Hong Kong: Overview

In 2009, the Hong Kong government held out on the introduction of a general, cross-sector competition law (the Proposed Competition Law) due to 'technical, legal and policy considerations'. With the financial situation improving, 2010 may well be the right time for the country to finally put in place a new economy-wide competition law regime. If this materialises, its introduction would signify a milestone in Hong Kong's overhaul of the existing sector-specific approach to competition regulation, which was introduced in 2000.

Since 2006, the government has conducted a series of public consultations on its proposal to introduce the Proposed Competition Law. Parallel to the Proposed Competition Law consultations, the government also consulted on the merger of the telecommunications and broadcasting regulators which, among other responsibilities, will also administer competition regulations in these two sectors. The Commerce and Economic Development Bureau (the CEDB) proposes to adopt a staged approach, first by combining the Telecommunications Authority (TA) and the Broadcasting Authority (BA) into one single unified regulator, called the Communications Authority (CA), through the introduction of new legislation (the Proposed CA Law). The government and the new CA will then carry out a comprehensive review of the two sectoral regimes, to prepare a comprehensive piece of legislation which will replace the existing legislation governing the two sectors (the Proposed Communications Law).

As with the Proposed Competition Law, the Proposed CA Law drafting process took longer than the government had expected due to technical and legal considerations. Specifically, the drafting of the proposed law also involved the preparation of a number of necessary consequential amendments to the existing laws governing the telecommunications and broadcasting sectors. The delays were reportedly also attributed to the added time the government took in seeking legal advice and comments from concerned parties. Nonetheless, the government plans to introduce both the Proposed Competition Law and the Proposed CA Law to the Legislative Council this year as part of the 2009-2010 session.

This article will be divided into two sections. The first will summarise recent developments, including an update of the current key components of the Proposed Competition Law and the notable aspects of CEDB's most recent consultation and subsequent position, as summarised by the Competition Policy Advisory Group (COMPAG) report issued in December 2009. The second section will discuss the consolidation of existing sectoral competition regulations.

Key features of the Proposed Competition Law

The CEDB issued two public consultation papers in November 2006 and May 2008 (the Consultation Papers) in respect of the Proposed Competition Law. COMPAG has taken the results of the Consultation Papers into account in preparing the Proposed Competition Law. It released its latest report in December 2009 discussing its progress on the introduction of the Proposed Competition Law. However, certain issues that arose from the public consultation process remain unresolved in the COMPAG report. A selection of the key issues are set out below.

Anti-competitive agreements

The proposed prohibition on anti-competitive agreements will regulate agreements and concerted practices that have the purpose or effect of substantially lessening competition. Such provisions will regulate both horizontal agreements (those that are at the same functional level of a supply chain) and vertical agreements (those between upstream and downstream participants in a supply chain). The CEDB also proposes to adopt an approach similar to that in the European Union, where a block exemption applies to vertical agreements that meet certain conditions.

To further clarify the scope of the law and facilitate compliance, COMPAG proposes that the provisions regulating anti-competitive agreements would be supplemented by a non-exhaustive 'blacklist' of examples of conduct that the Commission considers anti-competitive. COMPAG further proposes that the regulators be statutorily required to draw up guidelines on the interpretation and implementation of the proposed prohibition on anti-competitive agreements.

Abuse of a significant market position

The proposed regime will also prohibit certain types of unilateral conduct, where an undertaking with significant market power (SMP) abuses that position with the purpose or effect of substantially lessening competition in a market. A 40 per cent market share will give rise to a 'rebuttable' presumption of SMP. This is low in comparison to other major international jurisdictions and is unusual for a small open economy with a number of concentrated industries. Singapore, for example, sets its dominance presumption at 60 per cent. A comparatively low market share threshold in Hong Kong may give rise to unintended adverse consequences on the market, potentially hindering perfectly legitimate competitive behaviour of many larger corporations that breach the 40 per cent threshold due to the structure of the Hong Kong market, with its typically limited numbers of large industry players in any given sector.

Merger control

The latest COMPAG report does not mention whether merger regulation would form part of the Proposed Competition Law. Therefore, the Proposed Competition Law is not expected to include a merger control regime given that views remain divided on its necessity.¹ Alternatively, Hong Kong may draw on the European approach of introducing merger regulations after bringing in prohibitions against anti-competitive agreements and abuse of dominance.²

This may pose two problems. First, the proposed law governing anti-competitive agreements and abuse of dominance, although applicable in certain merger activities, may be inadequate in addressing competition concerns arising from companies merging or combining through acquisitions. Second, the continued application of the merger control provisions - which only apply to telecommunications carrier licensees under the sectoral competition law - makes the omission of merger control under the Proposed Competition Law even more glaring, as it places regulatory considerations on the telecoms sector that are not placed on other sectors, despite them having similar (or more concentrated) structural markets.

Establishment of appropriate agencies

The COMPAG report intends to change the institutional arrangement for the competition regulation regime from the original proposal of a civil administrative model to a judicial model. The Competition Commission (the Commission) would be established to investigate and prosecute the cases. A specialist Competition Tribunal (the Tribunal) would also be constituted within the judiciary to hear and adjudicate on competition law cases and to hear private rights of action arising out of the Proposed Competition Law. The Tribunal would have the power to impose penalties in the form of fines of up to 10 per cent of total turnover during the period when the infringement occurred, which is in keeping with present international norms. The Tribunal would also have the power to order disqualification of directors or senior management who have acted in a manner that contributes to a breach of the rules from holding directorships or management roles in any company for up to five years. The potential severity of the penalties continues to be an issue of concern for a cross-section of Hong Kong's business community.

Despite concerns from the business community over the proposed penalties, the sanctions are in line with other major jurisdictions. In fact, there has been an international trend towards criminalising the most serious anti-competitive offences, such as cartels and bid rigging. Major jurisdictions, such as the UK, France, Japan, Brazil and (most recently) Australia have followed the footsteps of the US in introducing criminal sanctions against the individuals engaging in such conduct. The rationale for introducing criminal penalties is to enhance the deterrence effect of the competition law. Therefore, the Hong Kong business community may see severe fines imposed if the Tribunal decides to send out a strong message to the business community on the importance of antitrust compliance.

The shift from the original civil administrative model to the proposed judicial model means the adjudicatory powers originally granted to the Commission are taken away and instead vested in the judiciary, through the specialist Tribunal. This may be the result of two recent Hong Kong court decisions in 2008.

In the Court of Final Appeal decision of Koon Wing Yee v Insider Dealing Tribunal and Financial Secretary³ the Court held that, even though the powers granted to the Insider Dealing Tribunal were civil in nature, because the system allowed the tribunal to impose serious penalties, such a feature gave rise to the need for the criminal standard of proof to be applied, as guaranteed by the Hong Kong Bill of Rights - a higher standard than that normally required to be applied in civil administrative cases.

In the more recent High Court constitutional challenge, Luk Ka Cheung v Market Misconduct Tribunal,⁴ the Court held that the powers granted to the Market Misconduct Tribunal (MMT) offended the doctrine of separation of powers in that the MMT exercised 'judicial' powers which are reserved exclusively for the judiciary under the Basic Law.

In opting for the Tribunal route, the government aims to avoid any potential conflict of interest between the Commission and the Tribunal and also to avoid court challenges with regards to the Tribunal on two fronts:

• its constitutional right to hear and decide competition cases; and

• the method and substantive legal standards to which it conducts its hearings.

Similarly, some commentators consider that the effectiveness of the Telecommunications (Competition Provisions) Appeal Board (TAB) (being the tribunal to which appeals are made from 'competition' decisions of the TA) has been plagued by jurisdictional challenges, which have delayed the hearing of substantive competition law concerns.

Exemptions and exclusions

The proposed exemptions and exclusions remain unchanged since the Consultation Papers except for the controversial proposal to exempt government or statutory bodies from the Proposed Competition Law.

The Consultation Papers justified the wholesale exemption of government or statutory bodies on the basis that:

• exemption would ensure government operations are not hampered by unfounded and misconceived complaints; and

• Hong Kong has a relatively small public sector and many services that are provided by the private sector are usually provided by the public sector in other economies.

COMPAG's latest report suggests the exemptions and exclusions of the Proposed Competition Law will not apply to government activities unless those activities are otherwise listed as 'non-exempted' in a schedule to the Proposed Competition Law. In other words, the current proposal suggests that certain bodies will not be exempted (ie, through an opt-in scheme). The opt-in scheme is undesirable as certain 'economic activities' may be inappropriately classified as 'government activities' simply because they are undertaken by a government or regulatory body.

A better approach would be for government or statutory bodies to be exempted on a case-by-case basis (ie, an opt-out scheme) and to have the government justify why a particular entity or body should be exempted. This system shifts the focus of scrutiny onto the activity in question rather than the type of entity involved.

Land regulation system

Neither the COMPAG reports nor CEDB have commented on the impact and ramifications of the introduction of the Proposed Competition Law on the government's existing sole right to grant land use rights in Hong Kong. Hong Kong's unique land-grant system means that the government has the potential to distort the competitive landscape and, possibly, efficient market outcomes. Given the possible limitations such a land system could have on the effectiveness of the Proposed Competition Law, it would seem that this is an unresolved area that urgently needs addressing, particularly if the government is to be exempted from the ambit of the Proposed Competition Law.

Consolidation of telecommunications and broadcasting sectors

Currently, telecommunications and broadcasting are the only two sectors in Hong Kong with competition regulations. The existing pieces of legislation which contain such competition provisions are the Telecommunications Ordinance (TO) and the Broadcasting Ordinance (BO). The competition provisions governing these two sectors vary widely in scope and regulatory mechanism. As part of the larger consolidation of the two sectors, the government proposes to create a new unified regulatory body together with the introduction of a cohesive Proposed Communications Law.

The government issued a public consultation document in March 2006 setting out proposals for introducing the CA as a single regulator of the telecommunications and broadcasting sectors. The rationale for the proposed merger of responsibilities is the rapid development and convergence of technological services and markets in the two sectors, calling for corresponding restructuring at the regulatory level. This overhaul is scheduled to occur in two stages. The first is the merging of the two existing regulators, TA and BA; the second, the replacement of the existing legislation governing the two sectors with one comprehensive piece of legislation, the Proposed Communications Law.⁵ Such a merger is in line with the trends globally, the UK and Australia also having merged their telecommunications and broadcasting regulators into a unified regulatory body in 2002 and 2005, respectively.

Current competition provisions

The existing competition provisions regulating the telecommunications sector are wider in scope than those governing the broadcasting sector. The TO covers 'any market for the provision or acquisition of telecommunications networks, telecommunications systems, telecommunications installations, or customer equipment or services'.⁶ It regulates the three pillars of competition control: anti-competitive practices, abuse of dominant position and merger control. The BO regulations only cover the television programme service market and do not contain provisions regarding merger control.

The regulatory authorities and appeal process are also different for the two sectors. The TA is responsible for enforcing the competition provisions of the TO. It is a public officer appointed by the chief executive of Hong Kong. The TA receives support from the government department, Office of Telecommunications Authority, on economic regulation matters in analysing and considering competition complaints. Appeals from TA competition decisions are heard by the TAB. In the broadcasting sector, competition provisions are enforced by the BA. The BA comprises a committee of non-official members and official members appointed by the chief executive. Appeals against the competition decisions of the BA lie with the chief executive of Hong Kong.

The difference in the two existing sectoral regimes will become increasingly marked as the two sectors further converge, creating challenges for the enforcement agencies. With this in mind, it is timely for the government to propose to modernise regulation of these two sectors and merge the two competition regimes into one.

Private actions are not currently available under either regime.

Proposed regime

The CEDB proposes to transfer the existing statutory powers and functions of the TA and the BA to the new CA through the Proposed CA Law. The public has been generally supportive of this proposal. The CA will comprise board members possessing the requisite expertise to deal with issues of the communications sectors. It will not, as suggested by some responses to the public consultation, include representatives of industry operators. This should ensure impartiality. The CEDB also proposes to have appeals from competition decisions made by the CA be heard by an expanded TAB as such appeals often involve highly technical expert evidence analysing markets and the economic effect of the conduct in question.

The CEDB will also task the CA with reviewing and rationalising both the BO and the TO, and work with the government to formulate the Proposed Communications Law. In the 2006 public consultation process, the CEDB envisioned a consolidation of the competition provisions into one framework by unifying the scope of the competition regime to the entire electronic communications sector, harmonising existing anti-competitive provisions and standardising the competition effects test for analysis and investigation.

In January 2010, the CEDB changed its previous proposal to one which repeals the competition-related provisions under the BO and the TO and instead suggests regulating the sectors under the corresponding provisions of the Proposed Competition Law. This will resolve the issue of existing inconsistencies in competition regulation between the BO and the TO. Further, it will also be in keeping with the spirit of the Proposed Competition Law, which is to implement a single cross-sector competition law that effectively and consistently regulates anti-competitive conduct in the Hong Kong economy. However, CEDB did not elaborate on the mechanism of this proposal or the timing of its implementation.

If the Proposed Competition Law is presented to the Legislative Council in this 2009-2010 legislative year as scheduled then, depending on when it comes into force, the BA and the TA (or the newly enacted CA) may have concurrent jurisdiction with the Commission. Therefore, consistency of approach and effective inter-agency cooperation during the transition will be crucial to ensure market certainty. These are especially important given the recent experience of the UK Office of Communications (Ofcom).⁷ Ofcom was created in 2002 to consolidate the responsibilities of five communications and broadcasting regulators. In fulfilling one of its responsibilities inherited from the legacy regulators, namely the promotion of equal opportunities in employment, Ofcom decided to depart from the procedures previously implemented by the legacy regulators. While Ofcom changed its procedures to decrease this heavy workload, it was reluctant to disclose its reasons for the change. As a result, a lengthy litigation ensued which sought to challenge Ofcom's right to change the established procedures.⁸ While Ofcom ultimately prevailed, the tribunal remarked that Ofcom could have avoided the litigation by making clear why it had taken the steps it did in relation to promoting diversity. While a similar case is unlikely to happen in Hong Kong, the government would do well in avoiding the pitfalls of miscalculation of workload, inconsistency in approach and inadequate communication.

Conclusion

This article has summarised the primary components of the competition law as currently proposed by COMPAG and CEDB, as well as exploring some of the key issues which remain unresolved following the recent public consultations.

Hong Kong undoubtedly has a unique economic and constitutional framework, such that a tailored competition law regime is clearly necessary to ensure that the needs of all interested parties (and particularly consumers) are adequately addressed. In general, the Proposed Competition Law achieves this delicate balancing act. Even though certain issues remain unresolved at the time of the latest COMPAG report (in particular, the exemption of statutory bodies and the lack of a merger control regime), the government has made a number of significant steps in the past 12 months towards responsibly addressing concerns raised by commentators in the Consultation Paper through, among other things, amending existing sectoral competition regulations to dovetail with the new competition regime.