Samuel Chan BBS JP, Chairman, Competition Commission (the Commission), highlights the need for directors, and the governance professionals advising them, to understand their exposure to competition law risks and to instill a competition compliance culture across all levels of the business from top down.
The first year of your tenure as Chairman has been highly active on the enforcement side – what are the Commission’s enforcement strategies in Hong Kong?
‘As with all competition authorities, it is important to make efficient use of the Commission’s resources in order to be as effective and far-reaching as possible in our enforcement mission. We are also conscious that as a relatively young agency the precedents we set at this stage of our development may have particularly enduring effects in not only building the foundations for future enforcement cases, but also providing greater clarity to the business and legal communities.
As regards enforcement priority, disrupting hardcore cartel conduct under the First Conduct Rule (FCR) of the Competition Ordinance (the Ordinance) has been the Commission’s top priority so far, particularly where such conduct reflects ingrained industry practice. This strategy is not only consistent with the Commission’s enforcement policy, but it is also supported by the complaints and queries we receive from consumers and businesses in Hong Kong, which predominantly feature concerns over cartel conduct such as price fixing, bid rigging, and market sharing and output control in a variety of sectors. Apart from cartels, abuses of substantial market power involving exclusionary behaviour by incumbents under the Ordinance’s Second Conduct Rule (SCR) are also among the forms of anti-competitive conduct which the Commission will accord priority to.
To carry out its enforcement work effectively and efficiently, the Commission has been bolstering deterrence on one hand and encouraging cooperation on the other. To bolster deterrence, besides companies, we will continue to pursue liability against individuals where appropriate. We will also hold a parent company accountable for contraventions committed by its subsidiary over which it exercises decisive influence. On the other hand, we encourage cooperation by putting in place a clear and transparent leniency and cooperation framework attracting cartelists, both companies and individuals, to come forward, thus improving detection and strengthening enforcement.
The Commission’s enforcement strategies have been working well and we have been able to bring six cartel cases under the FCR and one abuse of substantial market power case under the SCR to the Competition Tribunal (the Tribunal). The Commission was successful in all five cases already ruled by the Tribunal, except as against one respondent in one of the earlier cases. The other two cases are yet to be heard.’
What’s your view of the effectiveness of using such strategies as your leniency policy and the use of Section 60 commitments?
‘Under the Ordinance, the Commission has a range of enforcement responses at its disposal. These can range from initiating proceedings before the Tribunal for the most serious contraventions, to issuing Warning Notices, Infringement Notices or accepting Commitments to resolve competition concerns, or even issuing compliance reminders where the concerns are less troubling.
The enforcement response to cartel conduct, being the most egregious and blatant competition violation, will generally be the commencement of proceedings before the Tribunal against both the undertakings and individuals concerned. By their nature, cartels are often carried out in secret and are therefore difficult to detect. An effective leniency programme is therefore an essential detection and investigation tool that enables the Commission to pierce the veil of secrecy with the assistance of an insider who decides to break ranks and do the right thing, in exchange for immunity from sanctions.
The Commission has received leniency applications over the years and the enforcement actions we took in the IT cartel case last year are solid testimony to the importance of leniency in detecting and combating cartels. Leniency is a key tool in the Commission’s enforcement toolbox and is now available for both undertakings and individuals. The benefits for successful applicants are significant, as can be seen from the level of penalties being imposed by the Tribunal on perpetrators of cartel conduct.
Section 60 commitments are also an effective enforcement outcome in appropriate cases. They are not suitable in cartel cases in general because they do not entail the imposition of a fine or other sanction, which are essential elements of deterrence for such serious violations. They are, however, a very effective tool in speedily restoring competitive conditions in a market, providing a forward-looking remedy that can be enforced before the Tribunal should the commitment be breached. Although they do not entail the imposition of a sanction, commitments are no easy way out for the companies involved as they often require a significant change in business behaviour with potentially substantial financial consequences. In some cases, such as the Seaport Alliance matter, in addition to legal costs, the parties may also have to bear the costs of a monitoring trustee who is appointed to monitor their compliance with the commitments as required by the Commission.
Having accepted Section 60 commitments in two matters last year, the Commission believes that the business and legal communities may benefit from additional guidance on this particular enforcement outcome, the procedure involved and the types of commitments that may be considered appropriate. Towards this end, we are working on issuing a Guidance in due course.’
Last year saw the Commission’s first case relating to an alleged abuse of substantial market power – is this an area the Commission will be more active in?
‘In accordance with its Enforcement Policy, the Commission will direct its resources to investigations and enforcement actions that result in the greatest overall benefit to competition and consumers in Hong Kong. In addition to cartels, abuses of substantial market power involving exclusionary behaviour by incumbents are among the forms of anti-competitive conduct which the Commission will accord priority to. If the Commission obtains evidence that such abusive conduct is occurring, it will not hesitate to pursue those companies. Apart from the first abuse of substantial market power case we brought to the Tribunal last December, the Commission has other active investigations of the SCR cases underway.’
The Commission has also been active in advocacy and educational work – do you think these measures, along with the enforcement actions, are effectively getting the message out there about the importance of competition compliance?
‘In building and sustaining a robust competition regime, both enforcement and advocacy have a critical and mutually reinforcing role. While enforcement is important in deterring anti-competitive conduct, advocacy also plays an integral part in fostering a competitive culture through the engagement with, and education of, consumers and businesses.
As a result of the Commission’s outreach and advocacy efforts, concrete changes in business practices and culture have been observed in Hong Kong. Upon the full implementation of the Ordinance, there were noticeable price drops in sneakers, electronic goods and other retail items which may have been due to the elimination of resale price maintenance. Various trades and businesses, including small and medium enterprises, have taken steps to review and change their trade practices with a view to complying with the Ordinance, while many trade associations have changed their behaviour upon the Commission’s compliance project.
Over the past few years, there has been an increasing awareness and understanding of the Ordinance in the community reflected by the growing number and depth of the complaints and enquiries received by Commission. The advocacy efforts have also been effective in bringing cases and relevant evidence to the Commission’s attention. Advocacy and enforcement have been complementing each other, with advocacy bringing in complaints and cases, and enforcement outcomes generating public attention. As a matter of fact, almost all of our cases brought before the Tribunal so far have been complaints-driven, which is a solid testimony to the effects of our advocacy and education work.’
What is your top message for the directors of businesses in Hong Kong?
‘I cannot emphasise more the importance for directors to bring competition compliance to the board’s attention, assess the business’ exposure to competition law risks and instill a corporate compliance culture across all levels of a business from top down. It is also a good practice to have a system in place for staff members to report suspected anti-competitive conduct in the company.
When assessing competition risks, directors should ask themselves: Am I confident that employees are not having conversations with competitors that may involve sharing of pricing or other commercially sensitive information? Am I sure any trade associations that my company participates in are not acting as a forum to share information that ought not be shared? Will any employee, if asked to do a favour for a friend, submit a cover/dummy bid in response to tender invitation? These activities could seem innocuous but may result in significant sanctions including not only fines against the company, but also disqualification orders against the directors.
Directors should also bear in mind that the Commission provides a leniency regime which allows companies (including its employees and directors) to avoid sanctions if the company is the first one to report its involvement in a cartel to the Commission and cooperates in any subsequent investigation and enforcement action. Those who might have already engaged in anti-competitive practices are encouraged to approach the Commission for leniency, as they are able to ascertain whether the company or the individual concerned can benefit from the leniency programme on an anonymous basis first.
To sum up, no company is immune from competition law risks. Directors need to understand what those risks are and put in place measures to address them.’
In January this year, the Competition Tribunal made its first Director Disqualification Order – will the imposition of personal accountability for compliance breaches be a trend to watch?
‘The Commission believes that individual liability is an important means of driving deterrence and, ultimately, prevention of anti-competitive conduct in Hong Kong. As a matter of fact, the Commission has named at least one individual as a respondent in each of our last five cases brought to the Tribunal. Last year, the Tribunal imposed penalties and ordered a Director Disqualification Order against individuals for the first time, driving home the message that not only companies, but individuals involved in anti-competitive conduct may face severe consequences. The Commission will continue to pursue the liability of individuals, where appropriate, to strengthen deterrence.’
Do you have advice for company secretaries and governance professionals regarding their work relating to competition compliance?
‘Company secretaries and governance professionals have a key role to play in building a culture of compliance, not just within their own organisations, but in Hong Kong as a whole.
While the board has the overall responsibility for instilling a compliance culture and making the strategic decisions, company secretaries and governance professionals overseeing the day-to-day operations also need to understand and comply with the competition rules. They are in a good position to advise the company about the legislative framework and assist the board in putting compliance measures in place. Depending on the size of the business, they may also seek external legal advice for conducting competition risk assessment or make use of the materials published by the Commission to formulate a compliance programme.
If you wish to be better equipped to understand competition law, I would strongly encourage you to join the Chinese University of Hong Kong Faculty of Law (CUHK LAW) Workshop on Competition Law and Policy to be coorganised by the Commission this November. This training will not only cover the basics of competition law in Hong Kong, but will also explain how the law works in practice, what compliance efforts can be taken by a company to mitigate risks and how a company should respond to the Commission’s investigations. Following the success of a similar training for lawyers last year, we are excited to extend this for the benefit of company secretaries and governance professionals this year.’
What would be on your wish list in terms of changes to the Competition Ordinance and the powers of the Commission? In particular, do you think the merger rule should be expanded to all sectors of the economy?
‘We understand that there are concerns over some aspects of the Ordinance, including the statutory body exemption, private action and cross-sector merger control. The Commission is working with the HKSAR Government on the review of the Ordinance, but it is for the administration to decide on the scope and the timeline of the review.
Regarding merger control, this is often considered to be one of the pillars of competition enforcement in most jurisdictions, and a cross-sector merger rule would certainly help the economy to become more diverse and innovative. Having said that, numerous jurisdictions have adopted a competition law that initially did not consist of a merger rule, which was only added later on when the need became more apparent or the competition agency became more experienced.’
Some sectors in Hong Kong, for example the electricity market, are still subject to constraints on competition – what do you believe is the best way forward to remedy this?
‘With our extensive and proactive engagement with policymakers and the public sector over the past few years, competition consideration has been playing an increasingly important role in the formulation and execution of public policies and schemes. The Commission has been gratified to see a continuous increase in the awareness and capability of the public sector in integrating competition principles into policymaking, and it will continue its work in this regard.
A good example is the Commission’s submission made to the Environment Bureau in response to the Bureau’s Public Consultation on the Future Development of the Electricity Market in 2015. In its submission, the Commission recommended various measures with a view to facilitating the introduction of competition into Hong Kong’s electricity market.’
Companies with a base of operation in Hong Kong have received large fines from Mainland competition regulators. Will there be any investigation conducted in Hong Kong, and are there collaborations with those regulators? Also, are there particular sectors of concern, for example, tech retail in the Mainland?
‘The fact that a sizeable portion of commerce in Hong Kong is going digital means that the Commission anticipates there will be more and more cases involving digital markets. We are aware that digital markets have features that may impact on the types of anti-competitive conduct that can arise, as well as how such conduct is to be investigated. Towards this end, the Commission has invested in training and systems that enhance our capability in this respect. At the same time, we are working to develop good sector knowledge in key markets for the Hong Kong economy, including the finance and fintech sectors.
The Commission is keeping abreast of the recent actions of the State Administration for Market Regulation in the digital sector in the Mainland, as well as those of overseas competition agencies, paying particular attention to any Hong Kong element in those cases. We have good relationships with other agencies, which allow us to effectively collaborate in cases of common interest. We do have some investigations underway in the digital sector, some of which are promising, but I cannot comment further at this stage.’
Looking more broadly, competition law compliance is becoming a lot more complex globally – what are the future trends to watch?
‘The core of competition law compliance is straightforward: understand the risks that your company is facing and take appropriate actions to mitigate the risks. But one of the most common risks is employees’ individual conduct. For example, if divvying up fruitful bidding opportunities with a competitor helps a sales director obtain a bonus, they might do so intuitively without giving any serious thoughts to its legal implications. However, the company would be liable and has to bear the consequences. So there has been a trend to produce compelling training materials in order to help individual employees understand the consequences of contraventions of competition law.
There is also a growing realisation that it is important not only to think about compliance in terms of cartel conduct, but also anti-competitive vertical restraints and abuses of substantial market power. These may not be as clear cut as horizontal price fixing, but contraventions involving such conduct can have significant and severe consequences for the companies involved.’
Finally, can you talk about your own background and training?
‘I was born and educated in Hong Kong and I was fortunate enough to know I wanted to pursue my career as a barrister ever since I was young. I have been in private practice for more than 30 years and my exposure to the various facets of the business and commercial world has helped me immensely in my past and current positions of public service.
My experience in various advisory and statutory bodies, especially my long-time involvement in the work of the Consumer Council, has also shaped my current role as the Chairman of the Competition Commission. I was honoured to have served the Consumer Council for some 15 years, during which I chaired the Legal Protection Committee and the Management Committee of the Consumer Legal Action Fund, and eventually became the Council’s Vice-Chairman before the end of my term. Besides consumer protection, I was also appointed as a member of the Equal Opportunities Commission, and I am currently serving as a non-executive director of the Insurance Authority and Deputy Chairman of the Town Planning Appeal Board as well.
In May 2016, I was appointed as a Member of the Competition Commission and I was privileged to take up the chairmanship last May, a challenging yet rewarding position where I can further contribute to promoting a free, innovative and dynamic economy in Hong Kong.’