006/123/EC on services in the internal market, laying down a notification procedure for authorisation schemes and requirements related to services, and amending Directive 2006/123/EC and Regulation (EU) No 1024/2012 on administrative cooperation through the Internal Market Information System Legal base Article 53(1), 62 and 114 TFEU, Ordinary legislative procedure, QMV Department Business, Energy and Industrial Strategy Document Number (38450), 5278/17 + ADDs 1–2, COM(16) 821

Summary and Committee’s conclusions

1.1The EU Services Directive (2006/123) aims to ensure that all new regulatory measures imposed by EU countries affecting a wide range of services are non-discriminatory, proportionate and justified by public interest objectives, with the aim of removing barriers to intra-EU services trade. The notifications procedures the Directive contained were defective in a number of respects, meaning that Member States have been able to circumvent Commission scrutiny of new regulatory measures which may, in some cases, act as non-tariff barriers to trade and protect domestic businesses from competition.

1.2On 13 January 2017 the Commission proposed, as part of a wider Services Package, a Directive which would widen the coverage of the existing notifications procedure and strengthen it in various ways (see Background for a detailed account of the proposed Directive). In its Explanatory Memorandum, the Government said that it was a strong supporter of a liberalised EU services market, had called for better enforcement of the notifications procedure, and that the proposal addressed many essential areas for improvement.

1.3A General Approach was agreed at the Competitiveness Council on 29–30 May 2017 which narrowed the scope of the proposal in a number of respects. In response, the Committee asked the Government to provide more information about these changes, as well as the implications of Brexit for affected sectors.

1.4The Parliamentary Under Secretary of State at the Department of Business, Energy and Industrial Strategy (Lord Henley) has now provided the Committee with a response. The information that he provides mitigates the Committee’s concerns about some aspects of the General Approach (e.g. late stage parliamentary amendments), but downplays the significance of others (e.g. weakening the legal effects of a breach of the notification procedure). More detailed information about these issues is provided in the section of this report concerning the Minister’s letter of 12 December 2017. Despite these changes, the Minister considers that the General Approach preserves “most of the advantages of the Commission’s original proposal”.

1.5The Minister does not provide a detailed analysis of the implications of EU exit across the affected sectors, instead directing the Committee to the Government’s sectoral reports and to the OECD Services Trade Restrictiveness Index.

1.6We thank the Government for the exhaustive information provided in response to our questions about the General Approach that has been agreed. We are assured that the exclusion of late stage parliamentary amendments from the advance notification requirement is justified; however, we consider the exclusion of insurance schemes from the scope of the Directive regrettable, and regret the deletion of the clause which would have meant that a breach of one of the elements of the procedure would have rendered it unenforceable vis-à-vis individuals.

1.7On balance, we accept the Government’s view that the General Approach, which will continue the incremental liberalisation of the Single Market for Services, preserves most of the advantages of the original proposal, and is in line with UK interests. However, we note that the Member States’ progressive weakening of the Commission’s proposal may illustrate a dwindling impetus among the EU27 for further integration in the sectors covered by the Services Directive (excluding those service sectors for which harmonised frameworks exist), of which the UK has traditionally been the chief advocate.

1.8On the implications of EU exit, we note that the UK will continue to benefit from the effects of the proposal, post-withdrawal, particularly where individual Member States’ services regulation does not discriminate between EU and third country nationals. We conclude from the information provided by the Government that the impact on market access across the sectors covered by the Services Directive of a shift from EU membership to third country status will be highly uneven: UK access to the EU market in unregulated sectors (e.g. marketing, management consulting) is likely to be relatively unaffected, whereas service sectors for which more developed EU-level frameworks exist (e.g. legal services, accountancy, audit) will be more adversely impacted. This is without reference to any future UK-EU trade agreement.

1.9Although the Government does not provide the detailed analysis the Committee requested as to how different sectors would be impacted, it directs the Committee to the OECD Services Trade Restrictiveness Index (STRI) which provides a list of the restrictions affecting third county businesses seeking to operate in EU Member States. While this list does not in itself enable the Committee to make a comparison with the UK’s terms of access to the EU market, we note the UK Trade Policy Observatory’s statement that the STRI shows that outside the Single Market, “it is in professional services sectors … where access for foreign providers is restricted”, and that UK lawyers and accountants looking to provide services in the EU would be up against “major restrictions”.

1.10Post-withdrawal, we note the Government’s stated intention to preserve the Provision of Services Regulations 2009, which implements the EU Services Directive. The reciprocal cross-border obligations created by the Services Directive and the EU Member States’ implementation thereof will no longer apply vis à vis the UK. In practice, this means that, even if the UK retains in domestic law its regulations implementing the Services Directive, the EU27 will no longer be required to reciprocate. As a consequence, EU Member States will be permitted to discriminate against UK service providers, within the scope of the EU’s WTO GATS commitments.

1.11We therefore request further clarification of how the Government proposes to use the powers created by the EU (Withdrawal) Bill to modify the Provision of Services Regulations 2009 following EU exit and the end of the Prime Minister’s proposed implementation period. How does it intend to treat the EEA-specific provisions in the Regulations, which implement cross-border, intra-EU provisions of the Services Directive? We particularly ask the Government to clarify whether it considers that retaining the current implementation of the Services Directive vis-à-vis the EU27 is contingent on the EU27 reciprocating within the context of a wider trade agreement, or whether it intends to unilaterally extend these benefits to the EU27 post-withdrawal.

1.12We ask the Government to provide this information by 22 February 2018. In the meantime, we retain the proposal under scrutiny, pending the provision of the information requested. We draw this report to the attention of the Committee for Business, Energy and Industrial Strategy and the Committee for Exiting the European Union.

Full details of the documents

Proposal for a Directive of the European Parliament and of the Council on the enforcement of the Directive 2006/123/EC on services in the internal market, laying down a notification procedure for authorisation schemes and requirements related to services, and amending Directive 2006/123/EC and Regulation (EU) No 1024/2012 on administrative cooperation through the Internal Market Information System: (38450), 5278/17 + ADDs 1–2, COM(17) 821.

Background

1.13The Services Directive (2006/123/EC) established that national rules restricting the right of establishment and the freedom to provide services falling under the Directive must be non-discriminatory, proportionate and justified by public interest objectives. To ensure that all new regulatory measures imposed by EU countries fulfilled these conditions, the Services Directive introduced two notification procedures whereby EU countries would notify the Commission of new or changed regulatory measures affecting services.

1.14These procedures have proven ineffective for a variety of reasons. There is no binding requirement for Member States to notify draft regulations before they have been adopted. External stakeholders have no access to notifications, and failure to notify other parties of proposed measures does not have legal consequences. Member States are not required to demonstrate that proposed measures comply with the Services Directive. The Commission’s power to issue Decisions that block non-compliant measures only applies to establishment, and not to cross border service provision.

1.15These failings mean it is not currently possible to ensure that all new Member State regulation of services is non-discriminatory, justified and proportionate. To effectively enforce the Services Directive under the current rules the Commission would have to initiate legal infringement proceedings against Member States concerning already adopted measures, which is costly, politically difficult and less efficient than ensuring that non-compliant measures are not adopted in the first place. The Services Directive has, as a consequence, proven to be less effective than was originally envisaged.

The proposal

1.16On 10 January 2017, as part of a package of legislative and non-legislative proposals on services, the European Commission published a proposal for a Directive (hereafter ‘the Directive’) clarifying and reforming the services notification procedures laid out in the Services Directive 2006/123/EC, with the intention of addressing the limitations described above. It is intended to complement the existing notification proceeding applicable for goods and information society services.

1.17The proposed Directive modified the existing notification procedure by:

expanding the scope of the current notifications regime to include all authorisation schemes, professional liability insurance, and multidisciplinary activities for both cross-border service provision and secondary establishment;

creating an obligation to notify measures while they are in draft form and introducing a mandatory consultation period of three months, to allow comments by the Commission and other Member States to be made at an earlier stage;

introducing an ‘alert’ system, which allows the Commission to notify a Member State of its concerns regarding a draft measure, with the effect that the Member State may then not adopt the measure for a further period of three months;

extending the Commission’s power to adopt a binding Decision preventing the Member State from implementing a measure, so that it applies to cross-border service provision as well as establishment;

introducing an additional notice period of two weeks for Member States to notify the adoption of legislation;

clarifying the means of notifying;

requiring Member States to demonstrate that any measures proposed are necessary, proportionate and non-discriminatory, in line with the Services Directive;

enabling the Commission to publish Member States’ notifications on a public website to improve transparency and coherence; and

clarifying the legal consequences that a breach of the notification procedure’s requirements would carry, namely that they “should constitute a substantial procedural defect of a serious nature as requests effects vis-à-vis individuals”.

Scrutiny to date

1.18In the Government’s Explanatory Memorandum, the Parliamentary-Under Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Prior) welcomed the proposal, and said that the Government had specifically called for reforms to be made to the notifications procedure. He said that the Government did not anticipate that the proposed reforms would entail a substantial increase in the administrative burden or cost of the notifications procedure. The departmental assessment of the proposal noted that the Directive would require transposition, which would entail new secondary legislation and some amendment of existing legislation that regulates the current notification procedure. Following agreement of the Directive, Member States would have one year to transpose its requirements into domestic law, after which time those provisions would apply.

1.19In its report on the proposal on 22 February 2017, the European Scrutiny Committee noted that the Government had advocated this reform, which would help to deepen the Single Market in services, and supported the Government’s assessment that the proposal’s policy objectives could only be effectively achieved through EU action, and that the proposal was therefore not in breach of the principle of subsidiarity. The Committee sought further information about the implications of exiting the European Union in relation to the proposal.

1.20In the Minister’s response on 28 March 2017, he noted that regulatory cooperation of the kind envisaged by the Directive was achievable outside FTAs and not in breach of WTO rules, and that, EU subsidiaries of UK companies would continue to benefit from the removal of barriers to trade in the EU market, particularly where Member States’ services regulation does not discriminate between EU and third country nationals.

1.21In a follow-up letter of 10 July 2017 the Minister updated the Committee that a General Approach was agreed at the Competitiveness Council on 29–30 May 2017. According to the Minister, a compromise position was reached that involved the removal of insurance schemes from the scope of the proposal and the exemption of late stage parliamentary amendments from the requirement to notify prior to adoption. The clause setting out that a breach of one of the elements of the notification procedure constitutes a ‘substantial procedural defect of a serious nature as regards its effects vis-à-vis individuals’ had also been removed from the compromise text.

1.22In our subsequent report, on 22 November 2017, after the appointment of the Committee following the 2017 General Election, we requested that the Government provide further information about the weakening of the text of the Directive in the General Approach, and further clarify the implications of EU exit across the affected sectors. We specifically sought clarification regarding:

The exclusion of insurance schemes from the scope of the Directive;

The removal of “late stage parliamentary amendments” from the Directive;

The extent to which the deletion of the clause stating that a breach of any element of the notification procedure constitutes a ‘substantial procedural defect of a serious nature as regards its effects vis-à-vis individuals’ would weaken the effectiveness of the enforcement mechanism;

Whether the remaining benefits of the Directive in the General Approach were sufficient to merit the burden of implementing it; and

If the European Parliament advocated a more ambitious approach.

1.23Regarding EU exit, we sought clarification of:

How the Government intended to treat the Services Directive and associated legislation, including the notifications Directive, through the EU (Withdrawal) Bill;

Whether the Government intended to implement the Directive even if it would only be effective for a short period of time before the UK left the EU; and

An assessment of the extent to which access to individual EU Member States’ markets (in those sectors covered by the Services Directive) would be altered when the UK assumed third country status, in the absence of another agreement.

Letter from the Minister of 12 December 2017

1.24Lord Prior’s successor as Parliamentary Under Secretary of State at the Department of Business, Energy and Industrial Strategy (Lord Henley) provides an update in response to the Committee’s questions.

1.25The Minister describes in greater detail the effects of the General Approach, which weakens the text in a number of respects—e.g. through the exclusion of insurance requirements from the scope of the Directive. However, the Minister states that he believes that the Council’s General Approach preserves “most of the advantages of the Commission’s original proposal” (by requiring Member States to notify draft laws in advance of adoption; by requiring Member States to justify why their measures are required and demonstrate proportionality; and by promoting dialogue between Member States and the Commission) and therefore continues to hold significant benefits for UK service providers, thus justifying the changes.

1.26Furthermore, the European Parliament has voted on the proposal in Committee and is seeking to strengthen the proposal rather than to weaken it, suggesting that trilogue negotiations are likely to improve the proposal, from a UK perspective.

1.27Key points from the Minister’s letter are summarised below.

Exclusion of insurance schemes

1.28The Committee asked how significant a barrier insurance schemes were to services trade in the internal market, and for the rationale for their exclusion from the scope of the initiative. The Minister states that the Government has heard from many stakeholders about the challenges they face accessing the correct insurance, differences between professional indemnity insurance in different Member States, and how these inhibit the cross-border provision of services. He cites a European Commission Staff Working Document which summarises the situation. The Minister states that the Council excluded insurance requirements as some Member States argued that “they may change frequently and in minor ways”.

1.29Given that the Commission had identified insurance schemes as one of the chief barriers that inhibited service providers seeking to operate on a cross-border basis, their exclusion from the proposal clearly weakens it.

Removal of late stage parliamentary amendments

1.30Under the General Approach agreed by the Council, the Member States would not be required to amend their notification in advance if late stage parliamentary amendments were introduced. The Committee sought further clarification, as this would potentially provide Member States with a loophole to escape the effects of the notification procedure. The Minister clarifies that, although late stage parliamentary amendments are excluded from the requirement for advance notification, “the original proposal would need to have been notified, and the amendments would need to be notified within two weeks after adoption”.

1.31The removal of late stage parliamentary amendments from scope therefore appears to be a sensible compromise, which will ensure that the ability of parliaments to make late stage amendments to domestic legislation is not unduly constrained, without completely undermining the objectives of the initiative.

Consequences of a breach of the notification procedure

1.32The Minister explains, in detail, that the (now deleted) clause in the Directive had sought to codify CJEU case law which established that a breach of equivalent procedural obligations in the Technical Standards Directive (TSD) to notify resulted in a measure adopted in breach of these obligations being unenforceable against an individual in a national court. The Minister clarifies that the deletion of this clause does not necessarily mean that a breach would not be considered a serious procedural defect, but that a CJEU judgement would be required to consider it so.

1.33The Minister concludes that, while retaining the clause would have strengthened the enforcement of the Services Directive, the possibility that a breach of the procedure could be considered a substantial procedural defect by the CJEU remains a powerful incentive for Member States to comply with the notifications procedures set out in the Directive.

1.34The Minister appears to understate somewhat the significance of this deletion from the text. In effect, if the text of the General Approach were agreed, for a trader to show that a breach of the procedure was a substantial procedural defect, it would have to take a case to the CJEU which would have significant cost and time implications. So, in legal and practical terms, the incentive the General Approach creates for Member States to comply with the notifications procedures set out in the Directive is not commensurate with creating a procedural mechanism that would mean that a breach of procedure would automatically be considered a substantial procedural defect and have the effect of rendering the measure unenforceable against an individual.

The European Parliament

1.35The Minister states that the European Parliament has now voted on amendments at committee stage, and that it supports a more ambitious approach than the Council’s General Approach. Notable differences include retaining the requirement to notify changes in insurance requirements, a requirement to notify changes in rules around commercial communications, and retention of the language that breaches of the procedure should be considered a “substantial procedural defect”. The Parliament’s emerging position is therefore in line with UK interests—more so than the Council’s General Approach.

Brexit implications

1.36In response to the Committee’s request for a summary of the Department’s findings on the extent to which UK access to EU markets in sectors covered by the Services Directive will be affected by Brexit, the Minister states that:

“Leaving the EU will not put a stop to UK businesses’ ability to access EU markets and to set up in and invest in EU countries. In many of the sectors covered by the Services Directive, particularly those that are less regulated, foreign businesses are able to operate in the EU in much the same way as local businesses.”

1.37However, the Minister appears to somewhat contradict his point that leaving the EU will not put a stop to UK businesses’ ability to access EU markets, when he observes that:

“In certain sectors, particularly those that are very highly regulated such as the legal sector, there are more restrictions in different EU countries restricting the ability of non-EU firms to operate in the market.”

1.38The Government does not provide any detailed analysis of the extent to which access to the EU market is curtailed for third countries, by sector. However, he directs the Committee to:

the OECD Services Trade Restrictiveness Index which, the Minister states, provides a source of examples of restrictions affecting third county businesses seeking to trade in EU Member States, with the caveat that some of these restrictions may also affect domestic and EU businesses (however, the Index does not facilitate comparisons with the intra-EU trade regime on the basis of which the UK current trades with other EU Member States); and

States that Committee members will be able to read the Government’s sectoral analyses of market access in sectors covered by the Services Directive.

1.39The Minister adds that the Services Directive is implemented in the UK through the Provision of Services Regulations 2009, which the EU (Withdrawal) Bill will preserve, and correct as necessary, and that this will also be the case for any secondary legislation implementing the notifications Directive.

1.40The Minister undertakes to keep the Committee updated on any further progress.

Previous Committee Reports

Second Report HC 71—xxxi (2017–19) chapter 9 (22 November 2017); Thirty-Third Report HC 71–xxxi (2016–17), chapter 2 (1 March 2017).