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15 October, 2016
In our July article (view here), we noted that six months after the coming into force of the Hong Kong Competition Ordinance (“HKCO”), the Hong Kong Competition Commission (“HKCC”) is still in close dialogue with many Hong Kong trade associations.
In particular, we highlighted the ongoing discussions between the HKCC and the Hong Kong Association of Banks (“HKAB”) regarding the HKAB’s revised Code of Banking Practice (the “Banking Code”) (view here).
With the first anniversary of the HKCO on the horizon, there still appears to be considerable uncertainty regarding the competition law risks and precise scope of the Banking Code.
The Banking Code was originally issued by the HKAB and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies (“DTCA”). The Banking Code applies to “authorised institutions”, defined as including (1) licensed banks; (2) restricted licence banks; and (3) deposit taking companies. The current version of the Banking Code was issued in February 2015, and was endorsed by the Hong Kong Monetary Authority (“HKMA”), the government authority in Hong Kong responsible for maintaining monetary and banking stability.
The Banking Code is a non-statutory code, issued on a voluntary basis, which could, in principle, amount to an agreement between competitors, or a “decision of a trade association” under the HKCO First Conduct Rule.
It appears that the HKCC has been in discussions with the HKMA since before the HKCO came into effect regarding possible competition issues arising from the Banking Code. Indeed, we understand that prior to December 2015, the HKAB decided to suspend certain provisions on the basis that they risked contravening the HKCO, with effect from 11 December 2015 onwards. These include not only the provisions relating to student loans and liability for lost credit cards which we described in our July e-bulletin, but also a wide variety of provisions, including most if not all of the provisions relating to the level at which fees and charges are to be set by authorised institutions.
We understand that, notwithstanding the suspension of these provisions, the HKMA has said that it expects full compliance by authorised institutions. This has led to a dilemma for authorised institutions, which must determine whether or not to comply with the entirety of the Banking Code: we understand the HKMA has facilitated discussions between the HKAB and the HKCC to seek to resolve this issue.
In terms of the reasons for the suspension, the details of the HKCC's concerns have not been made public. However, the HKCC has obviously not undertaken a market study in this area, and it may be that some of the key provisions have been suspended pending the HKCC carrying out its own study, or at the very least, a robust discussion between the HKCC and authorised institutions.
Most of the suspended provisions can be divided into broad themes: (i) provisions which impose a limit on the fees and charges which may be imposed by authorised institutions; (ii) provisions which absolutely prohibit the imposition of certain fees and charges; and (iii) various specific provisions in relation to credit cards.
In relation to provisions in the first category, again we do not have details of the HKCC's concerns in this regard. However, such provisions could, in theory, lead to competition issues on the basis that where competitors agree a maximum price (or even simply agree that pricing will be “reasonable”), this may lead to “focal point pricing”, as authorised institutions' charges and fees are arguably likely to settle around the “maximum” point. In relation to the second category of provisions, an absolute prohibition on imposing certain fees and charges could potentially reduce innovation and harm maverick entrants.
In the third category (credit cards), all provisions relating to the amount of any payments/fees, and certain provisions relating to the terms on which these are paid, are suspended (and in particular provisions seeking to increase minimum periodic payments in certain circumstances). Interestingly, in the UK context, the FCA published the final findings in its credit cards market study in July of this year (view here). There seems to be a large degree of overlap between the FCA's findings/areas of focus and the areas covered by the suspended provisions. For example, minimum periodic payments are a key area of focus for the FCA in its final findings – the FCA for example considered increasing minimum repayments, but first has said it wants to understand the efficacy of “nudging” in encouraging customers to repay at a faster rate when they can afford to do so.
The objectives of the Banking Code include: “to promote good banking practices by setting out the minimum standards” which authorised institutions should follow, and to increase transparency in the provision of banking services. The Banking Code seeks to address a number of different issues, including disclosure and transparency, protection of customer data, financial education and awareness, and competition, with an emphasis on allowing customers to search, compare, and where appropriate, switch between products easily and at reasonable and disclosed costs. Broadly, these themes and objectives appear to be pro-competitive and to the benefit of consumers.
Clearly, a key issue is the extent to which the consumer benefits of the Banking Code may outweigh the relevant risks: this is something which, it appears, has for some time been and is still the subject of ongoing debate between the various interested parties.
For further information, please contact:
Adelaide Luke, Herbert Smith Freehills
adelaide.luke@hsf.com
