Originally enacted in June 2012, the Hong Kong Competition Ordinance is finally expected to come into full effect in the coming months – on 14 December 2015 – after several years of preparation.
Competition law has been considered a controversial new area of regulatory control for Hong Kong, and has attracted substantial concern from industry. Financial institutions and sponsors alike should therefore review their agreements and practices to assess and eliminate any competition law risks both for themselves and for their portfolio companies.

Preparing Hong Kong's regulatory framework for competition enforcement

Since the Competition Ordinance was enacted, the regulatory framework for competition law in Hong Kong has been gradually put into place.  This has included establishing the Hong Kong Competition Commission ("HKCC"), which – together with the Communications Authority – is the regulatory authority tasked with the investigation and sanctioning of anti-competitive conduct, and the Competition Tribunal ("Tribunal"), which is the court that will hear competition enforcement actions brought by the HKCC.

Another important step was the publication of the Guidelines under the Competition Ordinance ("Guidelines") on 27 July 2015, following extensive public consultation. The Guidelines set out HKCC's policy, approach and procedure for the enforcement of the conduct rules (discussed below).  Although the courts will eventually contribute to shaping the contours of Hong Kong competition law through precedents, the Guidelines are presently the clearest guidance on Hong Kong's competition regime.

Scope of the Competition Ordinance

Consistent with international practice, the Competition Ordinance sets out three types of substantive rules prohibiting anti-competitive conduct.

  • The "first conduct rule" prohibits anti-competitive agreements and concerted practices by businesses, such as cartels and other collusive conduct.  This rule applies both to agreements between competitors (horizontal agreements) and those between companies at different levels of the supply chain (vertical agreements).  The Competition Ordinance identifies price fixing, market partitioning, fixing production or supply volumes, and bid rigging as "serious anti-competitive conduct", subject to a different procedural standard.
  • The "second conduct rule" prohibits businesses with a "substantial degree of market power" from abusing that market power to anti-competitive ends.  The "substantial degree of market power" threshold will involve similar considerations to that of the "dominance" threshold in other jurisdictions.  Examples of potentially abusive conduct include predatory pricing, refusing to deal and exclusivity arrangements.
  • The "merger rule" prohibits mergers which have or are likely to have the effect of substantially lessening competition in Hong Kong.  Unlike merger control regimes in other jurisdictions, the merger rule applies only to mergers involving at least one telecommunications carrier license in Hong Kong.

Exclusions and exemptions 

The Competition Ordinance contains a number of exclusions and exemptions to the application of the substantive rules.  These include, for example, the exemption for "statutory bodies" (i.e., bodies established under an Ordinance, usually performing some sort of a public service function), exclusions for agreements or conduct of "lesser significance" and exclusions for conduct generating economic efficiencies. 

The Chief Executive in Council also has the power to exclude the application of the conduct rules on public policy grounds.  Indeed, the Chief Executive in Council has already used these powers to exclude the application of the conduct rules on a number of entities related to stock exchanges and clearing houses in Hong Kong.  These exclusions have been justified by the administration on the basis of the importance of these stock exchanges and clearing houses to Hong Kong's financial infrastructure and the necessity for their stability.

Competition Institutions 

HKCC is the primary competition authority in Hong Kong, with significant powers of investigation, including for dawn raids.  HKCC has also taken on an important role in "educating" the business community and public at large on the implications of the Competition Ordinance.  In the telecommunications and broadcasting sectors, the Communications Authority will have concurrent jurisdiction with HKCC.

The Tribunal is a specialised court established to hear and decide competition-related cases. The procedure before the Tribunal will largely resemble existing Hong Kong court procedure.  The Tribunal has broad power to impose sanctions for contravention of the conduct rules, including very significant pecuniary penalties of up to 10% of the perpetrator's annual turnover for up to three years.

Enforcement of the conduct rules

Whilst the substance of Hong Kong's competition law largely follows that of Europe, the enforcement of competition law in Hong Kong more closely resembles the United States and Canada, in particular by implementing a system of judicial enforcement.  Indeed, if HKCC believes a breach of the Competition Ordinance has occurred and merits a pecuniary or other penalty, it will need to bring the case before the Tribunal.  

Nonetheless, while HKCC cannot directly impose sanctions on companies, it may "settle" a case by way of commitments.  The authority may accept a commitment from a party for it to take or refrain from taking any action, in return for agreeing not to commence or continue an investigation or proceedings against the party.  If the alleged breach does not involve conduct amounting to "serious anti-competitive conduct" or the second conduct rule, HKCC must first issue a "warning notice" to allow the party an opportunity to remedy the alleged conduct before taking action.

Preparing for compliance with the Competition Ordinance – financial institutions

Since the enactment of the Competition Ordinance, many financial institutions have already begun reviewing their compliance policies. With the publication of the Guidelines, it has become clearer what the obligations will be under the Ordinance.

HKCC has not given any indication that the financial sector will be subject to greater oversight.  Nonetheless, financial institutions should continue to ensure that their key personnel, including management, sales and marketing and legal staff are familiar with the conduct rules.  

A review of ongoing agreements such as cooperation, distribution and sales agreements (particularly those entered into with competitors) and practices such as information sharing and trade associations should be conducted with a view to ensuring compliance under the first conduct rule.  Financial institutions with a strong position in their relevant markets will need to assess whether they are likely to be found to enjoy a substantial degree of market power, and if so, whether their practices risk contravening the second conduct rule. 

Experience in other jurisdictions shows that it can take some time before compliance training and other preparatory measures start to yield results.  However, whilst the Competition Ordinance may present an additional regulatory burden, most financial institutions and sponsors will already be familiar which similar obligations in other jurisdictions.