Hong Kong: Competition Commission

The year 2014 will be remembered as an important year for competition law in Hong Kong. It is the year in which the Competition Commission took shape and made its debut in the international antitrust community; the new Competition Ordinance (the Ordinance) was promoted among Hong Kong’s general public and businesses at large; and the Competition Commission’s draft guidelines for consultation were published, paving the way for the substantive implementation of the Ordinance.

It has taken Hong Kong nearly two decades to develop its first general competition law. Being the latecomer means we have the benefit of hindsight; we are well placed to learn from international best practice while remaining alive to local commercial realities. Our approach is reflected in the draft guidelines. That said, we need to play catch-up fast, most crucially to keep up with the expectations of the Hong Kong public and to get ready to carry out our role in a relatively short period of time.

Hong Kong’s competition law

A historical perspective

The idea of a competition law for Hong Kong first came to light in 1994, when the Consumer Council undertook a series of studies on business competitiveness in Hong Kong. These included studies on bank deposit interest rates, supermarkets, fuel, broadcasting, telecommunications and residential property. Recommendations made by the Consumer Council in relation to the telecommunications sector in this context ultimately led to the introduction of a competition regime for that sector in 2001.

In response to the Consumer Council’s various reports on competitiveness, the government established the Competition Policy Advisory Group (COMPAG) in 1997 to review Hong Kong’s competition-related issues at large, and to handle complaints. However, this latter function was limited by COMPAG’s lack of formal investigatory powers and of any authority to render binding decisions or enforcement actions. In 2006, COMPAG recommended that a cross sector competition law be introduced with an independent regulatory body set up to enforce the law. Various public consultations followed, and in 2008 the government’s Commerce and Economic Development Bureau released a blueprint of the key provisions of a proposed Competition Bill. The Bill was tabled in the Legislative Council in 2010 before being passed into law on 14 June 2012.

Substantive rules under the Competition Ordinance

Similar to established competition law regimes, Hong Kong’s Competition Ordinance comprises what are commonly known as the three pillars of competition law:

• a first conduct rule which prohibits businesses from entering into or giving effect to anti-­competitive agreements and arrangements;
• a second conduct rule which prohibits businesses with a substantial degree of market power from abusing that market power to engage in anti-competitive conduct; and
• a merger rule which prohibits mergers and acquisitions that substantially lessen competition.

While the conduct rules were designed to be sector-neutral and applicable to all industries, the government took a different approach in relation to the merger rule, whose scope of application is confined to the telecommunications sector (at least in the initial years of implementation of the Ordinance). For the avoidance of doubt, mergers in non-telecoms sectors are given an express exclusion from the conduct rules. Although this policy decision has attracted some criticism, it was arguably needed at the pre-legislative stage to gain business support and may be expected to help focus the Commission’s limited resources on behavioural issues which are more of a concern for consumers. However, it is envisaged that after acquiring a number of years’ enforcement experience, the government will review the Ordinance’s efficacy and reconsider whether a cross-sector merger control regime may be suitable for Hong Kong.

Institutional arrangements

In terms of institutional arrangements, the Ordinance adopts a two-tiered adjudicative enforcement model, with the Competition Commission, an independent statutory body, acting as investigator and prosecutor; and the Competition Tribunal, a specialist court in the High Court made up of judges of the Court of First Instance, acting as decision-maker and adjudicator. The structure was preferred over an EU-style administrative enforcement model in order to afford more checks and balances to the Commission’s power.

Under this structure, the Commission’s remedial function (other than in respect of bringing enforcement action before the Tribunal) is limited to bringing infringing conduct to an end through the acceptance of voluntary commitments and the issuance of warning notices or infringement notices. The power to impose sanctions lies solely with the Competition Tribunal, and the Commission will have to establish its case in front of the Tribunal before it can succeed in having pecuniary penalties or other sanctions (such as director disqualification orders) applied. Only after an infringement has been found by the Tribunal in a case brought by the Commission, can private parties then institute follow-on damages actions. The Tribunal will conduct its proceedings on the basis of general civil procedures with certain flexibilities. Its decisions can be appealed to the higher courts like any other decisions of the Court of First Instance.

The Competition Commission’s first year

A fresh and growing team

On 1 May 2013, I and 13 other colleagues were appointed members of the newly formed Competition Commission. With the help of a seconded team from the government, the Commission established a governance structure as well as internal administrative rules and procedures. A global talent hunt began in September 2013 to recruit a top management and professional team. The recruitment of mid-level and support staff started around the same time.

All the key executives recruited through the initial round reported to duty during the course of 2014, including our chief executive officer, Dr Stanley Wong. As of December 2014, we have over 40 staff members, and will continue to grow to approximately 50 in the coming months.

Early engagement with stakeholders

As soon as the first batch of executives arrived, the Commission immediately started engaging with stakeholders and interest groups with a view to understanding their concerns and expectations with competition enforcement in the Hong Kong context. Following the release of the Commission’s publication ‘Getting Prepared for the Full Implementation of the Competition Ordinance’ on 26 May 2014, our staff met with a broad range of trade associations, chambers of commerce, professional bodies, regulators, academics, economists and lawyers over the course of the next three months.

The engagement process proved to be particularly useful in terms of reaching out to businesses and the general public with a view to introducing the role of the Commission, advocating the benefits of competition law, and explaining its key elements and enforcement mechanisms. The insight we gained in this context on Hong Kong’s prevalent trade practices in different sectors of the economy greatly assisted the development of the draft guidelines that the Commission is required to publish under the Ordinance.

The draft guidelines

During the pre-legislative debate of the Competition Bill, the government outlined a phased-in implementation plan to address concerns that businesses might not have sufficient time to farmiliarise themselves with the new law and make necessary adjustments to their commercial practices. In 2013, institutional provisions in relation to the establishment of the Competition Commission and the Competition Tribunal were first brought into force, on 18 January and 1 August respectively. The substantive provisions of the competition rules and enforcement procedures on the other hand will become operative at a later date to be appointed by the government, but only after the Commission issues guidelines mandated under section 35 of the Ordinance. Through this phasing in of the Ordinance, businesses are afforded a reasonable transitional period during which they can gain an understanding of competition law through the Commission’s engagement and advocacy activities, as well as the publication and consultation on the Commission’s draft guidelines, before enforcement takes place subsequently.

In view of this phased approach to implementation, one of the Commission’s primary tasks in its first year of operation is to prepare the draft guidelines and conduct consultations as required by the Ordinance. After several months of hard work and with the cooperation of the Communications Authority, we drafted a set of six guidelines, namely:

• the Guideline on the First Conduct Rule;
• the Guideline on the Second Conduct Rule;
• the Guideline on the Merger Rule;
• the Guideline on Complaints;
• the Guideline on Investigations; and
• the Guideline on Applications for a Decision under sections 9 and 24 (Exclusions and Exemptions) and section 15 (Block Exemption Orders).

These draft guidelines were issued on 9 October 2014 for a two-month public consultation period. They are intended to provide general guidance on how the Commission will interpret and apply relevant provisions of the Ordinance. However, the guidelines do not have binding legal effect and notably do not bind the Tribunal or other courts. The first three guidelines provide detailed explanations on the key concepts and the economic rationale of the first conduct rule, the second rule, and the merger rule respectively. The conduct rule guidelines use in abundance hypothetical examples that reflect market situations likely to be found in Hong Kong, in order to help the reader relate competition theories and analysis to real life scenarios. Statutory exclusions and exemptions, as well as market definition methodologies, are discussed at length in the conduct rule guidelines. Guidance on how to file a voluntary merger notification, and on merger-related application and investigation procedures are provided in the merger guideline. Procedural guidance other than those relating to merger control is to be found in the three general process guidelines.

By the end of the public consultation, we had received a total of 62 submissions from various interested parties. The Commission is currently in the process of compiling and considering the feedback received, and making appropriate revisions to the draft guidelines as required. Our next step is to present a report on the public consultation results, together with a revised set of draft guidelines to the Legislative Council for a further consultation with the legislators, before finalising and issuing the guidelines in 2015.

Education and advocacy

We believe education and advocacy are just as important to promoting competition as enforcement actions, if not more important at the introductory stage of a new law. Coinciding with the engagement process and the public consultation on the draft guidelines, the Commission launched a series of media campaigns, consisting of TV, radio and internet commercials, advertisements in newspapers and posters throughout public transport networks. We also produced a mini movie about two intertwined bid rigging and market sharing cartel scenarios, thus featuring two types of ‘serious anti-competitive conduct’ under the Ordinance. The movie was released to the public through the Commission’s own YouTube channel (www.youtube.com/user/compcommhk).

Besides the media campaigns, a number of competition law seminars have been organised specifically targeting SMEs. The seminars focus on the fundamental principles of the law, and seek to deliver simple and clear messages to the audience by avoiding overly complicated legal and economic technicalities. While the Commission is not in a position to give legal advice on specific cases, we make an effort to address questions from the floor with a principle-based answer and, wherever possible, by offering practical compliance guidance. So far, the number of registrations to these seminars has consistently exceeded expectation, and the feedback is very positive. As the body of implementing rules and guidance develops, the Commission will continue to host public seminars so as to keep businesses up to date on the latest compliance and enforcement information.

Cross-agency and international cooperation

The Commission expects to work alongside other agencies in its enforcement of the Ordinance. According to section 159 of the Ordinance, the Commission shares concurrent jurisdiction with the Communications Authority in relation to competition matters in the telecommunications and broadcasting sectors. A level of co­operation with other sectoral regulators (especially those regulating organisations exempted from the Ordinance) can also be envisaged. Furthermore, when the Commission exercises its more intrusive investigatory powers such as entering and searching premises, police assistance may sometimes be required.

Inter-agency cooperation with authorities from different jurisdictions is another aspect that we are considering and looking forward to. As an initial profile-building and networking step, the Commission joined the International Competition Network in 2013 and participated in various international and regional conferences and forums to make its presence known in the global competition community. We have also established bilateral contacts with numerous overseas counterparts.

Looking ahead

As mentioned above, with the current consultation on draft guidelines drawing to a close, the Commission is looking towards revising the draft guidelines based on comments received and, pursuant to a requirement of the Ordinance, will consult the Legislative Council on the revised versions in the first half of 2015. Once the final guidelines are published, we will have cleared the way for the government to complete the final phase of effecting the Competition Ordinance, namely, by bringing the competition rules and the relevant operational provisions into force. A commencement notice in this regard is expected to be gazetted in the second half of 2015.

In the lead up to the commencement of the Ordinance, the Commission is working on other internal preparations besides the finalisation of the guidelines. These preparations include publishing policy documents in relation to leniency and enforcement priorities, preparing a memorandum of understanding on how to enforce concurrent jurisdiction with the Communications Authority, and issuing further educational materials (such as compliance toolkits, SME-focused and sector-specific brochures and booklets) to assist businesses and their advisers in understanding and complying with competition law. Capacity building within the Commission will also continue in 2015 through recruitment and training, so will our external advocacy programmes.

In sum, the Commission is well on the path towards completing the groundwork for the full implementation of the Competition Ordinance in Hong Kong.