This article was written by Neil Carabine and James Wilkinson.
The Estate Agents Authority has issued guidelines for real estate agents on Hong Kong’s new competition law. The guidelines summarise key features of the competition rules and answer common real estate sector questions. Real estate agents should provide the guidelines to all staff engaged in estate agency work, the EAA says.
Many standard business practices in Hong Kong are now illegal under the Competition Ordinance, which came into full effect on 14 December 2015.
Real estate agents and other the real estate businesses may be fined up to 10% of their company group’s annual turnover for competition law breaches. Real estate agents may also be subject to disciplinary action by the EAA, including licence suspension or revocation. Competition law compliance is therefore crucial.
Estate agents must make commercial decisions independently
The EAA guidelines emphasise that estate agents must determine their commercial strategies independently. Estate agents must not make or enter into arrangements (in writing or otherwise, express or implied) with their competitors to cooperate on matters such as:
- pricing (e.g. agreeing commission rates to be charged); or
- sharing markets (e.g. agreeing customers, geographic areas or property types that each company will target).
Estate agents must also avoid discussing or exchanging information with competitors about future pricing strategy and business plans.
The EAA notes that the current industry practice is for estate agents to charge commission at the rate of 1% of the purchase price for sale and purchase and half a month’s rent for tenancies. However, the law does not require a particular rate to be charged. Estate agents should make their own decisions about commission rates rather than adopting or following any standard rate or a rate that is set collectively in any way.
Estate agents may breach the Competition Ordinance if they agree or discuss with competitors:
- the commission rates they will charge;
- a formula to calculate commission; or
- elements of commission such as discounts, rebates or other incentives.
Estate agents should also avoid advising customers that charging a particular commission rate is “a customary practice or norm”, “a standard rate in the industry” or that all other estate agencies would charge the same rate.
In addition, real estate associations should not give any instruction or make any recommendation to members on rates of commission or any other commercial terms.
Competition law compliance
The EAA recommends that real estate companies take steps to ensure that they comply with the law. Compliance steps include:
- reviewing work practices and daily operations to identify competition risks; and
- setting up policies, procedures and training for staff to reduce the risk of competition law breaches.
Competition law guidance and training should in particular be given to high-risk employees such as those who regularly communicate with customers or competitors. A company may be held responsible for any wrongdoing by employees.
The EAA’s Circular No. 16-01(CR) is available on the EAA’s website. For more information on the impact of Hong Kong’s competition law on the real estate sector, see our Survival Guide for the Real Estate Industry.