Hong Kong Competition Ordinance is having an impact after just two months, say experts

Hong Kong's Competition Ordinance came into full effect on 14 December, bringing a cross-sector competition regime that prohibits a range of anti-competitive practices in Hong Kong.

The Ordinance has two main rules: the first conduct rule, which prohibits agreements, concerted practices or decisions of associations that have the object or effect of preventing, restricting or distorting competition; and the second conduct rule that prohibits a business with a substantial degree of market power from abusing that power.

Most activity by businesses in response to the Ordinance has related to possible contravention of the first conduct rule, and in particular the risk involved in contact and collusion between competitors.  

Even before the Ordinance came into full force it was evident that businesses operating in Hong Kong were looking at how they can comply with the upcoming rules.

For example, the shipping industry is taking steps to end the co-ordination of fee levels for the use of port facilities. In November 2015, five container terminal operators agreed to stop jointly setting the level of a port security charge (PSC) that is levied on port users. As a consequence terminal operators Hongkong International Terminals, Modern Terminals, Asia Container Terminals, COSCO-HIT Terminals (Hong Kong) and CSX World Terminals Hong Kong stopped accepting paper coupons that could previously be used to pay the PSC and instead began to individually issue electronic coupons.

This move was in response to concerns that the joint setting of the PSC would be viewed by the Competition Commission as price-fixing, which is considered to be serious anti-competitive conduct and a clear contravention of the Ordinance.

Concerns over existing practices

While straight agreements on prices raise obvious concerns under the Ordinance, more subtle forms of price fixing, involving the disclosure of competitively sensitive information, have also come under the spotlight. Late last year a member of the Competition Commission indicated that where businesses share information on wages this may potentially be caught by the Ordinance. Discussion of how much professionals should be paid may amount to price fixing as it essentially concerns the price that competitors will pay for a product.

In what may be a response to this, the Employers' Federation of Hong Kong said in December that it was considering the legality of its annual guidance on pay rises. Publishing the recommendations has been put on hold until the Federation can confirm the legal position on whether members could be considered to be involved in a price-fixing arrangement.

In some markets concerns about price-fixing were not enough to change behaviour before the implementation of the Ordinance, but as awareness of the new law has grown many organisations have come to recognise the risks involved and have changed their practices. 

For example, when the Ordinance first came into force the Hong Kong Jewellers' & Goldsmiths' Association and the Kowloon Pearls, Precious Stones, Jade, Gold and Silver Ornament Merchants Association decided to continue the routine publication of their daily buy and sell price recommendations for precious metals on their websites. These price recommendations were duplicated on the websites of some of Hong Kong's biggest gold retailers. 

However, a few days later the Hong Kong Jewellers' & Goldsmiths' Association stopped publishing reference prices, and both organisations said they would need to consider the legal position. Since then, gold buyers report a more competitive market for the metal, with uniform gold prices no longer the norm. The suspension of price recommendations has also coincided with local market heavyweight Chow Sang Sang abolishing the 2% commission it has traditionally charged customers.

Other markets have scrapped price recommendations, often at the instigation of trade associations or similar organisations that risk being accused of involvement in anti-competitive conduct due to their role in facilitating contact and collaboration between competitors. The Hong Kong Society of Notaries has decided to stop publishing recommended minimum charges for certain notarial services and the Travel Industry Council of Hong Kong (TICHK) has dropped its recommendations for tour guide fees. The TICHK is believed to have been contacted by the Competition Commission over concerns that restrictions on advertising prices may also contravene competition rules. 

Differing views over interpretation of the Ordinance

In the financial services sector, the Hong Kong Association of Banks (HKAB) and the Hong Kong Monetary Authority (HKMA), a government authority responsible for maintaining monetary and banking stability in Hong Kong, have issued conflicting statements.

The non-statutory voluntary Code of Banking Practice used by Hong Kong banks contains provisions that risk contravening the Ordinance rules. The HKAB has decided to suspend some provisions in the Code, particularly those relating to pricing, but the HKMA has said that it still expects banks to comply with the Code, as it considers the provisions necessary to protect consumer interest. 

This difference of opinion demonstrates the difficulty a business can face in deciding what is acceptable and what is not when collaborating with its competitors, particularly where there may be resultant benefits to consumers.

More recently, concerns have also been raised about certain mortgage guidelines issued by the HKMA that focus on the maximum possible loan-to-value ratio that can be applied in property mortgage loans. There will undoubtedly be many more instances where unease is expressed about industry-wide guidelines that may fetter independent business decisions.

Resale price maintenance

Businesses should be aware that arrangements between firms operating at different levels of the supply chain can also be caught by the Ordinance, particularly where these arrangements affect price. For example, sports footwear manufacturer New Balance is reported to have suspended the resale price policy it regularly issued to buyers. Under the Ordinance, resale price maintenance can amount to serious anti-competitive conduct even when the arrangement is between non-competitors.

Hong Kong suppliers of domestic piped liquefied petroleum gas (LPG) have emphasised that the retail prices of domestic cylinder LPG products are determined by individual distributors in a competitive environment, free from resale price maintenance. This follows an initial study into the petrol market by the Competition Commission amid concerns over the competitiveness of the market. LPG suppliers have also expressed disquiet about a government initiative to publish the prices of individual oil companies on a government website.

Block exemption consultation

One of the most keenly anticipated developments is how the Competition Commission will respond to an application by the Hong Kong Liner Shipping Association (HKLSA) for a block exemption order in relation to certain liner shipping agreements. 

The block exemption would exempt certain agreements from the first conduct rule, including voluntary discussion agreements and vessel sharing agreements. The HKLSA argues that these are "crucial in enabling carriers to provide regular, fixed day sailing schedules at rates that are not subject to severe fluctuation" and therefore lead to "efficiencies that benefit customers…and ultimately the wider Hong Kong economy."

The Competition Commission is currently consulting on the application. However, the Hong Kong Shippers’ Council plans to object to any special treatment for ship liners. The issue is so significant that the Hong Kong Government has given its own opinion on the block exemption to the Competition Commission, and legislative council members have raised concerns that the lack of some form of exemption will be detrimental to the future of Hong Kong's port.

While the Ordinance has only been in full effect for two months, its impact is already being seen in a range of markets in Hong Kong. Businesses and trade associations are increasingly aware that certain practices, particularly those involving contact and collaboration between competitors, may prove problematic under the new regime. 

There will be a fine line between acceptable collaboration between market players and anti-competitive conduct, with substantial fines and other negative consequences for businesses contravening the rules.

Finally, although most reported responses to the Ordinance have involved the first conduct rule, it is important to remember that those businesses that may have substantial market power will need to refrain from certain types of conduct that will be considered illegal under the second conduct rule given their market position. 

Guy Lougher and Frederick Good are competition law experts at Pinsent Masons, the law firm behind Out-Law.com.