We look behind an ICAC prosecution of music teachers and find bad practices at the tax-exempt Tom Lee Music Foundation, which requires its teachers to exclusively push products for Tom Lee Music Company.

Tom Lee Music practices not fair play
28 February 2016

On Friday, 26-Feb-2016 the ICAC announced that two music teachers have been charged with allegedly accepting commissions for referring students to buy musical instruments from a supplier. At the time of the alleged offences, Lai Kam Kit, aged 37, and Tse On Kei, aged 30, worked for Tom Lee Music Foundation Ltd (TLMF). Lai taught harp and violin, while Tse taught violin.

The ICAC says:

"Apart from teaching music courses, teachers of TLMF were required to work as consultants to promote, market and sell to their students musical instruments and related products of Tom Lee Music Co. Ltd., an affiliated company of TLMF. Teachers were not allowed to promote or sell musical instruments to students of TLMF and their parents for other suppliers."

The two allegedly accepted commissions from another supplier, Chairman Instruments Trading Ltd. Lai allegedly accepted $7,663 for a harp sale, and Tse allegedly accepted $1,637 for a violin sale. It is unclear whether they would have received a commission if they had sold instruments for Tom Lee Music Co Ltd (TLMC) as required.

Now, what the ICAC media release does not mention is that TLMF is a company "limited by guarantee". It is supposedly run for charitable purposes and since 19-Jan-1978 it has an exemption from profits tax under Section 88 of the Inland Revenue Ordinance. It has 18 music centers across the HKSAR. Yet now it appears that the music school works to promote the commercial interests of Tom Lee Music Co. Ltd, which is a for-profit company, on an exclusive basis.

As TLMF is limited by guarantee (without share capital), its accounts are available at the Companies Registry. To save you the expense of the pay-wall, we've put a copy of their latest accounts, for 2014, online. TLMF had revenue of HK$71.2m in 2014, down from $78.9m a year earlier, and booked a small loss in both years. In note 17 we see that TLMF received a commission of just $69,648 in 2014 "from a member of the Company" (presumably TLMC) for selling music books, but apparently no commission for selling instruments.

TLMF paid $1,014,688 for "goods" from a member of the Company "on a cost plus basis", but in the revenue in note 4, sales of music books were only $791,497. TLMF also paid advertising expenses of $911,034 to a member of the Company "on a cost basis". If these were stand-alone adverts for the school, then it could have contracted directly with the publications, so it seems possible that these adverts were also promoting TLMC. Unfortunately, the accounts of for-profit companies like TLMC are not required to be filed, so unless they publish them voluntarily, we won't know how lucrative that business is or isn't.

The ICAC case raises three questions:

  1. Should employees or contractors of a tax-exempt charitable foundation be required to exclusively promote the commercial interests of a related for-profit company? We think not.

  2. Under the Competition Ordinance, is it appropriate that what is one of the largest music schools in HK should be "requiring" its teachers to "promote, market and sell to their students" the instruments and brands sold by a related entity which is also one of the largest musical instrument retailers? This "bundling" may be an abuse of their "substantial degree of market power" under the Second Conduct Rule of the new Competition Ordinance.

    It is true that the parents and students are always free to buy their instruments elsewhere, but teachers are obviously under contract to push TLMC's products, even if they secretly think that other products and brands available from other retailers are better, or even if a child doesn't actually need a new instrument to play better. We urge the Competition Commission to investigate.

  3. Are parents and students made aware of this lock-in when teachers give their recommendations for new instruments? So beware, parents and students - your Tom Lee teacher is "not allowed" to promote instruments from other suppliers and is "required" to "promote, market and sell" instruments of TLMC. 

In Webb-site's view, that's not fair play. Tom Lee Music, which has a 63-year history in HK, should review its practices.

© Webb-site.com, 2016

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