Hong Kong: Competition Commission

The year 2015 will be remembered as an important year for competition law in Hong Kong. It is the year in which the Competition Ordinance (the Ordinance) came into full effect, on 14 December. We have, as of December 2015, received more than 400 complaints and enquiries. Certain businesses have already begun to cease long-term business practices that might infringe the competition rules. All these developments reflect well on our advocacy work. Apart from continuous advocacy effort, key documents (including the guidelines and policy documents) have been 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 guidelines. That said, we need to play catch-up fast, most crucially to keep up with the expectations of the Hong Kong public.

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 Ordinance

Similar to established competition law regimes, the Ordinance comprises what are commonly known as the three pillars of competition law:

• a First Conduct Rule that prohibits businesses from entering into or giving effect to anticompetitive agreements and arrangements;
• a Second Conduct Rule that prohibits businesses with a substantial degree of market power from abusing that market power to engage in anticompetitive conduct; and
• a Merger Rule that prohibits mergers and acquisitions that substantially lessen competition.

While the First Conduct Rule and the Second Conduct Rule (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 Competition Commission’s (the Commission) limited resources on behavioural issues that 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 Commission, an independent statutory body, acting as investigator and prosecutor; and the Competition Tribunal (the Tribunal), a specialist court in the High Court made up of judges of the Court of First Instance, acting as decision-maker and adjudicator.

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 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 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 familiarise themselves with the new law and make necessary adjustments to their commercial practices. In 2013, institutional provisions in relation to the establishment of the Commission and the 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, were only to become operative after the Commission issued guidelines mandated under section 35 of the Ordinance. Through this phasing in of the Ordinance, businesses were afforded a reasonable transitional period, during which they could 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 subsequently takes place.

In view of this phased approach to implementation, one of the Commission’s primary pre-commencement tasks was the preparation of the guidelines. After two successive rounds of public consultation and consultation with the Legislative Council, six guidelines were issued on 27 July 2015, 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).

The guidelines are intended to provide general guidance on how the Commission will interpret and apply relevant provisions of the Ordinance. The first three guidelines provide detailed explanations of the key concepts and the economic rationale of the First Conduct Rule, the Second Conduct Rule, and the Merger Rule respectively. The conduct rule guidelines use 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 that relating to merger control can be found in the three general process guidelines.

Policy documents and other guidance

The Commission also published its Enforcement Policy and Leniency for Undertakings Engaged in Cartel Conduct (the Cartel Leniency Policy) on 19 November 2015.

The Enforcement Policy

The Enforcement Policy supplements the Ordinance and the guidelines that the Commission has issued to provide guidance on how the Commission intends to exercise its enforcement function in investigating possible contraventions of the Conduct Rules through:

• adhering to six core principles in conducting investigations (professional, confidential, engaged, timely, proportionate and transparent);
• prioritising the use of the Commission’s operational resources to investigate conduct that may contravene the Conduct Rules in an efficient and timely manner; and
• identifying an enforcement response that is suitable and proportionate where the Commission considers a contravention of the Ordinance has occurred.

During the initial years of the operation of the Ordinance, the Commission believes that its resources should be focused on encouraging compliance with the Ordinance in the Hong Kong economy as a whole, rather than focusing on specific sectors. When considering whether to investigate a particular case, the Commission will accord priority to those cases that involve any one or more of the following types of conduct:

• cartel conduct;
• other agreements contravening the First Conduct Rule, causing significant harm to competition in Hong Kong; and
• abuses of substantial market power involving exclusionary behaviour by incumbents.

The Cartel Leniency Policy

Leniency is a key investigative tool used by competition authorities around the world to combat cartels. Cartels differ from other types of anticompetitive conduct. First, they are universally condemned as economically harmful. Second, cartels are usually organised and implemented in secret, making them more difficult to detect.

The Cartel Leniency Policy is a policy issued under section 80 of the Ordinance, which provides that the Commission may make a leniency agreement with a person that it will not bring or continue proceedings in the Competition Tribunal for a pecuniary penalty, in exchange for the person’s cooperation in an investigation or in proceedings under the Ordinance.

It sets out information relating to leniency applications, including an overview and scope of the policy and how to apply for leniency. A template for the leniency agreement between the Commission and an undertaking engaged in cartel conduct is attached to the Cartel Leniency Policy.

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. The Commission has launched a series of media campaigns, consisting of TV, radio and internet commercials, advertisements in newspapers and posters throughout public transport networks. In late July 2015, we launched 10 drama episodes of one minute each on primetime TV to illustrate how the competition rules apply, and have received excellent responses from businesses and members of the public. Over 1 million viewers tuned in to these episodes each night. In December 2015, we launched a new wave of publicity campaigns on multiple platforms to remind the public of the imminent full commencement of the Ordinance.

All the publicity and advertisement materials can be found on our website at www.compcomm.hk.

Besides the media campaigns, nine free competition law seminars have been organised, specifically targeting SMEs, trade associations and the public. 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. 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.

The Commission has also developed easy-to-understand publications, including brochures for SMEs and trade associations, and a compliance toolkit to assist businesses in complying with the Ordinance.

In addition, a roving exhibition, featuring informative panels and specially designed interactive electronic games, was held at seven locations across Hong Kong between September and November 2015, to increase awareness of the Ordinance among the general public.

The Commission has also made contributions to several policy debates. Based on the study of the market for building management services in Hong Kong’s many large housing estates, a submission was made to the government’s public consultation in support of proposed changes likely to enhance competition in that market. The Commission also made a submission to the government’s public review into the future of the electricity market, outlining how competition principles could be applied to that market.

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 memorandum of understanding has been signed between the Communications Authority and the Commission for purposes of coordinating the performance of their functions under section 161 of the Ordinance. 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 looking forward to. The Commission is a member and active participant of established networks such as the International Competition Network, and has 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

With our extensive preparatory work, the Commission is ready to handle the responsibilities and face the challenges of the full implementation of the Ordinance. We look forward to working with businesses and the general public to ensure that competition is vibrant and fair for the benefits of consumers and businesses.