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					                      Asian Conference on Consumer Protection,
                             Competition Policy and Law

                                 28 Feb - 1 March 2003
                                 Kuala Lumpur, Malaysia

     'Consumer Protection and Competition Policy in Hong Kong SAR, China'


                                                      Mrs. Pamela W.S. CHAN
                                                      Chief Executive
                                                      Hong Kong Consumer Council

1.   Hong Kong SAR is a society where the Government goes out of its way to
     emphasize that its approach to the economy, and by implication a reason for its
     success, follows the principle of "big market, small government". This is reflected in
     various areas, but notably in Hong Kong's consumer protection laws and its
     approach to competition policy. The Hong Kong Consumer Council has produced a
     number of reports and submissions dealing with various aspects of consumer
     protection and competition policy, which can be found at the Council's website
     www.consumer.org.hk

I. State of consumer protection in Hong Kong

Scope of consumer protection laws,

2.   Hong Kong's consumer protection laws can be broadly categorized as those that
     regulate and are largely directed at consumer safety, and those that regulate and
     are directed at market conduct. Both categories are important to economic growth
     as they have direct impact on issues of product quality, market efficiency and
     consumer confidence.

Safety, food and product legislation

3.     Looking first at safety, which is a primary issue in matters of quality, Hong Kong
     does have laws in the form of Ordinances covering such issues as:

           safety requirements for electricity supply, electrical wiring and products;

           safety requirements for children's toys and consumer goods;

           disclosure requirements for medicines and labelling requirements;

           regulating safety aspects of food and drugs;

4.   The enactment of the Toys and Children's Products Safety Ordinance in 1993, the
     Consumer Goods Safety Ordinance in 1995, and the implementation of the Food &
     Drugs (Composition & Labelling) Regulation marked a significant step forward in
     product safety for Hong Kong consumers. Nevertheless, Hong Kong does not have
     a product liability law.



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5.   When Hong Kong consumers suffer injury or damage caused by defective products,
     they have to sue for compensation by relying on the common law of contract or
     negligence. Under contract law, consumers will most likely encounter the problem of
     privity of contract with the manufacturer, while under the law of negligence, they
     have to prove all the technical legal elements of negligence which usually entails
     much cost and time.

6.   In 1998, the Law Reform Commission of Hong Kong prepared a report proposing to
     expand the law beyond the ambit of contract and negligence law and create a new
     form of liability based on the defect approach. This means a product is to be ruled
     as defective if it does not meet standards of safety that people generally are entitled
     to expect.

Marketing legislation
7. On the marketing side, which is critical in terms of market information and building
   consumer confidence, there are also laws governing the following areas:

Proscribing Market Conduct

    prohibiting false trade descriptions of goods;
    labelling of pre-packaged food
    restricting certain advertisements relating to medical matters;
    empowering the courts to give relief in certain contracts found to be unconscionable;
    consolidating and amending the common law with respect to the terms to be implied
     in contracts for the supply of services;
    prohibiting the promotion of pyramid selling schemes; and
    limiting the extent to which civil liability for breach of contract, or for negligence or
     other breaches of duty, can be avoided by means of exemption clauses.

Regulation of Specific Industries

    control and regulation of travel agents; insurance estate, agents and money
     changers;
    prescribing gold marking (description) standards for jewellers and goldsmiths.

8.   Notwithstanding the above legislations, the Council has recommended to
     Government that as a long term goal, Hong Kong's consumer protection laws should
     be consolidated into a single piece of legislation, covering a wide range of consumer
     protection issues, that will address some current deficiencies in existing legislation.
     The Australian Trade Practices Act 1974 has been suggested as a possible model.

Enforcement agencies

9.   Enforcement of consumer protection laws in Hong Kong is spread between different
     government agencies that have responsibility for distinct economic sectors. For
     example, the Electrical and Mechanical Services Department administers laws
     governing safety of electrical and gas distribution equipment, and lift and elevator
     maintenance. The Department of Health administers food safety legislation and the
     Customs and Excise Department administers the Trade Descriptions Ordinance.



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     This legislation prohibits false trade descriptions, false marks and misstatements in
     respect of goods only and was largely created to protect the interests of copyrighted
     and trade marked goods.

Access to redress mechanisms, consumer claims tribunal, etc.

Consumer Council
10. The Consumer Council performs a conciliatory role in handling complaints from
    consumers, by mediating between traders and consumers where there is a dispute.
    Where complaints cannot be resolved through conciliation or negotiation between
    the trader or the industry association, the Council provides advice to consumers as
    to possible avenues of legal redress through private action.

Small Claims Tribunal
 11. Apart from the general court system, an important avenue for private action redress
     is the Small Claims Tribunal which was set up in 1967 under the Small Claims
     Tribunal Ordinance. The Tribunal provides an informal, quick and inexpensive
     means to deal with claims not exceeding HK$50,000, where lawyers are not allowed
     to represent clients.

        The main types of claims handled by the Small Claims Tribunal include:
           debts
           service charges
           damage to property
           goods sold
           consumer claims

Consumer Council Legal Action Fund
 12. The Council also administers a fund known as the Consumer Council Legal Action
     Fund. This fund was established on 30 November 1994 with a Government grant to
     the Council of HK$10 million (US$1.2 million). The Fund aims to give greater
     consumer access to legal remedies by providing financial support and legal
     assistance for the benefit of, particularly, individuals or groups of consumers with
     similar grievances in cases involving significant public interest and injustice.
     Through supporting justifiable cases, the Council's fund also aims to deter
     undesirable business practices and educate the public as to their existing consumer
     rights.

Industry Self Regulation
13. The Council provides general assistance to various industry schemes on developing
    codes of practice and complaints mechanisms that can also provide a means of
    redress for consumers. While many of the schemes are self regulatory in nature,
    some schemes are reinforced by legislative measures specifically directed at
    resolving common problems in the industry. Such schemes can be found in the
    Insurance Complaints Board.

14. Self regulatory schemes, which do not have regulatory backing are found in the
    banking sector, through the Code of Banking Practice. The financial sector
    prudential regulator plays an important part in ensuring that the Code enhances
    consumer confidence, and regularly seeks the Council's views on ways to make the
    scheme more effective.


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II. Critical consumer concerns

Basic Needs and Access to Utilities ( water, electricity, telecommunications )
15. 15. There is no problem of satisfaction of basic needs for Hong Kong's consumers.
    The government provides a safety net for those whose income falls below the
    poverty line. Further, no one is denied healthcare due to lack of means.

16. As far as access to utilities is concerned, in keeping with Hong Kong's free market
    policy, there is limited government involvement in the provision of basic utilities.
    Whereas water services are provided by a government authority, the energy (gas
    and electricity) and communications sectors are characterized by private sector
    participation.

17. Hong Kong operates 'Scheme of Control Agreements' (SCAs) which are long-term
    contracts reached between private sector electricity utility companies and the
    Government. Schemes of control exist because these companies provide services
    to the public in a monopoly or semi-monopoly situation. This makes it necessary, in
    the public interest, for the Government to establish certain guidelines (SCAs) under
    which the companies will operate. The current low interest rate has exposed the
    problem with long-term agreements containing inflexible terms in respect of the rate
    of return at 13.5% above the current interest rate. Also, there have recently been
    problems in calculating the appropriate rate of return based on fixed assets.

18. There are three different forms of gas supply which is the primary fuel of choice for
    cooking in Hong Kong due to the desire for 'flame' cooking facilities. The sources of
    supply are, in order of prominence:

      Processed gas produced from naptha, provided through a privately owned Hong
       Kong wide gas reticulation network (the most commonly used service).

      Piped Liquefied Petroleum Gas (LPG) universally available to all tenants in a
       small number of housing estates that have been constructed with this form of gas
       supply in mind. Supplied by long term contract with competing oil companies.

      To a decreasing extent, LPG bottles by a number of competing oil companies can
       be purchased. These are usually supplied to older residential areas that are not
       served by either piped services.

19. The Consumer Council produced a 1995 report on the Domestic Water Heating and
    Cooking Fuel Market in which it found that the processed gas supplier had 70% of
    the overall fuel market and there were limited opportunities for competing forms of
    gas to expand, let alone retain market share. The Council suggested that in order to
    facilitate competition a common carrier system should be created for gas distribution
    based on the network owned by the incumbent processed gas supplier, in the same
    manner as there is sharing of the telecommunications network infrastructure. So far
    no progress has been made.

20. Water supply is provided by a government owned entity and is not subject to any
    price regulation apart from the government's periodic determination of applicable
    retail prices.


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21. Telecommunications services (including access to the Internet and electronic
    commerce) are served by liberalised competitive markets. There are community
    service obligations placed on the previous incumbent monopoly with regard to fixed
    line services. Compensation provisions exist to offset losses incurred in providing
    unprofitable services, and levies are placed on other competitors who enjoy the
    benefits of access to the public switched telecommunications network.

Consumer Credit
22. The issue of consumer credit has been a matter of grave concern for consumers in
    recent years under the economic low tide. The unprecedented decline of assets in
    the property market (60 %) has left many people with negative equity. Coupled with
    the aggressive marketing of credit cards, this has resulted in a large number of
    consumers falling into a debt trap. As a result there has been an escalation of
    disputes over excessive financial charges on defaulting credit card loans
    (accumulated interest charges have totaled up to 60%) and complaints against
    unruly conduct of debt collection companies.

23. Apart from licensed money lenders who are regulated by the police force under the
    Licensed Money Lenders Ordinance, the conduct of credit providers (banks, credit
    card companies and other deposit taking institutions) is largely regulated through
    self regulatory means, by way of the above mentioned Code of Banking Practice.
    The Code is a voluntary guideline that requires financial institutions to abide by
    certain rules that are aimed at protecting consumers.

24. The Council assisted in a revision of the Code following a successful court action in
    July 2000 brought under the Unconscionable Contracts Ordinance by consumers
    who were subjected to onerous debt collection practices by some banks in Hong
    Kong, set out in the terms and conditions of credit card contracts. This was a
    landmark case in the history of consumer protection law in Hong Kong. The case
    concerned the validity of a clause in credit card agreements requiring customers to
    be responsible for all costs and expenses incurred by credit card issuing banks in
    recovering debts owned by the customers, on a full indemnity basis. Some credit
    card issuing banks sued their customers for unpaid credit card balances. The
    customers did not defend themselves in the proceedings.

25. Having obtained default judgment, the banks relied on the above indemnity clause in
    the credit card agreement and applied for costs, but to no avail. The banks then
    appealed against the decision. As it was a matter of public concern whether the
    indemnity clause was enforceable under the Unconscionable Contracts Ordinance,
    the High Court invited the Council to appear as amicus curiae to address issues
    relating to the Ordinance in the appeal. Taking into account the relevant survey
    findings and related information provided by the Council, the court held that the
    clause was unconscionable under the Ordinance and was therefore unenforceable.

26. Subsequently, the Council had discussions with the banking sector prudential
    regulator (the Hong Kong Monetary Authority) to discuss ways to enhance consumer
    welfare with regard to the manner in which banks conducted their business in light
    of the court ruling. An industry working group was formed to review the Code of
    Banking Practice which adopted some of the Council's comments. These covered a
    wide range of issues, not limited to the issues raised in the consumer action;


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    including the following:

   a) How representations on the terms and conditions for banking services should be
      made available to consumers.

   b) The quotation of interest rates. The Council had long urged the banking industry
      to use a common method for calculating the Annualized Percentage Rate (APR)
      of credit card advances and that all relevant fees and charges should be taken
      into account in the calculation of APR.

   c) Clear and prominent disclosure of crucial information to customers before they
      enter into an agreement for an electronic banking service at the point of service
      within the web site when a customer contracts for such service.

   d) Requirements to disclose relevant statements in relation to protection of
      customers' personal data when using an electronic banking service.

Collection of consumer credit information

27. Bankruptcy rates have also soared from an annual figure of 639 in 1997 to 25,328 in
    2002. Industry has blamed the increase on the lack of positive consumer credit data
    sharing. The Consumer Council has long expressed reservations on finance
    industry's proposals to expand the range of information on consumers' personal
    credit information that financial institutions can share amongst each other. The
    current shared database in Hong Kong is limited to so called 'negative' information,
    i.e. records of late payments, loan defaults and bankruptcies. However, banks have
    recently been seeking to expand that database to include 'positive' information, i.e.
    records of loan amounts outstanding and the numbers of credit cards held by a
    person. In past discussions with the Council, the industry had provided research
    material from other jurisdictions that quantified the benefits to consumers of an
    expanded credit information database in those jurisdictions.

28. The finance industry has claimed that the sharing of positive credit information will
    help address the problem of multiple delinquencies. However, the Consumer
    Council has expressed the view that the problem with individuals' over indebtedness
    may be the result of the indiscriminate issuing of credit cards by financial institutions.

29. For example, consumers have been encouraged to expand credit by financial
    institutions through credit card installment plans, minimum settlement plans, and
    bonus gifts. The aggressive promotion of credit services has tempted consumers
    into debts that are beyond their repayment ability; resulting in rising bankruptcy rates.
    The Council was of the view that other measures may be as effective and without
    the privacy repercussions. For example:

              expanding the sharing of negative information, for example only sharing
               information on those consumers who only pay the minimum amount

              to have credit card applicants voluntarily declare the number of credit
               cards and their repayment history; and

              introduce criminal law suit for those who make false declarations and


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                 attempt fraud, as in the case of Switzerland.

30. The Council's counter proposal to the government was unsuccessful. Government
    has decided to allow positive credit information soon. At the same time, the industry
    has taken steps to review their over aggressive marketing tactics.

Consumer safeguards
31. The Council has also taken the position that if the credit information database is
    expanded, then consumers cannot be expected to accept a sacrifice to their privacy
    if the industry and government cannot clearly tell them what they get in return.
    Accordingly, the Council has requested the government and industry to clearly
    establish some likely goals that will be achieved in Hong Kong, within a reasonable
    period of time, if the proposal goes forward. By the same token, if the goals are not
    achieved the industry and government should be prepared to dismantle any
    procedures that have been put in place to expand the collection of information, and
    revert back to the previous position.

32. Based on past assertions made by industry and government as to benefits of
    expanding the database, the Council has suggested the following goals should now
    be spelled out by industry, for consumers to consider.

      a) The expected differentiation in interest rates for those consumers with different
         credit risks.

      b) The expected reduction in default rates and bankruptcies, that are attributed to
         the fault of debtors, rather than economic causes.

      c) The expected increase in the percentage of consumers who will be eligible to
         obtain credit under the expanded data base, as compared to the level under the
         current limited data base.

      d) The expected decrease in other costs of finance, such as the required down
         payment, convenience of access, credit limits and fees.

33. The industry has also made general assurances that there will not be any increases
    in abusive access to the consumer information database. This also suggests that a
    goal should be set, against which the new procedures can be measured.

III. State of competition policy and law

The need for a law based competition policy
34. Hong Kong is considered as very competitive in the international tradable sector.
    However, domestic competition and international competitiveness are two different
    concepts:

(a)      The international competitiveness of an economy measures a country's ability to
         compete with other countries in attracting global direct investment. In this
         respect, Hong Kong is often reported to be highly competitive.

(b)      However, domestic competition is typically measured by the size and the number
         of firms in domestic markets, substitutability of like products, contestability, ease


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       of entry and exit by firms in each industry. Hence a country/territory can score
       highly in international competitiveness league tables while lacking competition in
       sectors of the domestic economy.

35. It is competition that provides incentives for firms to improve their efficiency, which
    will in turn improve the welfare of consumers and society as a whole. Consumers
    have an interest in open and competitive markets that maximize their range of
    choice. Therefore, the Consumer Council has been campaigning over a long time
    for the introduction of a general competition law; for the following reasons:

36. In the past two decades Hong Kong has undergone an economic structural change
    from a manufacturing-based economy to a services economy. The services sector
    has expanded and replaced the manufacturing sector as the major economic activity
    in Hong Kong, and the export of services is now expected to be the engine of future
    economic growth.

37. Nevertheless, there are many services that are consumed locally that cannot be
    substituted from overseas markets - known generally as non-tradables. These are
    distinguished from goods and services which can be bought overseas – known as
    tradables. For example, where a particular good is too expensive, a consumer can
    usually look to an overseas market to find one that is cheaper. In other words, Hong
    Kong consumers are increasingly dependent on non-tradables that are not subject
    to competition. Unlike trade in the manufacturing sector, which faces international
    competition, not all markets in the local services sector are automatically highly
    competitive.

Main elements of Hong Kong's competition policy
38. It was on this basis that the Consumer Council called for a general competition law
    in its 1996 Report “Competition Policy: the Key to Hong Kong’s Future Economic
    Success”.

39. In its response, the Government considered a sector-specific approach to
    competition law more appropriate for the economy rather than the introduction of a
    general competition law. Currently, the telecommunication and broadcasting sectors
    have competition provisions in relevant legislation. As for other sectors, the
    Government has issued a competition policy that outlines its objectives and guiding
    principles on competition. In short this requires that Government agencies propose
    initiatives for furthering the policy objective of using competition as a means to
    ensure economic efficiency, and to assess competition complaints in their respective
    areas of responsibility.

40. The Government's statement also called on businesses to voluntarily cease and
    refrain from adopting restrictive trade practices that impaired economic efficiency or
    free trade. A body called the Competition Policy Advisory Group (COMPAG) was
    also created to oversee the application of competition policy by government bureaus
    and departments. COMPAG consists of senior executives from key policy bureaus
    and departments and is chaired by the Financial Secretary. It does not conduct
    inquiries itself, but meets a number of times during the year to discuss the ongoing
    work of the government in this area. The Consumer Council's Chief Executive is
    also a member of COMPAG.



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The Council's Position on competition policy
41. The Council has been working closely with COMPAG by monitoring trade practices
    and making recommendations on matters with competition implications. While
    working within the government's current sectoral, administrative and self regulatory
    policy, the Council remains committed to the ultimate introduction of a general
    competition law, administered by a general competition authority, as its preferred
    option.

42. One of the major reasons why the Council still considers its general legislative
    framework appropriate for Hong Kong is that the sector-specific approach in
    particular, has fundamental problems. For example:

           Targeting industry sectors is 'piece meal' and cannot match the changes
            that are taking place in the marketplace (it ignores the fact that convergence
            takes place between different industries, and that some very large and
            powerful businesses have cross ownership between different sectors with
            means of influencing how competitive activity is undertaken);

           If there are two different regulatory agencies with responsibility for business
            activity that crosses between two jurisdictions you have a recipe for
            regulatory confusion. With this approach there is no clear way in which
            government can deal with the major competition issues such as vertical
            agreements between companies operating in different sectors.

           The approach often means that market participants are required to operate
            under a license and therefore the regulatory controls are only on the
            licensees not other market participants who may influence competition. In
            addition, this often also means that the major sanction that can be applied is
            the removal of a license to operate which can be impractical, e.g. if a
            telecommunications operator loses its license customers lose their service,
            and the market loses a competitor.

           Dispute resolution, where there is a split between regulators, could mean
            uncertainty as to which agency is the regulator, giving rise to 'agency
            shopping', i.e. business playing one regulator off against the other.

           Encourages regulatory capture where the regulator becomes industry
            specialized and the major industry participants develop a close relationship.

43. Industry specific regulation also confines an industry specific regulator's activities
    within a policy that may have a limited application. For example, current sector
    specific regulation separates the economic and competition oversight of
    telecommunications and broadcasting into two areas. However, technological and
    marketing convergence is blurring the distinction at an increasing rate.


Conclusion
44. While Hong Kong has a number of legislative provisions protecting consumers, and
    it has a formal competition policy, the Consumer Council considers that there is
    room for improvement. A general competition law that provides an overarching
    framework within which competitive markets can function to maximum efficiency,


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and a comprehensive system of consumer protection that ensures consumer
confidence in the free market mechanism, is a vital ingredient for economic success.
Such measures are features of successful economies around the world.




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