Background
		Government consumer protection activities protect the public health, safety and welfare and make free markets more efficient by allowing buyers to make more informed choices.
		A wide range of local, state and federal agencies perform some consumer-related functions -- educating buyers about their choices, licensing providers, enforcing minimum standards for professional competence, ethical behavior and product safety and reliability.
		A long-standing issue concerning the State's consumer protection efforts has been the independence of the professional boards and their relationship to the director of the Department of Consumer Affairs.

Background

The State's response to the Consumer Movement has been to vest a wide variety of public agencies with some consumer protection function. These protections are justified by economic analyses that show certain government interventions increase efficiency in the market. Perhaps more importantly, practical politics often require a government response when the unqualified or the unscrupulous take advantage of consumers.

In California, specific functions are performed by several departments. In some cases consumer protection is a new addition -- as it is with the Department of Motor Vehicles' role in enforcing the automobile lemon law. In other cases, programs were created for the sake of the consumer, but have evolved with the careful guidance of the regulated industry.

In California, as in most states, the regulation of professions and some businesses is accomplished by semi-autonomous boards grouped within a department. The California Department of Consumer Affairs -- in addition to providing administrative support to the boards -- has broad authority to advance consumer protections wherever needed.

Over the years, the department has made significant contributions to making Californians better consumers, helping to identify bad actors, and defining a marketplace that induces the spirited competition that leads to better service at lower prices. But the department also is haunted by the conflicting relationship between itself and the semi-autonomous boards and commissions, and the department's overall effectiveness has been limited by significant funding reductions.

The Public Sector and the Public Interest

A perennial public policy issue is the role of the government in the marketplace. One economic justification for government intervention is "market failure," when the dynamics of the market fail to provide a desired commodity in a competitive way. For instance, when it has been demonstrated that a certain good or service is most efficiently provided by a single provider, the government has regulated monopolies. Environmental pollution is another market failure -- because the market does not consider the economic costs of the degradation -- and government has intervened to correct for that failure.

Two other common market failures are the provision of public goods and "inadequate information."⁽⁵⁾ Both of these failures are used to justify the government consumer protection activities:

• Consumer Protection as a Public Good. Public goods are ones that for a variety of reasons are not adequately provided by private suppliers. Economists often use military defense as the classic public good: If government did not provide for the public defense, the market would not either. Among the reasons is the "free rider" problem. If public defense were not supported by public taxes, some people would support it, some people would not -- but all would benefit. So it is, economists say, with consumer advocacy: Few people want to do it or pay for it, but everyone stands to benefit from it.



• Consumer Protection as Information. Many consumer protection activities -- including regulatory mechanisms -- are premised on the consequences to consumers, the economy and society at large due to inadequate information. For instance, a patient who does not know that a doctor is a fraud can suffer extreme injury. To counter this lack of information, the State sets minimum standards and enforces those standards to ensure competence -- improving the commerce of medical practice.

State policy makers have been relatively quick to create regulations where inadequate information can cause harm to the public health, safety and welfare -- if not because regulations can make the market more efficient, certainly because it is responsive to public concerns.

In practice, regulators have asserted that strict licensing provisions reduce the need for extensive enforcement mechanisms -- and that is the rationale for license exams and other minimum requirements for lawyers, doctors, accountants and engineers that can be difficult to pass. However, a practical consequence of this trade-off is that new providers may be artificially kept out of the market, reducing competition and increasing prices. And if enforcement is inadequate, consumers may be assuming too much about a provider -- and as a result still suffer the consequences of "inadequate information" anyway.

In other fields, low licensing requirements are expected to be counterbalanced with more rigorous enforcement efforts. That is the case in security guards, where turnover is high and the industry wants to minimize recruitment times. It is also the case in vehicle repair -- where workers are not licensed but registered, resting virtually all of the consumer protection on the efficacy of enforcement programs.

In more recent years, however, many industry-specific regulatory bodies have come under criticism for rules that do more to limit competition than protect consumers. As the Little Hoover Commission noted more than 30 years ago, too many businesses are being regulated at the behest of those businesses.

Industry-specific regulatory mechanisms are legally complemented by broad antitrust and anti-competition statutes, fraud, unfair business practices and other legal provisions intended to reduce consumer abuses in the marketplace.

From an economic standpoint, consumer activists argue that well- executed consumer protections are good business, as described in testimony from the California Public Interest Research Group:

Strong consumer protections and effective enforcement powers cut down on unacceptable business practices and provide consumers additional powers of redress, thereby making the marketplace more efficient and properly self-regulating. When bad corporate practices are allowed to continue and proliferate, honest businesses are left to suffer along with consumers who get ripped off.⁽⁶⁾

From a more practical and political standpoint, consumer protection efforts are government's response to citizen complaints, as described in testimony by Consumers Union:

Consumers often feel powerless when fighting businesses, particularly large corporations. That imbalance of power, combined with the impact on one's quality of life that consumer problems often have, are important reasons why the State needs to take a strong role in assisting consumers.⁽⁷⁾

And in numerous ways, the State has taken a strong role. Regulators are fond of saying their rules govern from cradle to grave because the State regulates the doctors that bring Californians into the world and the funeral, cemetery and embalming industry that usher them out. For practical reasons, these consumer protection efforts are diffused throughout government -- a reality that creates opportunities and challenges for those charged with consumer protection.

Broad-Based Consumer Protection

If closely examined nearly all state agencies have a consumer-related function. In some instances, consumer protection was the inspiration for its creation -- but that fact may have been lost along the way as regulators became more sympathetic to those they regulate than the public they serve.

Thanks, however, to nonprofit consumer advocates and to government "re-engineering" efforts, consumers do not have to look quite so hard to find the programs operating on their behalf. In the nearly ritualized exercise among bureaucracies of the 1990s, efforts to identify "customers" have refocused industry-aligned agencies away from fee-payers and back toward taxpayers.

Many state agencies have recognized and formalized their role in consumer protection by establishing dedicated units to respond to calls from the buying public, investigate complaints and more vigorously enforce regulations that had long been central to their statutory mission. Some of those departments -- besides the Department of Consumer Affairs -- that have named consumer assistance or protection units are identified in the table below.

Other agencies have not designated special consumer divisions, but still have expanded the function. The Department of Real Estate, for instance, proactively has expanded the information it makes available to buyers about the agents that the State regulates. And others, such as the Department of Social Services, have seen their consumer-related role increase as the number of people using a regulated service increase.

The Attorney General also plays a broad and large role. Many state agencies rely upon the Attorney General to act on their behalf during enforcement and other legal proceedings. The Attorney General also enforces anti-competition, fraud, false advertising and other provisions. In many of these instances, the Attorney General has coordinated with county district attorneys, more than one regulatory agency and even other states. It focuses on cases with statewide significance or those with victims in more than one county.⁽⁸⁾

This diffused approach reflects a rational distribution of responsibility, leaving to subject-matter experts the responsibility for protecting that group of consumers. But it also creates the potential for confusion, duplication or unintended gaps in the State's protection efforts.

For example, medical services are increasingly dominated by managed care providers. So who does a consumer turn to? Physicians are licensed by the Medical Board, which is in the Department of Consumer Affairs. Health maintenance organizations are regulated by the Department of Corporations. Hospitals are licensed by the Department of Health Services. And to complicate matters, the Department of Health Services has some authority over those health maintenance organizations that provide Medi-Cal services.⁽⁹⁾

Similarly, lemon law violations can be reported to the Department of Motor Vehicles or the new Motor Vehicle Board, but Consumer Affairs arbitrates many of the cases.

In addition, no matter how these functions are grouped organizationally, public managers face a persistent challenge of divided loyalties and conflicting expectations. Consumer advocates, some policy makers and even some sections of the statutes expect those agencies to stand up on behalf of the consumer. Conversely, the businesses, other policy makers and other sections of the statutes expect and direct those agencies to work on behalf of the industries by developing new markets, promoting California-made products and limiting competition.

The Department of Consumer Affairs is often described as an umbrella agency for the semi-autonomous professional boards that were created over time. But by law, the Department of Consumer Affairs is supposed to be much more: It is charged with monitoring the consumer protection efforts of other state agencies, advocating within the upper echelon of the executive branch on behalf of consumers, and representing consumers wherever their interests are at stake.

The History and Nature of the Licensing Boards

The longest standing dispute over the State's consumer protection infrastructure involves the oldest part of that infrastructure.

In 1876, the Legislature passed the Medical Practices Act, which established minimal standards for physicians, developed licensing exams and levied fines for violations. Before the turn of the century separate boards had been created to regulate dentists, pharmacists and veterinarians. By the late 1920s, 10 boards existed -- certifying accountants, architects, barbers, cosmetologists, dentists, embalmers, optometrists, pharmacists, physicians and veterinarians.

While inspired by consumer protection, once established the boards functioned more like professional guilds than regulatory watchdogs. Examinations did as much to limit competition and hold up prices as they did to screen out incompetence. Investigation and enforcement efforts were lax.

In 1929, the Department of Professional and Vocational Standards was created to consolidate administrative functions of the boards. But that reform did little to dilute the independence of the boards or to diminish the control of the boards by the professions they regulated.

By the time the Little Hoover Commission reviewed the department in 1967, the abuses were well-known: "There appears to be no question but that the licensed groups benefit; the benefit to the public, on the other hand is not always as clear."

In 1970, Gov. Reagan proposed reorganizing the department. The purpose of the plan was three-fold:

• To provide consumers an effective consumer advocate within state government.



• To provide an alternative means of resolving disputes between consumers and businesses short of court actions.



• To provide consumer education as the best consumer protection.

The plan went into effect, and the concepts were affirmed by the Legislature that same year in the Consumer Affairs Act.

The act changed the name from the Department of Professional and Vocational Licensing to the Department of Consumer Affairs. It authorized the department to take legal action to protect consumer interests, to receive and act on consumer complaints, to report on the consumer protection efforts of other departments and to advocate on behalf of consumers. Much of the authority is vested specifically with the director of the department. The director's responsibilities as defined in statute appear in the adjacent box.

Currently, the department issues more than 2.1 million licenses in more than 200 occupations. The department does this by setting minimum qualifications, issuing licenses, registerring or certifying practitioners, investigating complaints, disciplining violators and educating consumers and licensees.⁽¹⁰⁾

The Department of Consumer Affairs acts as an umbrella agency for what the director calls "37 small departments" that regulate and license such disparate professions and businesses as contractors, embalmers, car stereo installers, futon manufacturers and auto mechanics.

Nine programs or bureaus currently are administered directly by the department: Arbitration Review, Barbering and Cosmetology, Automotive Repair/Smog Check, Cemetery, Electronic and Appliance Repair, Funeral Directors and Embalmers, Home Furnishings and Thermal Insulation, Private Post-Secondary and Vocational Education, Security and Investigative Services. The balance of the businesses are regulated by 28 semi-autonomous boards, commissions and committees. Appendix E provides a complete listing of the boards.

Combined, the department has a total of 2,526 civil servants. Roughly half of those work for the boards and commissions and the balance work for one of the bureaus or in a variety of support services, such as department's enforcement or investigations divisions. Combined, the department has a budget of $306 million a year. Nearly half of that, $145 million, is spent by the boards and commissions.

Each of the boards is self-governing: the department's role in relation to them is largely ancillary, providing computer and mail services, for instance. The department has no input on such areas as staffing, which in some boards may be a crucial determinant in the direction board members move. The department's leverage with the boards extends to the director's authority to disapprove rules, regulations or fee changes. The board can override the director's veto, though, with a unanimous vote. By contrast, the department has total authority over its own bureaus and programs.

Many of the most horrific cases of regulatory abuse are now historical. Former directors tell of examination procedures in effect as recent as the 1970s that resulted in higher passing rates for California-trained and Caucasian professionals.⁽¹¹⁾ The problems now are much more subtle -- in part because a number of laws have been enacted that counter these abuses -- including civil rights laws, open meeting and public records laws, and financial disclosures. But many of these laws rely on the spotlight of public scrutiny to prevent abuses or uncover them when they happen. The boards do not receive the same kind of public participation that, say, city councils and school boards receive.

And not all abuses are ancient history. As recently as 1995, the Legislature took specific action regarding the Structural Pest Control Board to counter "apparent unwillingness of the SPCB to address widespread abuses in the structural pest control industry."⁽¹²⁾

Also in that case, the Joint Legislative Review Committee observed that the intent language of the statute creating the board was backward. The law said that "ensuring consumer protection" was a means to attain "a fair and competitive marketplace." Rather, the committee noted, the purpose of encouraging fair and competitive markets is to provide consumer protection. In other words, consumer protection is the end, not the means.

Efforts to realign the authorities between the department and the boards are detailed in Finding 3 of this report. In general those efforts have been both persistent and largely rebuffed by the boards and the professions associated with them.

In terms of the department's larger role -- as omnibus consumer advocate and educator -- the department also has a troubled history. For a variety of reasons explored in greater detail in Findings 1, 2, and 4, the department is not living up to the expectations of consumer advocates and department officials themselves.

The department's director conceded to the Commission that "consumer affairs" may be a misnomer for the agency because its focus remains what it was 30 years ago: licensing and regulating a variety of professions that ultimately comprise only a small portion of the marketplace.

Administratively, the Department of Consumer Affairs also has some unusual characteristics. The department is one of four departments involved in a pilot project on performance-based budgeting. The Little Hoover Commission's 1995 report, Budget Reform: Putting Performance First, was a detailed study of this process.

The effort, which the Legislature approved in 1993, gives the department great flexibility in such areas as budgeting and contracting, but demands the participating departments submit annual performance reviews and demonstrate results: a cost-effective program, performance innovations and identifiable savings. The director argues the department has met these goals, but the staff at the Legislative Analyst's Office believes Consumer Affairs has not been able to quantify its successes convincingly.

The Sunset Review Committee

Years of debate failed to yield a structural solution to the dysfunctional relationship between the boards and the department. Eventually policy analysts and reforms began to define the solution in terms of a process that might bring about the desired change. The Legislative Analyst, the Little Hoover Commission and others characterized the process as a sunset review -- submitting existing government agencies to the same rigorous test that should be used to determine when a new agency is considered for creation.

The boards and some of the professions argued that oversight occurred annually during the budget process. But in 30 years the Legislature has created numerous regulatory schemes while only eliminating two boards: those governing dry cleaners and auctioneers.

In 1993 and 1994 the Senate Business and Professions Committee and the Assembly Consumer Protection Committee began to review the regulatory boards and identified six fundamental problems that the Legislature at large agreed needed correcting:

1. There were licensing laws and regulations which clearly benefited the profession but not the consumer or the professional candidate who wanted to enter into the profession. In effect, the licensed group, through the board and its licensing program, had set up artificial barriers of entry into the profession that enabled it to control the availability and cost of services and restrict competition.

2. Little or no disciplinary actions were being taken against licensees. Board would argue, "that they were doing such a good job of weeding out the incompetent, that there was little need for enforcement." But when the number of complaints were reviewed -- it was not clear why so few were actually disciplined.

3. Committees of the boards, made up of volunteer professionals, would make decisions usually accorded to staff or the executive officers concerning investigations or disciplinary actions to be taken against licensees.

4. Boards were not carrying out their statutory responsibility for particular programs, or taking an extremely long time to implement.

5. Boards were not operating their licensing, examination and enforcement programs in an effective and efficient manner. (They) were not responding to consumer complaints, or resolving complaints in a timely fashion. Program spending was not prioritized and some programs were too costly or completely unnecessary.

6. Boards lacked definitions of professional standards, or what amounted to incompetent, negligent or unprofessional conduct.⁽¹³⁾

As a result of these findings, the Legislature in 1994 established the Joint Legislative Sunset Review Committee (SB 2036; Chapter 908, 1994) and a process for routinely and intensely scrutinizing the performance of the boards. The statute requires the boards to first analyze themselves, their goals and objectives, priorities and enforcement efforts. In short, the boards were asked to justify their existence.

After their self-examination, the boards are reviewed by the Joint Sunset Committee. The basic issue for the Joint Committee to consider during its deliberations is whether the State should continue to regulate this area, and if so, what changes should be made to these boards to improve their overall effectiveness and efficiency to ensure that the interests of California's consumers are protected adequately.⁽¹⁴⁾

Importantly, the 1994 law only provides for the regulatory boards to be eliminated, not the regulations. In the event a board is eliminated, those responsibilities pass to the department.

It is difficult to measure the committee's effectiveness if the measure is the de-boarding of a profession. For starters, all of the reviewed boards may have met the test established by the Legislature as being necessary to protect the public safety.

But the politics of regulation are such that even in some cases where the committee concluded the boards were unnecessary, the professions were capable of recreating the regulatory framework.

As a result of sunset review, the Board of Landscape Architects has become a subset of the Board of Architectural Examiners and the Board of Barbering and Cosmetology has become a program within the department. On July 1, 1997, the Board of Guide Dogs for the Blind was sunsetted. But as a result of subsequent legislation, it was "sunrised" on Jan. 1, 1998.

At the same time, however, the committee has significantly improved the legislative oversight of all of the boards. By requiring the boards to scrutinize themselves under the cloud of possible elimination, some boards have made reforms on their own. For instance, more disciplinary actions are being taken by the boards and backlogs in complaints have been reduced.⁽¹⁵⁾

The boards also have cut costs, and they have recovered more of their investigation costs through enforcement actions. Some boards have lowered the barriers to new market entrants by converting to national standardized tests, while other boards have validated unique aspects of their examinations to ensure they were testing what should be tested. Some boards also have developed more reasonable reciprocity with licensing agencies in other states.

Summary

Over the last century, a very clear role for the government -- and in particular state government -- has been defined in terms of consumer protection. Those protections most often are regulatory mechanisms that are spread throughout the government based on the subject expertise of the public entity -- motor vehicles, public utilities, health care. Some of the earliest regulatory efforts were of professions, conducted by quasi-independent boards. Those boards were first placed under the umbrella of a department for administrative purposes, but that department was later expanded to provide over-arching consumer protection. As embodied in the Department of Consumer Affairs, the State's consumer protection efforts face two ongoing challenges -- how to ensure that the boards are really protecting the public and not the regulated profession, and how to make sure that the department is doing all it can to protect consumers in its broader mission.