On Oct. 15, 2018, the Hong Kong Competition Commission (Commission) published a decision (Decision) finding that the Code of Banking Practice (Code) is not excluded from the application of the First Conduct Rule under the Competition Ordinance (Ordinance). The Decision was taken in response to an application for exemption under section 9 of the Ordinance made in respect of the Code (the Application). The Application was made in Dec. 2017 by 14 institutions authorised under the Banking Ordinance (AIs). Although the Commission found that the Code is not excluded from the application of the First Conduct Rule, nevertheless, it states that it has no current intention to further investigate or pursue regulatory action in respect of the current version of the Code.
On Oct. 19, 2018, the HKMA issued a circular regarding the Code (Circular), which was prepared in consultation with the Commission. By the Circular, certain provisions of the Code which had been suspended in December 2015 following discussions with the Commission have now been re-activated in light of the Decision. Further detail is set out below.
CODE OF BANKING PRACTICE
The Code is a voluntary and non-statutory industry code of practice jointly issued by the Hong Kong Association of Banks (HKAB) and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies (DTCA), and is endorsed by the Hong Kong Monetary Authority (HKMA). It sets out recommendations on banking practice covering various services to private individuals, including provisions that restrict the AIs’ ability to determine independently, and therefore compete, on various fees, charges, interest rates and credit lines.
The coming into force of the Ordinance in 2015 gave rise to some uncertainty as to whether certain provisions of the Code could raise issues under the First Conduct Rule (which prohibits anti-competitive agreements between competitors); see our previous e-bulletin here. Consequently, several provisions in the Code were suspended by HKAB in December 2015 following discussions with the Commission. These provisions included those which: (i) impose a limit on the fees and charges which may be imposed by AIs; and (ii) absolutely prohibit the imposition of certain fees and charges, as well as various specific provisions in relation to credit cards. In December 2017, the Application was made to obtain clarity in respect of these suspended provisions.
THE FIRST CONDUCT RULE AND THE LEGAL REQUIREMENTS EXCLUSION
The First Conduct Rule provides, among others, that an undertaking must not, as a member of an association of undertakings, make or give effect to a decision of the association if the object or effect of the decision is to prevent, restrict or distort competition in Hong Kong.
HKAB and the DTCA constitute associations of undertakings, as their membership comprises of AIs which fall under the definition of undertakings in the Banking Ordinance. Thus, the Code, being issued by the HKAB and the DTCA, may be characterised as a decision of an association of undertakings, and AIs as members of these associations may potentially fall within the ambit of the First Conduct Rule to the extent they are giving effect to the Code.
Certain arrangements are exempt from the First Conduct Rule under Schedule I of the Ordinance, including: (a) agreements enhancing overall economic efficiency; (b) agreements for the purposes of complying with a legal requirement; and (c) services carried out by an undertaking entrusted by the Government with the operation of services of general economic interest.
The Application was not made because the Code would result in “economic efficiencies” (this would have required a more detailed analysis of the Code’s compliance with the First Conduct Rule), but rather on the basis of the compliance with a legal requirement exclusion set out in section 2 of Schedule 1 of the Ordinance (“Legal Requirements Exclusion”). Under this exclusion, the First Conduct Rule does not apply to an agreement to the extent that it is made for the purpose of complying with a legal requirement imposed by or under any enactment in force in Hong Kong.
THE COMMISSION’S FINDINGS AND HKMA CIRCULAR
In the Decision, the Commission takes the view that the Legal Requirements Exclusion does not apply to the Code. In reaching this conclusion, the Commission notes that the Code is not a legal requirement imposed “by” or “under” the Banking Ordinance within the meaning of the exclusion. The fact that there are monitoring procedures in place to ensure compliance with the Code is taken seriously was also not considered sufficient to demonstrate there is a legal requirement to comply with the Code for the purposes of the Legal Requirements Exclusion.
The Commission was not obliged to reach a conclusion as to whether the giving of effect to the Code has breached the First Conduct Rule as this fell outside the scope of the Application. Nevertheless, the Commission has stated that it has no current intention to pursue investigative or enforcement action in respect of the current version of the Code and went so far as to recognise the practical benefits of the Code.
As described above, on 19 October 2018 the HKMA issued the Circular, confirming that the excluded provisions have been re-activated as part of the Code. In the Circular, the HKMA states that it expects AIs to comply with all of the Code provisions, which set out the minimum standards that they should follow in their dealings with customers to ensure that the customers are being treated fairly. The HKMA will continue to monitor AIs’ compliance with the Code and follow up on any non-compliance cases with individual institutions as appropriate. The Circular also states that the HKMA expects all AIs to comply with all applicable legal requirements, including the Ordinance.
The Decision may come as a surprise to some, as the Code was implemented with the aim of protecting consumers in mind, and has been formulated with the input and support of the Consumer Council and the HKMA. However, it is important to note that the Commission was not asked to assess the Code for compliance with the First Conduct Rule; rather, it was asked to confirm that the Legal Requirements Exclusion would apply to it. The Decision shows that the Legal Requirements Exclusion is and will be narrowly construed by the Commission, which will have a clear impact on any future applications relying on this provision.
Notwithstanding the Commission’s conclusion, it explicitly recognized that the Code “may, in fact, benefit customers in particular ways, [and] is intended to promote good banking practices towards customers”. The Commission has also confirmed that it “has no current intention to pursue investigation or enforcement action in respect of the Code in its present iteration, including the giving effect to the Code by AIs”. These are helpful statements in relation to the provisions of the present Code. However, the statement should not be taken as a broader indication of whether the Commission may have any other concerns within the industry.