Hong Kong watchdog’s move against agency giving other sectors pause for thought

“Although they will be exempted from prosecution, affected consumers can still sue them for damages if the court eventually rules that they have committed the relevant anti-competitive practices,” Lee told a radio programme.

Midland Realty faces Hong Kong legal action for alleged sales commission fixing

“The Competition Commission can ask Centaline and its subsidiary to admit legal liabilities based on their [alleged] price-fixing behaviour, so that affected consumers can make a claim against them.

“In other words, they are not totally exempted from legal liabilities.”

The watchdog on Tuesday accused Midland and Centaline of directing agents to charge a minimum net commission rate of 2 per cent for first-hand residential properties starting on January 1. The two agencies control nearly 90 per cent of the market.

Midland Realty International and Hong Kong Property Services (Agency), two subsidiaries of Midland Holdings, are also facing legal action.

The investigation is the first by the watchdog into what commission chairman Samuel Chan Ka-yan earlier called a “crucial part” of the city’s economy.

According to the commission, senior management from Midland and Centaline met six times between October and December last year to discuss how to boost business and cut costs.

During the final meeting, they allegedly agreed to fix the net commission rate at a minimum of 2 per cent, and frontline staff were told by internal memo later that month.

The net commission rate is what developers pay to property agencies after deducting their expenses, such as rebates.

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According to the watchdog, the agencies fixed the rate to limit the rebate they offered to homebuyers.

Lee said the case involved an alleged agreement to restrict the maximum rebate amount their frontline agents could offer to homebuyers out of their own commission, resulting in purchasers getting less money back and paying more for flats.

“Usually property agents will offer rebates to buyers of first-hand residential properties as a form of sales promotion,” he said.

“If the agents agree that the rebate cannot exceed a certain percentage, it means the homebuyer will get less rebate and ultimately will need to pay a higher price for the property they buy.”

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But it is unclear how many people were affected by the alleged fixing or the size of the financial benefit to the companies.

Chau Kwong-wing, chair professor of real estate and construction at the University of Hong Kong (HKU), said the case also served as a strong deterrent in other sectors suspected to engage in cartel-like behaviour, such as oil companies, as firms were at risk of being exposed by their rivals under the leniency policy.

“It rings an alarm bell for other industries that if they engage in price-fixing activities, they can easily be betrayed by their rivals like what Centaline did to receive leniency,” he said.

“I think the Competition Commission has used this case to warn other potential offenders to refrain from taking part in any anti-competitive behaviour.”

Gary Ng Cheuk-yan, a senior economist at Natixis Corporate and Investment Bank, agreed, saying other industries might formulate their own preventive measures after weighing the potential consequences for Midland group.

“The possible outcome will be the disqualification of Midland group’s five directors, which is set to have a short-term impact on its profits and operation,” he said.

However, he noted that as the market dictated everything, the agency could easily find a way to restore business.

“Midland is free to adjust its strategy to enhance its competitive edge. Maybe it will raise its rebates to buyers to restore its reputation,” he said.

Lawmaker Andrew Lam Siu-lo said the case could create more room for small and medium-sized agencies to survive.

“This case aims to crack down on the big agencies’ [alleged] collusion in sales-commission fixing, resulting in more room for competition between property agencies, be they small or big,” he said.

The commission’s Lee also dismissed criticism over Centaline and Ricacorp receiving leniency, saying the policy, used in cases targeting cartel-like behaviour to incentivise businesses to cooperate, helped to further the investigation.

“This policy greatly speeds up the commission’s efficiency regarding investigations and instituting prosecutions,” he said.

“The public interest is much greater, as the policy can entice involved parties to help with the successful prosecution of parties violating the competition law.

“Not all enterprises can be granted leniency. Those that are the mastermind or use coercive means to force other parties to join their illegal practice are excluded.”

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He added that those granted leniency had significant responsibilities as they needed to fully cooperate with the commission, such as by providing supporting documents and arranging staff and directors to meet investigators.

The commission is seeking remedies before the Competition Tribunal over its allegations that Midland breached the First Conduct Rule of the ordinance, along with five members of its top management.

It also seeks to disqualify the five as directors and require Midland to adopt compliance programmes. The commission is pursuing costs from the defendants to pay for the investigation and legal proceedings.