Given the recent vigorous activity by Hong Kong’s financial services regulators, firms are now focusing their attention on the steps being taken to implement Hong Kong’s first cross-sector substantive competition law regime, which creates a new regulator armed with extensive enforcement powers, including the ability to conduct dawn raids and levy significant fines.
After several years of debate, Hong Kong’s new Competition Ordinance was published in the official gazette in June this year. The obligations contained in the Ordinance are outlined in terms that will be familiar to Australian and European practitioners. The Ordinance essentially prohibits anti-competitive arrangements and agreements or cartel conduct (referred to as the “First Conduct Rule”) and abuses of market power (referred to as the “Second Conduct Rule”), subject to a range of exemptions, block exemptions and minimum turnover thresholds. There is no cross-sector merger control regime (similar to the position adopted in Malaysia), with merger control to continue to be limited to the telecommunications sector. Further details of the Ordinance are included in our recent client alert.
The Ordinance follows the global trend towards internationalisation of competition law, by extending the obligations beyond national borders. In particular, the Ordinance potentially applies to agreements or conduct engaged in both inside and outside of Hong Kong, and to firms located both inside and outside Hong Kong. The Ordinance therefore has a potentially broader impact across the Asia Pacific region, particularly given Hong Kong’s role as the hub of the financial services sector.
With a recent change in Government in Hong Kong, and a number of measures required before the Ordinance can take effect, the Ordinance is not likely to come into force until 2014 (or later). However, firms should take the opportunity now to assess the likely impact of the Ordinance on their business and start to develop a compliance strategy. Attention is also turning to the steps being taken by the authorities to prepare for the introduction of the Ordinance.
Implementation measures and exceptions
The Hong Kong Government has yet to establish the new competition law regulator, the Competition Commission and will shortly be recruiting members and staff, which are likely to include senior officials in Hong Kong and those with experience with other well regarded competition regulators. A Competition Tribunal will also be formed, comprising members of the judiciary.
The new Commission is expected to issue guidelines clarifying the way in which the provisions of the Ordinance are likely to be interpreted, and drafts are already being prepared. The Commission will also have the power to issue block exemptions prescribing that certain types of agreements will benefit from immunity in relation to the First Conduct Rule. It is also likely that various types of conduct will ultimately benefit from exemptions. Firms should therefore start considering whether they benefit from similar arrangements in other jurisdictions (such as the European Union) and whether they should be making submissions in support of a similar approach to be taken in Hong Kong.
Key risks and "red flags"
Breaches of the Ordinance may lead to a range of penalties for firms and individuals involved. In particular, a civil pecuniary penalty for a single contravention of the Ordinance can be applied up to a maximum of 10% of a firm’s annual turnover in Hong Kong for each year that the conduct occurs (up to a maximum of 3 years). The Ordinance also provides for the possibility of private follow-on actions and therefore the risk of damages. Individuals involved in the contravention may also face disqualification from acting as directors.
Given those significant penalties, firms should now be taking steps to identify any existing agreements or arrangements that are likely to be caught by the Ordinance, and put in place a plan to amend these. In addition, any new agreements that are likely to remain in force after the Ordinance takes effect should be drafted in a manner that is compliant. There is the potential for action by the Commission not just in relation to individual agreements, but also in relation to industry-wide arrangements (in a manner similar to the European Commission's action in relation to multi-lateral interchange fees).
Experience of action taken in the financial services sector in other jurisdictions suggests that the types of antitcompetitive conduct that are most likely to result in regulatory scrutiny by the Competition Commission are price fixing, information sharing, and bid rigging. To illustrate, in 2001 eight Austrian banks participated in a wide-ranging price cartel which commenced prior to and continued after Austria’s European Union Membership resulting in fines of €124.26 million (CEOs of the cartel members, known as the “Lombard Club”, met regularly to fix deposit, lending and other rates). Sharing of prices between competitors alone can also lead to regulatory action and has resulted in the imposition of fines in the financial services sector in 2010 by the UK's Office of Fair Trading, following the exchange of pricing information for loans between executives at industry meetings and in social settings.
Bid-rigging (a form of price fixing and market allocation where participants who are invited to tender for a project agree not to bid against each other) has also been a particular focus of competition law regulators in Asia. It has also been attracting scrutiny in the United States. In an ongoing 2012 US Government investigation, a number of financial institutions have been alleged to have rigged bids for investment contracts to raise money for municipal bonds awarded by municipal bodies. Regulators and courts in the US have also been considering so called "club deals" involving buyout firms.
Hope for the best, prepare for the worst
While the introduction of a competition law in Singapore has led to very few formal investigations and minimal fines, the recent approach taken by other regulators in Hong Kong suggests that the Hong Kong Competition Commission is likely to be much more interventionist. Fortunately, firms have some time to prepare. Steps that firms can take now to prepare for when the Ordinance takes effect, include the following:
Leverage existing experience - most financial institutions will already be subject to competition laws in other jurisdictions. As such, it is important to consider how to extend existing policies and controls to Hong Kong and whether any amendments may be needed to be made to global policies. Procedures for dealing with unannounced regulatory inspections (ie "dawn raids") used to prepare for competition law investigations in other jurisdictions should now be adapted for use in Hong Kong.
Review current practices & identify risk areas - certain types of conduct will necessarily involve higher degrees of risk and rules should be put in place to deal with these, for example guidelines for staff attending industry association meetings.
Communicate wisely - this will include implementing a process to review marketing collateral, website and key strategy papers to identify any unfortunate language.