Smoking Gun
5 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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