Select Committee on European Union Thirty-Eighth Report

The Services Directive Revisited

Chapter 1: Background

The original draft Directive

1.  In January 2004, the European Commission published a draft Services Directive aimed at creating a single market in service industries. The Committee reported on the proposal in July 2005[1], when we concluded that the Directive was essential to the removal of unnecessary and unjustified obstacles to trade and to flexible markets thereby making the European Union more competitive in a global economy. However, the draft Directive provoked vocal opposition in a number of Member States, opposition that struck a chord in the European Parliament.

2.  Service industries, including construction, electricity, gas and water services in addition to more traditionally defined services, account for over 70% of the Gross Domestic Product of EU Member States. However as we set out below, some services are excluded from this Directive and others are derogated from that part of the Directive which deals with temporary service provision.

3.  The purpose of the Services Directive is to facilitate the free movement of services between Member States. Although in principle there is free movement, existing barriers protect incumbent domestic operators, reducing competition and inflating prices; these barriers create or preserve existing returns to incumbents. There is also often excessive paperwork, which erects cost-creating barriers to new operators.

4.  Many services by their nature are best provided by relatively small firms. The often considerable and confusing bureaucracy required before provision of a service is legally allowed creates a difficulty in entering overseas markets, where a firm may wish to test the market by operating temporarily whilst it gauges the demand for its services.

5.  The overriding aim of the original draft Directive was to reduce barriers to the operation of a single market in the provision and purchase of services. It sought to do this by reducing restrictions on the establishment of services in another Member State and reducing restrictions on the provision of services on a temporary or occasional basis in another Member State. Our original inquiry and subsequent consideration of the revised draft Directive have largely concentrated on the latter as this is the area which has generated the most controversy.

6.  Proponents of both drafts of the Services Directive argue that reducing these restrictions will have the range of benefits typically associated with the greater liberalisation of the EC Internal Market, namely: the intensification of competition; increased pressure on underperforming firms to improve; and as a result an improvement in productivity and innovation to the benefit of consumers.

7.  As with any process of liberalising the Internal Market where previously restrictions were in place there will be winners and losers, even though the forecast outcome is a substantial overall benefit. It was to be expected therefore that opposition might come from those who felt threatened by liberalising measures, whether they be individual Member States or the interests of business and organised labour.

8.  In some countries with higher per capita incomes, concerns about the impact of liberalising services were encapsulated in the phrase "a race to the bottom", implying concerns that in some important senses, liberalisation would lead to a lowering of standards. These concerns found expression in the European Parliament.

9.  In February 2006, the European Parliament suggested a series of amendments to meet such concerns, and the Commission has largely accepted those amendments in its revised draft Directive. The Competitiveness Council reached political agreement on the revised draft on 29 May. The text will now go back to the European Parliament for a Second Reading.

10.  On 25 May, we wrote to Lord Sainsbury ahead of the Council meeting detailing our emerging conclusions from this inquiry (letter in Appendix 2) and were content for the United Kingdom to agree to the draft Directive as it stood. This report formally lifts the scrutiny reserve on the Directive.

Our previous recommendations

11.  In our 2005 report, we strongly endorsed the previous version of the Directive. We believed it "important for the European Union to be bold and resolute in its embrace of the single market" (para 180) and we reached the conclusion that, for the most part, the Directive provided the mechanism through which this could be achieved. We also found most of the concerns expressed by others to be unfounded.

12.  We endorsed the horizontal nature of the Directive, by which services were not defined exhaustively nor categorised but rather the same framework should apply in an overarching manner. This approach seemed preferable because a number of factors are common to a range of services. It may be contrasted with sectoral harmonisation: we saw "a clear danger in the sector-by-sector harmonisation of regulations route [in] that negotiations will become bogged down for many years". (para 182) We endorsed mutual acceptance (of national standards), rather than mutual recognition, so that for example if a plumber is viewed as qualified in Poland, he is qualified to work in the United Kingdom, subject to some safeguards.

13.  We viewed the ability to provide services on a temporary basis as an important freedom, and therefore asserted that "Nothing should be done through the Directive … that diminishes in any way the existing legal freedom to provide services. Rather, the aim should be to simplify and strengthen that freedom." (para 186) We called for a clear set of guidelines regarding the nature of "temporary" in order to provide legal certainty. Some witnesses to our original inquiry were concerned that "temporary" was only defined as the alternative to established provision, without explicit criteria which make an enterprise established. (para 60)

14.  We strongly supported the Country of Origin Principle (CoOP) as the underlying basis for the operation of a business in another Member State. This is the principle that if an enterprise complies with the rules applicable in its country of origin, then it qualifies to provide services on a temporary basis in another Member State, despite the differences there may have been between the regimes. The alternative is a country of destination principle, under which an enterprise is not allowed to provide a service unless the legal and regulatory requirements of the destination or host country are complied with. We felt that the latter would put substantial demands upon the information that businesses, especially SMEs, would require whenever they wished to do business in another Member State on a temporary basis.

15.  We were also of the view that certain health and safety concerns had been exaggerated and doubted the need for extensive derogations in this respect. Here it was clear that some comfort should be offered to consumers as to the minimum quality of service they should expect; indeed if none were offered consumers might become reluctant to purchase the service. However, the danger was that "health and safety" could provide a back door through which onerous requirements could be placed on providers from another Member State. (paras 196-200)

16.  We took the view that many of the concerns expressed about a "race to the bottom" in terms of employment conditions would be met by the overriding application of the Posting of Workers Directive (Directive 96/71/EC) to employees posted to work in another Member State. The effect of this would be that such employees would be covered by the laws and regulations relating to employment in the host country.

17.  We called for the Commission to rule out "blanket derogation for all services of general economic interest," (para 208) as distinct from services of general non-economic interest. All services of general interest are provided at low cost or free on demand, but those of general economic interest are typically produced by private or public enterprise in return for payment from the public purse.

18.  Nevertheless, although we provided a strong endorsement for the approach adopted by the Commission's drafters, we acknowledged that the path to adoption of the Services Directive was not smooth.

19.  In particular, we were "doubtful that the changes the United Kingdom may need to make in registering or providing information on service businesses that wish to trade in other Member States have been fully grasped" (para 206). This was because the United Kingdom takes a rather relaxed approach to the provision of many services. No registration process is required in order to set up in business in many service occupations, but this means that the first draft Directive's proposed mechanism of home country supervision of an enterprise is more complex for the UK than for other states which have a more formal approach to many service activities. For example, a German hairdresser is registered. Hence at some level of Government, information on the enterprise is collected and can be verified. The same is not true for a British hairdresser, who might not even be registered for VAT purposes.

The Commission's revised draft Directive

20.  The initial draft Services Directive has now been revised considerably.

21.  Although the word "horizontal" does not appear in the revised draft Directive, it is clear that it remains horizontal in nature. That is, although there is a list of indicative services covered (Recital 14), this is not exhaustive and unless specifically excluded or derogated, the draft Directive is intended to cover all services. However there are significant exclusions and derogations which are dealt with below.

22.  The revised draft Directive retains the right to provide services in another Member State on a temporary basis and it is clearly viewed as an important mechanism through which trade in services between Member States can develop—this is set out the second paragraph on the aims of the Directive and is discussed at several further points, for example in relation to Article 16 discussed below. The concept of temporary has been codified somewhat by reference to existing case law (Recital 36b).

23.  The revised draft makes it clear in Article 3 that the Posting of Workers Directive prevails over the Services Directive, where the two conflict. This was a matter that we viewed as explicit already, but was the subject of some previous confusion by certain parties in the earlier version of the Directive. The same article also clarifies that the consumer protection law (and more generally, any contractual or non-contractual relationship resulting from the supply of services) is that of the state in which the consumer resides, rather than that of the provider.

24.  However the basis on which services may be provided temporarily or occasionally without establishment in another Member State has changed from a Country of Origin Principle to a Country of Destination Principle. In the revised draft Directive both the right to provide services on a temporary basis and the legal and regulatory framework within which such operations may take place are brought together in the single phrase "the Freedom to Provide Services".

25.  While the revised draft Directive places the legal framework clearly within that of the Country of Destination, it seeks to ensure that this does not become a major constraint upon the provision of services on a temporary or occasional basis.

26.  It seeks to achieve this in two ways. Firstly Article 16 (1) limits the ways in which host country requirements can be applied: "Member States shall not make access to or exercise of a service activity in their territory subject to compliance with any requirements which do not respect the following principles: (a) non-discrimination … (b) necessity … (c) proportionality."

Article 16 (1)

Freedom to Provide Services

Member States shall respect the right of service providers to provide services in a Member State other than that in which they are established.

The Member State in which the service is provided shall ensure free access to and free exercise of a service activity within its territory.

Member States shall not make access to or exercise of a service activity in their territory subject to compliance with any requirements which do not respect the following principles:

(a)  non discrimination: the requirement may be neither directly nor indirectly discriminatory with regard to nationality or, in the case of legal persons, with regard to the Member State in which they are established,

(b)  necessity: the requirement must be justified for reasons of public policy, public security, public health or the protection of the environment,

(c)  proportionality: the requirement must be suitable for securing the attainment of the objective pursued, and must not go beyond what is necessary to attain that objective.

27.  Secondly under Article 16 (2), there is a list of things, such as authorization requirements to register and obligations to possess identity documents relating to the activity, that cannot be imposed upon service providers from another Member State.

Article 16 (2)

Freedom to Provide Services

Member States may not restrict the freedom to provide services in the case of a provider established in another Member State by imposing any of the following requirements:

(a)  an obligation on the provider to have an establishment in their territory;

(b)  an obligation on the provider to obtain an authorisation from their competent authorities including entry in a register or registration with a professional body or association in their territory, except where provided for in this Directive or other instruments of Community law;

(c)  a ban on the provider setting up a certain infrastructure in their territory, including an office or chambers, which the provider needs to supply the services in question;

(d)  the application of specific contractual arrangements between the provider and the recipient which prevent or restrict service provision by the self-employed;

(e)  an obligation on the provider to possess an identity document issued by its competent authorities specific to the exercise of a service activity;

(f)  requirements, unless those necessary for health and safety at work, which affect the use of equipment and material which are an integral part of the service provided;

(g)  restrictions on freedom to provide the services referred to in Article 20.

28.  Notwithstanding the above limitations imposed upon the application of host country laws and regulations, the revised draft Directive provides something of a loophole under 16 (3), which states that "Member States will not be prevented from imposing requirements on the service provider where such requirements can be justified" for the reasons set out below.

Article 16 (3)

Freedom to Provide Services

The Member State to which the service provider moves shall not be prevented from imposing requirements with regard to the provision of a service activity, where they are justified for reasons of public policy, public security, public health or the protection of the environment, and in accordance with paragraph 1. Nor shall that Member State be prevented from applying, in conformity with Community law, its rules on employment conditions, including those laid down in collective agreements.

29.  There are a number of exclusions and derogations which were not in the original draft Directive. Exclusions apply where services are entirely excluded from the scope of the Directive, whether those services are provided on a temporary or an established basis. Derogations exempt certain service areas from those parts of the draft Directive relating to the provision of services on a temporary or occasional basis, for example Article 16. It follows therefore that some service industries are not covered at all by the Directive, while others are covered only when operating on an established basis, and other services are covered entirely.

30.  The exclusions are set out in Article 2; amongst other things, the Directive excludes all of healthcare, most social services, gambling, services of temporary work agencies, private security services audio-visual services and some official services of professions. "Services of general non-economic interest", which include things such as defence and social services provided without specific charge, are also excluded from the scope of the Directive (Recital 7a). Some services are excluded because they are the subject of other directives such as the Financial Services Directive.

31.  Turning to the derogations, services of general economic interest, for example water supply, are derogated from Article 16 by Article 17. Thus they will not benefit from the freedom to provide services on a temporary basis, but are subject to the other provisions of the Directive. Also derogated by Article 17 are specific services reserved within a country to the activities of a particular profession in some Member States; this could be a potential cause of difficulty for entrants from other Member States, where they may be able to operate.


32.  The timetable for implementation of the Directive is as follows. A period of two years is proposed for implementation of laws, regulations and administrative provisions necessary to comply with the Directive. A period of a further year is allowed for the Commission's evaluation of reports on the implementation coming from Member States. The Commission will then present a summary report to the European Parliament and to the Council, accompanied where appropriate by proposals for additional initiatives.

33.  Implementation requires a series of actions, in terms of registration/ authorisation of enterprises that may mean both implementing new legislation or procedures and abolishing existing legislation or requirements.

34.  We note for example, that Article 33a places an obligation on Member States to provide certain information on providers established in their territory to other Member States on request. In particular, this includes that the provider is not exercising its activities in an unlawful manner; results of checks may be required of the Member State of establishment.

35.  It will also require a thorough investigation of a diverse set of existing regulation that have grown up over many years for many different purposes, but which may now have outlived their usefulness (or where usefulness cannot be demonstrated in terms of the principles of Article 16). This is likely to be a significant activity.

36.  In addition, within three years of the Directive entering into force, Single Points of Contact must have been established (see Articles 6 and 22). These are to allow potential service providers to complete any procedures and formalities required in order to provide services on a temporary or established basis.

37.  We discuss the nature of such points of contact together with the evidence received from our other witnesses, below in Chapter 2. The Committee's recommendations can be found in Chapter 3.

38.  We make this report for the information of the House.

1   'Completing the Internal Market in Services' EU Committee, 6th Report 2005-6, HL 23 Back

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