Competition Commission set to produce fresh banking targets for investigation
The Hong Kong Competition Commission published its enforcement policy last week and lawyers say this will put banks under greater scrutiny if they are found to be suspected of anti-market behaviour.
The law that grants the commission the power to act on protecting consumer and fighting anticompetitive behaviour affecting competition in Hong Kong will come into effect on December 14.
Banks’ businesses in rates, forex, syndicated lending, credit cards and even bankers’ involvement at trade associations are some of the initial at-risk areas that are assessed to be the most vulnerable.
The commission, staffed mostly by expat investigators hired from its aggressive Australian counterpart, is seen as eager to make its mark and may follow the precedence where Western banks and their bankers have only emerged from prosecutions and jail terms for their involvement in rates rigging and forex manipulation scandals.
Neil Carabine, partner at King & Wood Mallesons said the commission is not expected to show mercy.
“People have had three years’ notice to get their house in order. We will likely see a fairly strict implementation by the Competition Commission. They [the commission staff] want to get the word out and make people aware of it. They also want to make sure they have cases they will win,” Carabine said.
Urzsula McCormack, partner responsible for financial services regulation at Kings & Wood Mallesons added: “Anything to do with pricing is a potential target; there is typically great sensitivity around fees and charges, particularly where the consumers in the retail sector and clients are affected.”
Further than banks, other financial service companies such as credit card firms and payment systems could also be suspect. McCormack noted a recent case of currency conversion services supplied by Visa for users to settle in home currency at the point of sales when they travelled have previously drawn the Australian Competition and Consumer Commissions’ ire.
While some consumers may feel they have benefited, the court ruled the service had produced the effect of reducing competition. Visa was fined A$18 million as a result in September.
While the law focuses on market competition in Hong Kong, actions by international banks decided outside of the territory that produce a material impact and consumer interest in Hong Kong could be assessed by the commission.
If found guilty, the commission has the power to disbar the persons held to be responsible for the anticompetitive behaviour for up to five years and fine up to 10 per cent of the revenue made by the banking group gained in Hong Kong in which the violation happened.
Unlike equity businesses that are conducted through open and transparent venues such as the exchange for price discovery; rates, forex and syndicated lending activities are areas of activities where banks’ sales and marketing staff and traders habitually communicate to one another in setting prices and sharing market information in order to get deals done.
Especially at events when bankers are given drinks to socialise, sometimes they may let more than what they should slip to competitors. Bankers were warned on their involvement at trade associations.
Unusually, the commission has explicitly said it will not look to intervene in mergers and acquisitions other than in the telecoms industry, so breakups of the multi-stake banking groups is unlikely to be on the horizon anytime soon.
In Europe, regulators are increasingly moving from holding the institutions liable for the indiscretions to holding the individuals accountable for violations to the law. Hong Kong regulators are seen to be only just starting. In a landmark case where Ping An was found to have failed to comply with Hong Kong’s antimoney-laundering laws, earlier this year the Securities & Futures Commission held the former CEO of Ping An Securities liable, and banned him from the industry for one-year for internal control failures.
If a fresh investigation reopens on HIBOR in Hong Kong, Elaine Zhou, banking analyst at Macquarie Securities thought one bank could be at risk of being investigated, because of its large share of interbank activities in the HIBOR market.
Traders say the HIBOR mechanism should have been more robust since the HKMA’s move to strengthen quote mechanism: the Treasury Markets Association now discard the top and bottom outlier quotes, and calculate a rate based on median pricing amongst the quotes provided by the nine banks involved in HIBOR pricing.
Instead, investment bankers now point to the aggressive lending practises made by Chinese banks in Hong Kong as candidates for further review.
“We are basically getting disintermediated by the China banks. They come into deals with full financing, fully underwriting the deals. There is very little left around for international banks to do,” said a regional head of investment banking.
Chinese banks’ motive in expanding in Hong Kong are mixed.
“We’ve seen it all. It’s exactly like five, 10 years ago. When their [state-owned banks such as Bank of China which now leads the regional league tables] NPL rises, they try to expand their lending to push up their denominator to make their NPL ratio look smaller,” said a head of Asia-Pacific debt syndicate at an US bank, “They cannot service the investment grade names. So they focus on the leveraged buy-outs, the high yield deals in the cross-border space, especially for the Chinese SOEs looking to expand overseas.”
Compared to the global average, the level of competition in retail banking in Hong Kong is also deemed to be quite low. RFI group, a banking marketing intelligence company, said in its latest research only 6 per cent of Hong Kong banking customers said they may consider switching their main bank over the coming year, as opposed to the average 11 per cent reported at the global level.
HSBC enjoys a disproportionately large market share. It has de facto control of 54 per cent of market share. Some 36 per cent of RFI respondents consider HSBC as their main bank, with 18 per cent pointing to Hang Seng Bank, which is also owned by HSBC. About 20 per cent of respondents surveyed reported Bank of China; 9 per cent Standard Chartered and 4 per cent said Citi.
It is this lack of dynamism which has previously prompted the UK competition watchdog to urge for a review of banks’ overdraft facilities for personal checking accounts and services provided to small-medium sized enterprises.
In the US, American president Barack Obama has also signed a Credit Card Act into law in 2009, under a newly set up Consumer Financial Protection Agency which works to promote fairness and transparency for consumers.
Unfair or abusive practises are now prohibited in the US such as hiking up rates on an existing balance or allowing a consumer to go overlimit and then imposing an overlimit fee. Rates and fees on credit cards more transparent so consumers can understand how much they are paying for their credit card and can compare the services provided by the competition.