This article was written by Neil Carabine, Richard Mazzochi, Urszula McCormack and James Wilkinson.
Hong Kong’s new competition law is now in effect and applies to all financial institutions in Hong Kong. Numerous financial institutions and payment systems participants have faced penalties by competition authorities overseas for anti-competitive conduct, and similar fines may now be imposed in Hong Kong. It is therefore vital that financial institutions ensure their compliance programs, internal reviews and leniency strategies contemplate Hong Kong where appropriate.
In this article, we provide an outline of the new Hong Kong competition rules and compliance tips for financial institutions.
A quick synopsis of the new rules
Hong Kong’s Competition Ordinance prohibits conduct that harms competition in Hong Kong. There are two key competition rules that apply to the financial sector, known as the First and Second Conduct Rules.
A brief synopsis of the competition rules is set out below. For further details, see our Hong Kong Competition Law Guide.
First Conduct Rule – Cartel conduct
The First Conduct Rule prohibits conduct and agreements between businesses that have the object or effect of preventing, restricting or distorting competition in Hong Kong.
The rule is especially focused on preventing cartels – arrangements between competitors to fix prices, share markets, rig bids or restrict output. Resale price maintenance (for example, fixing a resale price for a product) is also prohibited. Other agreements, such as exclusive distribution and joint buying, may breach the rule in some cases.
Second Conduct Rule – Abuse of market power
Companies that have a substantial degree of market power in a market must not abuse that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. Examples of conduct that may be abusive include predatory pricing, exclusive dealing, refusals to deal, and tying and bundling.
Consequences of breaching the competition rules
The maximum fine for each contravention of the competition rules is 10 per cent of the turnover of the company group in Hong Kong for each year in which the contravention occurred, up to a maximum of three years. Companies found to have breached the rules may also be exposed to follow-on damages actions by persons who have suffered loss or damage as a result of the breach.
Individuals involved in a breach may also be fined. In addition, a director of a company that breaches the rules may be banned from being a director or managing a company for up to five years, irrespective of whether or not the director was personally involved in the breach.
Regulatory flow-on impacts
Liability under the Competition Ordinance for a company or a relevant individual can have significant flow-on impacts from a financial regulatory perspective, given the extensive “fit and proper” obligations to which they are subject. A good example of the potential flow-on risk for individuals is the recent SFC enforcement case involving corruption in investment research. In that case, an SFC-licensed representative was convicted by a court and sentenced to prison for one year under the Prevention of Bribery Ordinance. The SFC then banned the individual from the industry for 15 years.
Incentives for whistleblowers
A “first in” whistleblower may be entitled to full immunity from prosecution under the Competition Ordinance (and potentially derivative immunity for relevant individuals), subject to meeting a range of obligations, including ongoing cooperation. There is no set discount for others who come forward, unlike the position in other jurisdictions that apply a sliding scale for a certain number of persons. Rather, leniency is at the discretion of the Competition Tribunal.
Financial sector competition cases
Financial institutions have been targeted by competition regulators in other jurisdictions, giving rise to a number of high-profile investigations and prosecutions. Jurisdictions looking at competition in the financial sector include Australia, Europe, the United Kingdom, the United States and Singapore.
Companies should be aware that the competition rules may even apply to conduct carried out overseas or by non-Hong Kong companies. The rules will apply to the extent that the conduct harms competition in Hong Kong.
The following diagram illustrates some of the key areas involving financial institutions that have been pursued by overseas regulators.
Ares of interest in global competition cases involving the financial sector.
The following table also provides three international case studies and the Hong Kong position in relation to such conduct from 14 December 2015.
|What would the Hong Kong position be?
First Conduct Rule
LIBOR benchmark manipulation
The European competition authority fined five banks a total of €670 million for involvement in illegal cartels relating to LIBOR.
It is likely that similar conduct by financial institutions in Hong Kong would infringe Hong Kong’s competition law. The conduct would amount to cartel conduct, which is considered to be one of the most serious forms of anti-competitive conduct.
In the LIBOR case, one bank received full immunity from fines because it was the first bank to expose the conduct. Similar immunity may be available under the Hong Kong Competition Commission’s leniency policy, but leniency for others is at the discretion of the Tribunal.
Second Conduct Rule
Abuse of market power
Credit cards -exclusive dealing
The Australian Federal Court fined a major payment card company A$18 million for contractually preventing financial institutions from acquiring currency conversion services from a competing service provider.
This “exclusive dealing” conduct, if carried out in Hong Kong, may infringe Hong Kong’s competition law.
Exclusive dealing occurs when, for example, a company will only supply a product if the purchaser agrees not to acquire the same product from a competitor. This is a common commercial arrangement and in most cases is allowed. However, it may breach competition law if carried out by a company that has substantial market power for the purpose of excluding a competitor from the market.
Exclusive dealing in this case may be deemed an abuse of market power and attract competition law penalties.
Obstructing an investigation
As is the case in Europe, it is an offence to obstruct the Hong Kong Competition Commission when it is executing a search warrant. Fines of up to HK$1 million and imprisonment for up to 2 years may be imposed.
The Commission also has the power to issue notices requiring a person to produce documents or information, or to attend before the Commission to answer questions. Failure to comply with such a notice is also an offence
There are several other global investigations involving financial institutions (including FX, precious metals, interchange fees and credit card surcharges) that could also trigger Hong Kong competition law from 14 December 2015, subject to the facts.
Review business practices
Look out for high-risk issues such as:
- lack of awareness of competition law;
- collaboration and sharing of information with competitors; and
- if your institution has substantial market power in a market (which may be a “niche” aspect of the broader Hong Kong financial services market), conduct that may constitute an abuse of that power.
Review existing contracts to determine whether there are any “red flag” provisions that need to be assessed against Hong Kong competition principles. Examples of contracts that require particular attention include:
- contracts involving cooperation between competitors (for example, joint ventures, joint buying or joint selling);
- supply agreements that include terms that may amount to prohibited resale price maintenance (for example, fixing a resale price for a product); and
- exclusive distribution agreements.
If your company has a substantial degree of market power in a market, consider whether contracts include terms that may amount to an abuse of market power.
Carry out an internal audit to identify potential competition law risks. This should include reviewing standard contracts and interviewing key staff.
Compliance manual and “dos and don’ts”
Prepare and circulate a competition law compliance manual and “dos and don’ts” guidance for staff. Senior management should endorse the manual and make it clear that they support the company’s compliance efforts.
Competition law training
Train relevant staff about potential competition law “hot-spots”. In particular, train staff who may interact with competitors and customers. Refresh this on a regular basis.
Take action if a breach is identified
Take all necessary action to rectify any breach as quickly and practicably as possible, and immediately seek legal advice. It may be appropriate to seek leniency in exchange for co-operating with the Competition Commission. Breach reporting to your regulator(s) also needs to be considered, as well as a potential report to others such as the Joint Financial Intelligence Unit, depending on the facts.
Ensure that staff keep a paper trail of high-risk decisions and contracts. For example, record the reasons for price changes, and note that the decision was reached independently and without discussion with competitors.
Complaint handling procedures
Most regulated financial institutions already have robust complaint-handling procedures. These should also be capable of addressing competition law concerns. Competition Commission investigations may be triggered by complaints from the public.
Exchanging information with competitors
Exchanging confidential business information with competitors may breach the Competition Ordinance. Caution should be exercised when speaking with competitors, including in informal settings such as industry and social events. The diagram below sets out some high-level “dos and don’ts” in relation to communicating with competitors.
“Dos and don’ts” of communicating with competitors
What about participating in trade associations?
Trade associations are legal and companies can participate in their activities. However, competition risks may arise from trade association participation. In particular:
- trade association activities offer a forum to discuss competitively sensitive information and/or reach illegal agreements;
- social events around trade association meetings are often the origin of anticompetitive behaviour; and
- statistics and reports prepared by trade associations may induce sharing of competitively sensitive information.
- cataloguing the associations in which your institution participates and the individuals involved. The numbers are likely to be higher than you expect;
- providing guidanceto staff on participating in an association – including an emphasis that general competition rules apply; and
- monitoring participation on an ongoing basis – including “outcomes” of meetings, such as comparative pricing anecdotes or proposals for a common approach on a certain issue.
KWM Competition Law Guide
Our Hong Kong Competition Law Guide provides a useful outline of the competition rules, key “dos and don’ts”, and additional practical tips for compliance.
The Hong Kong Competition Commission has published guidelines and policies that provide guidance on the competition rules. The key materials you should be aware of are:
- Guideline on the First Conduct Rule;
- Guideline on the Second Conduct Rule;
- Guideline on Investigations;
- Guideline on Complaints;
- Guideline on Applications for a Decision and Block Exemption Orders;
- Enforcement Policy; and
- Leniency Policy for Undertakings Engaged in Cartel Conduct.
Industry association materials
A number of industry associations have published guides and “dos and don’ts” which provide useful practical guidance on the competition rules.