Advertising agencies' price code may violate competition law, say experts

Association's pricing rules on minimum fees members can charge clients could be in violation of competition legislation, experts say

PUBLISHED : Saturday, 15 September, 2012, 12:00am
UPDATED : Saturday, 15 September, 2012, 3:16am

Longstanding pricing rules set by the advertising industry's leading trade association conflict with the competition law, the consumer watchdog and legal experts warn.

Members of the Association of Accredited Advertising Agencies of Hong Kong (HK4As), a group of 29 major firms, are required under a code of practice to charge clients according to a scale of minimum payments.

The Consumer Council said such practices could easily fall foul of the law against price-fixing, bid-rigging, market allocation, output control and other activities that distort market competition. The law was passed in June but is unlikely to take effect until 2014.

The association's code, in a section named "minimum scales of remuneration", says member agencies should charge their clients not less than 15 per cent of an advertising project's gross expenditure.

When a non-member is responsible for buying media advertising time or space and a member offers creative services, the latter is advised to charge a lower minimum rate of 12.15 per cent.

"All studio artwork hours are to be charged at the minimum rate set by the HK4As, which shall be revised from time to time," the code states.

"The foregoing scale of remuneration should be regarded as the minimum allowable scale below which no Member of the Association is permitted to operate, in either Hong Kong or the People's Republic of China."

The code, which was available on the HK4As website, was removed after an enquiry from the South China Morning Pos t.

The Consumer Council said the code could breach the first conduct rule of the competition law, which prohibits concerted practices that prevent, restrict or distort competition.

If the agencies formally endorsed the code, their action could constitute price-fixing, one of the four serious anti-competitive practices the authorities have targeted.

"The seriousness of the offence would depend on how the code is enforced, such as whether the members would be penalised if they breached the terms," the Consumer Council said.

Thomas Cheng, an assistant professor of law at the University of Hong Kong, said the code was clearly an example of price-fixing. "As long as they informally agree with each other to abide by the price-fixing scheme and actually do adhere to it, the conduct would constitute illegal price-fixing. There is no need for a formal agreement under company seal," Cheng said. HK4As chairwoman Sue McCusker said the trade association had not updated the code for a long time. "It needs to be overhauled. We will do a review of the code at the next executive meeting in October," McCusker said.

The code had not been strictly enforced, as the industry was very competitive, she said. It has also become outdated since a restructuring of the advertising industry years ago.

In the past decade, advertising agencies have become either providers of advertising content (creative) or media planning services (media).

McCusker said creative agencies had shifted to demanding a lump sum fee based on the amount of time spent instead of charging fees based on a percentage of advertising expenditure.

Media planning agencies are also making the change.

Industry veterans say some agencies have used the code to negotiate for higher fees.

The new law will not take effect until a Competition Commission and a complaint-review tribunal have been set up.