Webb-site.com has
obtained a letter which provides an exclusive look at Legislator Henry
Wu's anti-competitive attempt to maintain the brokerage cartel's fixed
commission rates. In other jurisdictions, this kind of collusion and
price-fixing would be illegal. Hong Kong badly needs a competition law. |
Smoking Gun
5th November 2001
Webb-site.com has obtained a letter which provides an
exclusive look at the last-ditch efforts of the brokerage
sector to head off competition. Legislator Henry Wu
King-cheong, who holds the
Functional Constituency seat for the Financial Services Sector (otherwise
known as the small brokers sector), has
written to brokers seeking their support for a minimum transaction size below
which the fixed minimum commission rate would apply. To see the letter in
acrobat format, click here.
This letter is reminiscent of the Law Society's failed attempt
not so long ago to fix tender rates for the handling of government property
transactions.
The minimum commission rate of 0.25% is currently set by the
Stock Exchange of Hong Kong Ltd, which has a legally-protected monopoly on the
operation of a stock exchange in Hong Kong. Rule
534 sets the limit.
Mr Wu's letter says the cartel has reached a "consensus
that the Authorities should adopt a two-tier brokerage commission system"
in which commissions on large transactions would be negotiable but those below a
certain value or "Line" would be subject to the cartel rate.
In order to set a "reasonable specific invoice
amount" (reasonable, that is, if you are a broker, but extortionate if
you are a customer) brokers are invited to fill in a questionnaire (see page 2 of
the letter) in which they specify what the average value per invoice was in June
and September this year, and are then asked what should be the "Line" between
fixed and negotiable rates.
The tick-boxes start at $0.25m and go up in steps of
the same amount to $2m. Notably, there is no tick-box for "zero". In
Mr Wu's book, full competition is not an option. At the mid-point of the line, they
are basically suggesting a minimum charge of HK$2,500 for a $1m transaction, and
at the low-point of $250k, the scale would be $625. All that just for picking up
the phone and pressing a few buttons.
In most developed economies, there exist laws against such
anti-competitive collusion and price-fixing. The mere existence of Mr Wu's
letter in such jurisdictions would be grounds for investigation by the
competition authorities. Hong Kong has no such laws, and it is one of the things
which is holding back the economic recovery.
To be fair to Mr Wu, he is only arguing the case for the
dysfunctional constituency which elected him, one of 30 "functional
constituencies" which make up half of our Legislative Council. The tiny
constituency of 448 voters (including companies) is dominated by brokers, most
of them small. To vote,
you have to be a Stock Exchange or Futures Exchange brokerage, or a member of The
Chinese Gold & Silver Exchange Society, membership of which is capped at
192.
The internet was not invented yesterday, and nor was electronic
trading and settlement. The brokers have had years to adjust to technology and
to merge their businesses to achieve economic scale, and have had a huge pay-off
from the flotation of HKEx.
Now they are tugging at the economic heartstrings and arguing
that 4,000-5,000 jobs could be lost as a result of competition. That's not a
factor which the "Authorities" (read government/ SFC/ HKEx) should
consider - we don't have minimum commissions on estate agents, travel agents
or insurance brokers, and there is no reason why any sector of the economy
should have protection from the free market.
© Webb-site.com 2001
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