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Competition Commission Rules Hong Kong Code of Banking Practice is Subject to Competition LawsNovember 13, 2018
The Hong Kong Competition Commission (Commission) recently found that the Code of Banking Practice (Code) is subject to the First Conduct Rule (FCR) in s. 6(1) of the Competition Ordinance (CO). The Code is an industry code for retail banking services aimed primarily at promoting sound banking practices and consumer protection. On 15 October 2018, the Commission rejected an application by 14 Hong Kong banks for a decision under s. 9(1) CO confirming that the provisions of the Code were excluded from the competition rules by virtue of s. 2 of Sch. 1 to the CO. Importantly, the Commission did not confirm whether the Code had the object or effect of harming competition in contravention of the FCR. The procedural framework only required the Commission to rule on the availability of the exclusion in s. 2 of Sch. 1. That said, the Commission provided an assurance that it had no current intention of taking any enforcement action against the applicant banks in respect of their compliance with the Code, noting that the Code may benefit Hong Kong consumers.
The Hong Kong Association of Banks (HKAB) and the Association of Restricted Licence Banks and Deposit-taking Companies (DTCA) issued the Code on 6 February 2015. At the time, the Hong Kong Monetary Authority (HKMA) endorsed the Code.
In general, the Code applies to retail banking and was adopted to promote good banking practices and certain minimum standards, including with respect to transparency and the fair treatment of customers. The Code includes both general principles and specific recommendations on retail banking practices. The Code is, on its face, non-statutory and voluntary; its application does not supplant any relevant legislation in Hong Kong.
Soon after the Code was adopted, the HKAB and DTCA suspended certain provisions in view of concerns under the CO, particularly provisions of the Code prohibiting the imposition of certain types of fees, interest rates, and charges. Formally, however, the HKMA still required banks to fully comply with the Code, including with the suspended provisions. The suspended provisions had the potential to raise competition concerns because they arguably prevented banks from competing on fees and from determining independently aspects of their conduct in the market. The HKMA requirement that the Code be followed therefore seemed to raise a conflict with the requirements of the CO.
As a result, on 11 December 2017, 14 banks, all members of the HKAB and DTCA, applied to the Commission for a decision excluding the Code from the CO pursuant to s. 2 of Sch. 1. A favorable decision from the Commission would have immunized the banks from any enforcement action in respect of the Code. The applicants argued that the Code was excluded from the application of the FCR because conduct pursuant to the Code was made for the purpose of complying with a “legal requirement” (s. 2(1) of Sch.1 CO provides that the FCR “does not apply to an agreement [concerted practice or decision] to the extent that it is made for the purpose of complying with a legal requirement”). The test in part is whether the legal requirement eliminates any margin of autonomy of the undertakings concerned, compelling them to enter into or engage in the conduct while leaving them with no scope to exercise independent judgment. However, central to whether s. 2(1) of Sch.1 CO was available in the case was whether the Code constituted a “legal requirement” within the meaning of the law and not merely whether there was compulsion. “Legal requirement” is defined in the CO as a requirement “imposed by or under any enactment in force in Hong Kong.”
II. The Code is Not Excluded from the CO
As noted, the banks argued that their conduct in compliance with the Code was the result of a legal requirement such that the normal competition rules did not apply—the banks had a defense by virtue of s. 2(1) of Sch.1 CO. The Commission rejected the argument. It explained that the provisions of the Code were not requirements imposed by or under any enactment in force in Hong Kong, including, for that matter, the Hong Kong Banking Ordinance. The Commission ruled that the Code is (1) voluntary and non-statutory, (2) not referred to or imposed by the Banking Ordinance, and (3) compliance with the Code is not comparable to a requirement imposed directly by a statutory license. The Commission further explained that:
- the fact that the HKMA referred to the Code in its Authorization Guidelines and may have regard to a breach of the Code when assessing whether its integrity criterion was satisfied did not establish a mandatory legal requirement;
- the involvement and endorsement of the Code by the HKMA did not transform the Code into a requirement imposed under an enactment;
- the compliance monitoring mechanisms found in the Code, and any discretionary consequences for non-compliance imposed by HKMA, are not sufficient to elevate compliance with the Code into a requirement imposed under an enactment; and
- the elimination of the margin of autonomy must be the result of a legal requirement imposed by or under an enactment, not external factors like expectations of compliance on the part of the HKMA, HKAB, or DTCA.
Arguably, although implicitly, the Commission appears to suggest that the HKMA may have been able to issue the Code as a legal requirement by making compliance compulsory, establishing mandatory sanctions in cases of non-compliance, tying the Code explicitly to particular provisions of the Banking Ordinance, and, potentially also, issuing the Code in the name of the HKMA.
III. Key Takeaways
The Commission’s decision has two key takeaways.
First, the exclusion from the competition rules for compliance with a legal requirement pursuant to s. 2 of Sch. 1 to the CO is a narrow one. The Commission relied on a range of criteria to conclude that the Code has not been and is not given effect to by banks for the purpose of complying with a requirement imposed either by or under the Banking Ordinance or any other law. Broadly speaking, the legal requirement exemption is only applicable to agreements, concerted practices, or decisions that are compelled, leaving the relevant undertakings with no margin of autonomy. The absence of autonomy is not sufficient, however, there must also be a legal requirement as defined: a law imposing the requirement although the Commission appeared to accept the possibility of a requirement imposed by license issued under a law.
Second, the Commission did not conclude that the Code was in fact anticompetitive. The Commission only assessed whether the Code met the criteria for the legal requirement exclusion. In this context, the Commission possibly ‘fudges’ the question of whether the Code was a decision of an association of undertakings noting that it “may be characterized as a decision of an association of undertakings” (emphasis added). It is worth noting that decisions of associations of undertakings subject to the competition rules would typically be intended to further the interests of the member undertakings whereas the Code, by contrast, seems more about the interests of consumers—indeed it was formulated with the input and support of the Hong Kong Consumer Council. In addition, there appears to be a suggestion that the Commission accepts that the banks might have no margin of autonomy but to comply with the Code. While that ‘compulsion,’ if that is what it is, is not the result of a legal requirement, there remains a question as to whether compelled conduct not reflective of the collective interests of the banks could still constitute a decision of an association of banking undertakings for the purposes of the FCR. In the event, the Commission did not need to answer these questions as, strictly, the CO only required the Commission to decide whether the Code was excluded as a legal requirement from the application of the FCR. The Commission concluded it was not.
 The Code is available on the Hong Kong Monetary Authority’s website.
 The FCR prohibits anticompetitive agreements, concerted practices and decisions of associations of undertakings.
 The Commission’s decision and statement of reasons are available on the Commission’s website.
 The HKMA is the government authority in Hong Kong responsible for maintaining monetary and banking stability.
 The Statement of Reasons lists the suspended provisions on page 9.
 Under section 9(1), an undertaking “that has made or given effect to, is giving effect to or is proposing to make or give effect to an agreement [concerted practice or decision] may apply to the Commission for a decision as to whether or not the agreement [concerted practice or decision] is excluded from the application of the FCR by or as a result of Schedule 1” CO.
 See paragraphs 3.1-3.3 of the Commission’s Guideline on the First Conduct Rule.
 See generally page 19 of the Statement of Reasons.
 See Statement of Reasons, paragraph 3.2.
 See generally page 33 of the Statement of Reasons.
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