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18 August, 2016
More than six months have passed since the full implementation of the Hong Kong Competition Ordinance (the “Ordinance”) on 14 December 2015. During this period, the Hong Kong Competition Commission has been busy with a wide spectrum of activities – ranging from educating the business community and considering a block exemption application for the shipping industry, through to enforcement actions (including issuing warnings and asking parties to take action to bring offending conduct to an end), advocacy and conducting market studies.
Highlighted below are some of the more significant developments in recent months.
Enforcement activities
On 14 June 2016, the Commission disclosed for the first time statistics on its enforcement activities. Rose Webb, Chief Executive of the Commission, announced in a speech that since the implementation of the Ordinance:
The Commission has received 1,250 enforcement contacts, of which 272 related to alleged cartels, 238 related to alleged resale price maintenance, 267 related to alleged abusive conduct and 224 related to the general state of competition.
Out of the 1,250 enforcement contacts, the Commission has moved 111 cases to the initial assessment phase, 10 cases of which are currently under in-depth investigation.
On 31 May 2016, the Commission published its first ever enforcement action:
The Hong Kong Newspaper Hawker Association had issued a notice to its members to increase the recommended price at which they sold certain branded cigarette products.
The Commission decided not to take any further action after the association quickly rectified its conduct by withdrawing the price recommendation notice and reminding its members that they should individually determine their own prices. The Commission’s
decision took into consideration the fact that the conduct was public, in apparent ignorance of the law and that the association quickly rectified its conduct.
Project on trade and professional associations
On 14 March 2016, the Commission published a press release announcing the progress of its compliance project on trade and professional associations.
The statement noted that the Commission had identified over 20 associations whose public practices appeared to place them at high risk of contravening the Ordinance. Examples of high risk practices include price recommendations or fee scales as well as codes of conduct or rules that may restrict price competition between competing association members.
Among the identified associations, the Commission noted that 12 associations removed or were in the course of removing their price restrictions or fee scales. The Commission warned that those associations not taking steps to end problematic practices were risking enforcement action.
In the financial services sector, the Commission has been in discussion with the Hong Kong Association of Banks since prior to the full commencement of the Ordinance on the Code of Banking Practice. The Code, which is non-statutory and is not exempted from the Ordinance, was issued by the Association of Banks and endorsed by the Hong Kong Monetary Authority. The Authority expects all banks to comply with the Code and monitors their compliance.
Prior to 14 December 2016, the Association of Banks decided to suspend certain provisions of the Code that risk contravening the Ordinance. However, the Authority issued a statement reminding all banks that they should continue to comprehensively comply with the Code notwithstanding the potential risks. This has raised a dilemma for banks to determine whether or not to continue complying with provisions of the Code which may be anti-competitive. This also raises questions for other industries that are subject to regulatory guidelines. It is understood that the Authority has facilitated discussions between the Association of Banks and the Commission to address this issue.
Statement on exemption for statutory bodies
On 6 July 2016, the Commission issued a statement confirming that the First and Second Conduct Rules do not apply to exempted statutory bodies including aided, direct subsidy scheme and caput schools. However, statutory bodies are still expected to adhere to competition rules even though they are not subject to the Ordinance. The Commission said it may refer any enquiries and complaints of alleged anti-competitive behaviour to the Administration.
This statement was made after some secondary schools said they were scrapping a long-standing informal agreement between the schools on student enrolment for fear of violating the Ordinance. A teachers’ association had said it planned to request clarification over the issue from the Commission.
The Commission’s statement does not break new ground, but confirms the previous understanding that it is up to the Administration to ensure that the exempted statutory bodies do not undertake anti-competitive conduct unless there are justifiable causes. Upon receiving complaints, the Administration’s Competition Policy Advisory Group (or COMPAG) may request the relevant governmental departments to follow up and deal with a case. The Administration may also, by regulation, apply the provisions of the Ordinance to a statutory body if necessary.
Despite calls from some legislators and certain sections of the public for the Administration to bring statutory bodies under the scope of the Ordinance, the Secretary for Commerce and Economic Development recently restated that the Administration will follow its original plan to review the exemption for statutory bodies three years after the commencement of the Ordinance. Currently, the substantive provisions of the Ordinance do not apply to over 500 statutory bodies, a considerable number of which the Administration concedes are engage in economic activities that affect market operation.
Market study into the building maintenance market and the “Fighting Bid-rigging Cartels” campaign
On 24 May 2016, in response to to public concerns over alleged collusive activities, the Commission announced the results of its study into the residential building renovation and maintenance market.
The Commission’s analysis focused on tender data on some 500 past residential building projects, all of which were tendered prior to the implementation of the Ordinance. The Commission carried out two screening analyses, which focused on: (i) whether a particular contractor was more likely to win a tender run by a particular consultant; and (ii) the extent to which the value of bids appear to reflect underlying costs.
The 14-page report noted that:
Suspicious patterns were identified which point to the possibility of prevailing bid manipulation practices. However, there was conclusive proof of collusive activities to have taken place.
If the Commission were to encounter similar patterns using more recent data, it would very likely investigate.
Partly in response to the market study’s findings, the Commission launched a “Fighting Bid-rigging Cartels” campaign to raise awareness and educate the business community on how to detect and prevent bid-rigging.
Market study into the auto fuel market
The Commission has been undertaking a study into the auto fuel market for some time, the results of which are expected to be released in the latter part of 2016. The Commission has not disclosed any details of this market study to date.
Block exemption for liner shipping agreements
The Commission recently announced that it is expected to make a decision on the block exemption for certain liner shipping agreements in the third quarter of 2016. This is the only formal application for a block exemption the Commission has received to date. The Commission previously completed a preliminary public consultation on the application in March 2016.
The Hong Kong Liner Shipping Association, on behalf of carriers operating through Hong Kong, previously submitted a formal application for a block exemption order for certain liner shipping agreements.
The liner agreements seeking for exemption fall into two categories: (i) voluntary discussion agreements (VDAs); and (ii) vessel sharing agreements (VSAs):
VDAs are commercial agreements between carriers where parties exchange and review information such as market data, trade flows, supply/demand forecasts and business trends. Importantly, the VSAs also involve agreeing to recommend voluntary guidelines for rates, charges, service contract or tariff terms and other commercial terms.
VSAs are operational agreements between carriers where parties discuss and agree on technical and operational arrangements relating to the provision of liner shipping services, including the coordination or joint operation of vessel services, and the exchange or charter of vessel space.
Both categories of agreements raise potential issues under the First Conduct Rule (prohibition on anti-competitive agreements). It has been common for the industry to seek, and be granted, exemptions in other jurisdictions, including the EU, Singapore and Malaysia, to clarify the legitimacy of such arrangements under competition laws. The Commission has previously said that whilst the application is being considered, it is unlikely to take enforcement action against the agreements.
Advocacy
The Commission has been playing an active role advocating competition policy to the Administration. In June 2015, the Commission made a submission to the Environment Bureau on its public consultation on the future development of the electricity market. The
Commission proposed that the Administration, amongst other things:
establish an independent advisory body to make recommendations on: (i) terms of access by new entrants; (ii) a mechanism to allow for the selling of electricity at the wholesale level to facilitate supply from new suppliers; (iii) specific measures to enhance grid interconnection; and (iv) measures to deal with the transitional issues arising from introducing more players; and
to renew the current contractual Scheme of Control Agreements (which regulate the electricity sector) with the power companies for five years rather than entering new long-term agreements.
What this means to you?
The last six months have shown that the Commission has, in addition to its educational role, actively taken on the mantle of investigation and enforcement. Although only one enforcement action has been published to date, the number of on-going cases suggest that the Commission is committing significant resources to investigations. We expect the Commission to initially focus its enforcement efforts on consumer-facing sectors and conduct in other sectors which causes significant harm to competition, particularly “easy cases” involving cartels and resale price maintenance.
Businesses that have not already done so should review their business conduct for any possible contravention of the Ordinance and
where necessary, take appropriate remedial measures.
This legal alert keeps the clients of the firm “Baker & McKenzie” and other interested parties abreast of changes in legislation that may, to one degree or another, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this legal alert are not legal opinions and cannot replace the necessity of receiving legal consultations or opinions in specific practical situations.
For further information, please contact:
David Fleming, Partner, Baker & McKenzie
david.fleming@bakermckenzie.com
