2008/08/01
Introduction 1. In the Chamber's response to the government discussion paper romoting Competition "Maintaining our Economic Drive"in February 2007, the Chamber stated that "whether or not a competition law will protect the competitive environment and promote competition relevant to the Hong Kong context will depend on how the law is designed and drafted." The Chamber notes that the detailed proposals for a competition law are now spelled out in the present consultative paper. 2. The Chamber's position remains that we are prepared to consider supporting a competition law if it is well designed in accordance with a minimalist approach, and "if there are enough safeguards to address business concerns and to ensure that it will be pro-market and business-friendly." The present consultation paper has been considered against this long-held position of the Chamber. 3. Our response consists of the following three parts. The first addresses the broad principle and approach to competition law. In the second section, we shall discuss eight general issues on various aspects of the proposed law. The final part lists our comments on the 50 specific proposals in the consultation paper. Principle and approach 4. The Chamber's position with regard to competition law can be summarized in four words: minimalist law, incremental implementation. - Minimalist law means the coverage of the law must be restricted to a limited set of anti-competitive behaviour. As stated in our previous paper, "The law should be limited in application. The seven categories of conduct as suggested are reasonable and there is no need to extend to other types of conducts." The "seven categories of conduct" refers to the following behaviours mentioned in consultation paper in November 2006, namely, price-fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards, and abuse of dominant position. - Incremental implementation is required because not every one of the seven types of conduct is equally well-defined. Hence the law can be made effective in stages, applying first to the most clearly defined behaviours (such as price-fixing and bid-rigging) and giving more time for the regulator to prepare for implementation of the more contentious aspects (e.g. abuse of dominant position). 5. The Chamber will have no objection to a law designed in accordance with the above principle. However, we are concerned that the proposals in the consultation paper lack clarity in objective and coverage, and suggest a possibility of future "regulatory creep". Without clearly defined objective and coverage, there is every likelihood that what may have started off as a sensible policy would in time be expanded and distorted through the political process into a different creature from what was conceived at the outset. General issues 6. In our view, it is considered as important to get the approach right as it is to consider the fine points of the detailed proposals. In this section we shall discuss eight general issues, namely, object and coverage, thresholds and determinations, merger regulation; penalties, private action, sectoral competition laws, exemptions, and implementation. (1) Object and coverage 7. According to the present consultation paper, the purpose of the legislation is to "enhance economic efficiency and thus the benefit of consumers through promoting sustainable competition". The behaviours to be regulated will not be specified; instead the law will apply to a generic concept of "undertakings" which are engaged in conducts that have "the purpose or effect of substantially lessening competition". It will be left to the Competition Commission to establish guidelines to illustrate what are the actual conducts to be regulated. 8. The Chamber finds such an approach problematic. Hong Kong is basically a free market where competition is a matter of course among companies. The Competition Commission's primary task should be as a regulator against problematic behaviour, not to promote competition which is usually the task of regulators of specific economic sectors. 9. Besides an objective which we find problematic, we are concerned that the coverage (undertakings with behaviours that substantially lessen competition) is too ambiguous. There would be a huge grey area between "benign" and "bad" behaviours thus giving too much burden on, and discretion to, the Commission and the Tribunal. This is not a matter that can be entirely resolved through illustrative guidelines - it is reasonable for guidelines to be formulated to give practical guidance, but the law itself must be clear before guidelines can be issued. 10. We would prefer that the object of the law be specifically limited to regulating anti-competitive behaviour, which should be specified explicitly in the law. In line with the minimalist principle, the list of behaviours should be specifically limited to the seven types of conduct outlined above. 11. Naming the infringing behaviours in the law will not do away with the need for guidelines. Besides serving an illustrative purpose, the guidelines will help provide a bridge of understanding between the regulator and the market. To ensure that the guidelines are drawn up only after thorough engagement with stakeholders, the need for consultation in drawing up guidelines should be provided for in the legislation. (2) Thresholds and determinations 12. According to the Consultation Paper, the Commission will have wide powers of discretion to determine: - thresholds for action: 20% market share to trigger possible action on anti-competitive agreements, and 40% for abuse of dominant position; - what constitutes anti-competitive behaviours and hence warranting action - in deciding this, the Commission will consider purpose or effect of substantially lessening competition; - what constitutes "rivolous complaints" and hence not to take action. 13. Insofar as thresholds provide a safe harbour for small businesses, they have our support. On the other hand, they must not be administered in a way to suggest any implication of "big is bad" Whatever the upper threshold is, it should at most be an indicator of possible substantial market power and should not be taken as definitive as other indicators such as relative market share and barriers to entry should also be taken into account. There must not be any a priori assumption of problematic behaviour for companies with market shares beyond the thresholds. 14. It is not clear to us how the levels suggested (20% and 40%) are justified, and whether the same level should apply for every market in every sector. In either case, we would like to emphasise that the "market" must be defined clearly and properly, to enable market participants to assess the effects of their conduct, especially when most Hong Kong-based companies are competing in a market that goes beyond the geographical boundary of Hong Kong and links the Mainland to the world. The definition of market is crucial, but it is an issue which is not adequately addressed in the consultation paper. 15. On determining infringing behaviour, the Chamber has two concerns. First, the "substantially lessen competition" criterion is questionable: a competitive market means precisely that players are trying to "substantially lessen" the role of each other and they should not be punished if they succeed. In the competition policy debate, there is a huge body of literature about the need to focus on market contestability rather than forming arbitrary judgements of allegedly more or less competition. Secondly, the concept of assessing purpose or effect is problematic - while it is reasonable to examine effect and conduct, it goes against common sense to punish people for what is "in their mind" (purpose). It is more reasonable for the criteria to be changed to both purpose and effect. 16. In our view, no single test would work, whether in determining thresholds, infringing behaviour or frivolous complaints. More specific guidelines would be needed to enable the public to understand the standards to be applied, and in some circumstances a case-by-case approach may be required before an across-the-board standard is established. (3) Merger regulation 17. While the current proposals do not cover regulation of mergers, the consultation paper indicates that the subject may be reviewed in future, and invites views on whether merger provisions should be introduced and if so, when. The options offered in the consultation paper include: - to introduce merger provisions now; - to introduce merger provisions but delay enforcement till later; - not to include merger provisions but to reconsider after a review of the law. 18. To the Chamber, none of above options is acceptable. Our position has long been that if a law were to be enacted, it should be limited to regulating behaviour, not market structure. To introduce merger regulation will violate the principle of a minimalist law. Market structure rules, whether on monopolies or mergers, are simply not needed, whether now or in the future. (4) Penalties 19. According to the consultation document, the Commission can hand down penalties of 10% of turnover up to $10 million. Penalties beyond $10 million can be imposed by the Tribunal. There seems to be a presumption that the regulatory expertise in competition regulation is readily available in Hong Kong - an assumption which the Chamber is not entirely satisfied with. 20. The Chamber's view is that there should be clear, objective and transparent guidelines to enable the Commission and the Tribunal to determine penalties. Some issues that need to be clarified include: - how would "turnover" be decided - would it be specific to the infringing behaviour or does it refer to the total turnover of a company; - the period over which turnover applies, whether it correlates with the period of the anti-competitive behaviour, and if so, whether the penalty would be retroactive, i.e. applying to existing action which would be deemed infringing after the law were in force, and whether there would be grand-fathering arrangement; - how a "group" comprising several entities will be impacted, e.g. companies under "common control" whether they would be treated as a single undertaking and subject to one penalty or several undertakings each subject to a penalty specific to its own turnover; - the nature of the fine, whether it would be punitive on the infringer, or compensatory to the aggrieved, or used as deterrent for other players; - the 10% being the cap, what would be the norm; - what would be the right of legal representation for defendants in the determination of penalties, since the penalty level might be comparable to those imposed under criminal sanction. (5) Private actions 21. In common with other jurisdictions, the proposed competition law would allow "follow-on" actions, allowing victims of misconduct to take private action to recover damages. In addition, the consultation paper proposes that "stand-alone" actions be allowed to enable alleged victims to take cases directly to the Tribunal without going through the Commission. For both follow-on and stand-alone cases, representative actions on behalf of groups such as consumers or SMEs would be possible subject to permission by the Tribunal. 22. It is reasonable for aggrieved parties to have the right to seek redress through private action. On the other hand, if there is no certainty that parties taking action are genuinely aggrieved, it may give rise to an abundance of frivolous complaints, as well as inflation of expectations in areas with less clarity or certainty (such as abuse of market dominance). The potential cost of administering private actions should not be under-estimated, as it could seriously tax the priorities and resources of the regulator. 23. In our view, an appropriate balance would be to limit private action to follow-on actions only, with the certainty that an infringement has been established. Stand-alone actions should be excluded. With regard to representative actions, since those currently permitted in Hong Kong are only available in very limited circumstances, for prudential reasons we suggest that their introduction be delayed to a later phase in the implementation of the competition law. (6) Sectoral competition laws 24. At present there are two sector-specific competition laws on telecommunications and broadcasting. With the enactment of the new competition law, the telecommunications and broadcasting sectors will be subject to one more ordinance which overlaps with existing laws, and market players will have more than one regulator on competition to answer to. This is clearly not satisfactory, and requires careful thinking in achieving regulatory and institutional harmony. The matter is made more complicated by the pending merger of the regulatory regimes in telecommunications and broadcasting. The proposal in the consultation paper is that the overlapping provisions in the telecommunications and broadcasting laws would be repealed, and the Telecommunications Authority and the Broadcasting Authority will share jurisdiction with the Competition Commission over competition matters in these sectors. In other words, there will be two sets of competition provisions, namely, the regulation of conduct rules under the Competition Ordinance (on which the shared jurisdiction applies), and the residual provisions not in the new Ordinance but retained in the Telecommunications and Broadcasting Ordinances. 25. However, to have two regulators on the same competition issues, and two competition laws for the same sector, is structurally problematic. This is recognised in the consultation paper itself, which acknowledges, for instance, that shared jurisdiction "could lead to a situation where the respective regulators might interpret the law differently"(p.49, para 8). Such discriminatory treatment for selected sectors is not justifiable and it diminishes the rationale for an all-embracing competition law. 26. In reforming our competition policy regime, the ultimate objective should be to subsume the competition policy roles of OFTA/Broadcasting Authority into the new Competition Commission, so that all companies should become subject to a single body of competition law under a single competition regulator. OFTA and Broadcasting Authority can and should retain their role as market regulators and overseers of the myriad technical issues relating to telecommunications and broadcasting, but they should over an agreed period of time cede their powers in respect of anti-competitive behaviour. 27. Besides telecommunications and broadcasting, some other sectors are also subject to regulation by their own respective regulatory authorities, e.g. the financial services industries. Although the sectoral regulatory regimes are not necessarily directed towards competition, the introduction of the new cross-sectoral competition law may give rise to issues of consistency between the new law and existing sectoral laws, regulations, and international agreements and obligations. The Competition Commission should recognise that conduct that is required or recommended by sector-specific regulations and guidelines should not be liable to constitute a breach of the competition law. (7) Exemptions 28. We welcome the provisions for exemptions and exclusions on the grounds of economic benefits, public interest or public policy. In addition, we suggest that there should be an exclusion provision to avoid potential conflict between the new competition law and Hong Kong's legal requirements arising from international treaties or obligations, for example, bilateral aviation agreements entered into by the HKSAR government and other jurisdictions. A clause on "avoidance of conflict with international obligations" would be appropriate. 29. While welcoming exemptions and exclusions, we would express concern about the discriminatory way in which they are to apply between government and the private sector. According to the consultation paper, the future competition law will include a non-application clause for government and statutory bodies. The Chamber's position is that the principles for exemptions and exclusions should apply across the board, i.e. to both the private sector and the government in the same manner. For precisely the reason stated in the consultation paper - that "the activities of the public sector almost invariably would fall under the criteria for exemptions and exclusions"(para 3, p.50) - there is no need to non-apply the law for government and statutory bodies. In most cases, government and statutory bodies would be exempt or excluded as a matter of course, as they provide public instead of economic or commercial services. However, it remains the case that some public sector bodies, albeit a minority, may be engaged in commercial activities and competing in and influencing the market place with other players. There is no reason to exempt these from regulation solely on the ground that they belong to the public sector; to do so would distort the definition of "market" of which the public sector bodies are players. (8) Implementation 30. The Consultation Paper describes several levels of behaviours which will be regulated, including: - "hard core" behaviours which are always illegal; - non-hard core conduct which is infringing only under certain circumstances; - abuse of dominant market position which applies only to certain players ("dominant" firms) under certain circumstances. 31. The consultation paper has not stated which activities are to be considered "hard core" they will have to be defined by the Commission. However, the consultation paper itself indicates several different possibilities: - "hard core conduct such as price-fixing or bid-rigging"(para 3, p.44) - "price-fixing, market allocation and bid-rigging...such 'hard core' conduct" (para 18, p.28) -"hard core conduct, i.e. price-fixing, bid-rigging, output restriction and market allocation"(para 7, p.45) 32. The lack of consistency even within the consultation paper itself underlines the difficulty in defining clearly the subject matter to be regulated. Even if we were to limit the conducts to the seven types mentioned above, there are varying degrees of clarity in definition, and hence different levels of difficulty in applying the law. 33. In view of that, we would recommend an incremental, phased approach in implementing the law. The experience gained in each phase will help prepare for implementation of the next. According to this incremental approach, the implementation can be carried out in three phases: - Phase I deals with price-fixing and bid-rigging. - Phase II deals with other anti-competitive agreements, including market allocation, sales and production quotas, joint boycotts, and unfair or discriminatory standards. The introduction of representative action could also be considered. - Phase III will tackle abuse of dominant position. 34. Phase I is to deal with price-fixing and bid-rigging, presumably the most "notorious" anti-competitive conducts judging from the way they are presented in the consultation paper. There is also considerable regulatory experience to draw from both internationally and locally (e.g. the provisions against bid-rigging in Sections 6 and 7 of the Prevention of Bribery Ordinance). Even so, there are many tasks to be undertaken before full implementation of Phase I - consultation will have to be conducted and guidelines to be drawn up before they are applied. The regulator will have to accumulate experience in making determinations on infringement or exemption. 35. Limiting the law's application only to the Phase I conducts does not mean giving a free ride to all other behaviours. Other conducts which are less capable of clear definition in advance, and whose economic effects are less clear, could be addressed on a case-by-case basis, and be subject to a cease and desist order (i.e. prohibiting conduct on a prospective basis only) for the future if found to be anti-competitive in the Commissioner's judgement. The cease and desist provisions will thus be useful as an interim measure to help both the regulator and market players build up experience. 36. Phase II would see more conducts added to the list of prohibited practices but the same principles and procedures should be applicable. The introduction of representative actions could also be considered under this Phase. With smooth implementation of the first two phases, the Commission will be in a much better position to proceed to Phase III to tackle issues that are contentious in the international arena. 37. Under Phase III, issues like abuse of dominant position can be dealt with after gathering more international experience. This is needed because of the current lack of clarity as to the concept of abuse, which has been widely acknowledged. In time an effective regime could be established when the ongoing international effort to achieve greater clarity bears fruit. Besides, another challenge is to tackle the possible need for cross-border collaboration, such as joint investigations, given that some regimes may have the authority of imposing criminal sanctions. There is no need to rush into implementation of these complicated issues, for which the implications must be examined carefully. Specific proposals
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