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Executive Summary
1. Background
1.1. The Consumer Council received complaints in relation to four property development projects regarding management companies bundling telecommunications service charges with building management fees in the relevant residential estates.
1.2. On 11 August 2004, the Telecommunications Authority (TA) published its investigation report on complaints concerning the provision of telecommunications services at Banyan Garden. The report touches on issues some of which fall outside the TA's jurisdiction. The issues have raised a number of important consumer protection concerns involving the telecommunications market and the property sector, which the Council is obligated to address.
1.3. Initial enquiry revealed that the bundled services form part of the technological features of the relevant properties and were promoted as upmarket features. By bundling telecommunications service charges with the management fees, the developers could have the intention of offering an efficient service but the arrangement inadvertently has become an issue of consumer concern.
1.4. This report studied: how consumers of telecommunications services are being affected by the bundling arrangements, and what improvements are necessary to address the problems surfaced. Of relevance to the property sector are the issue of consumer choice, and a concern over a wider application of bundling arrangements and action to exclude essential facilities from the definition of common facilities thus depriving residents of enjoyment of such facilities, and this would have detrimental effect on consumers.
2. Consumer Concerns
2.1. Consumer concerns arising from bundling of telecommunications service charges with management fees include:
- predetermined choice rather than allow individual selection based on personal service requirements;
- both users and non-users have to pay for the service; and
- consumers with existing fixed term service contracts either pay more for duplicate service or bear penalty cost to opt out of them.
2.2 In addition, an innovative case (carve out case) to exclude the communications network area from the estate common areas causes concern with costs involved for unit owners to access the network and use alternative communications providers. By means of a lease of the communications network area, the developer assigned to its associated company a right to install and operate the communications networks in the estate for a period of 47 years at the nominal rent of $1 per year. There was in fact express disclosure of the lease in the relevant sales brochure, but the legal implications of the lease were apparently not understood by the purchasers. Complaint arose as it was found that the broadband Internet service charges and the public antenna maintenance charge had been bundled with the management fees for the estate. Upon the opposition by the owners committee of the charging scheme, the associated company subsequently agreed to levy the broadband Internet service charges only on users of its service, but did not agree on unbundling of the public antenna maintenance charge.
3. Consumer Awareness of the Bundling Arrangement
3.1. The Council has conducted a survey of 64 property sales brochures made available to it between January 2002 and August 2004 to obtain a general picture of representations on provision of telecommunications services in the relevant property developments.
3.2. 27 out of the 64 brochures contain references to telecommunications services, or similar terms in the information on services and facilities (see [1] - [3] in Appendix 1). Notably,
- 3 out of the 27(see [4] )sales brochures clearly state under the section on property management that the management fee will be inclusive of the Internet service charges.
- In one of these 3, it is stated that residents are able to enjoy 24-hour broadband Internet service without any additional payment (see [5] ). But in a later part of the sales brochure, there is the description that the management fee includes Broadband Internet charges (see [6] ).
The Council found on enquiry with property sales agents and management companies that:
8 more developments out of the 27 in fact have bundling management in place, but do not disclose the arrangement in their sales brochures. The inconsistency is highly misleading but can easily escape attention from unwary purchasers;
In the sales brochure of 1 out of these 8, it is even stated that there will be 24-hour free broadband Internet services (see [7] ) when residents will in fact be paying for the services as part of the management fee. However, prospective purchasers will not be aware of this fact because of the non-disclosure in the sales brochure.
3.3. On the engagement of pre-determined telecommunications providers:
- 19 out of the 27 sales brochures contain references that telecommunications networks in the developments are to be installed and/or operated by particular service providers (see [8]).
- the references in some contain discrepancies between the Chinese and English versions (see [9] ). Readers of the English version may get the impression that only the installation (but not operation) of the infrastructure and equipment has been arranged;
- only 4 of them go further to say that the broadband Internet services are to be provided by particular service providers (see [10] and [11] ); and
- 9 other developments in fact have selected particular providers to provide the Internet services but do not provide any information on it in the sales brochures.
3.4. The survey therefore revealed substantial number of cases of non disclosure, partial disclosure and inconsistent and ambiguous representations regarding a) the bundling of Internet service charges with management fees and b) the engagement of selected telecommunications providers, and whether infrastructure supply and/or service provision was concerned. It is doubtful whether, from reading the sales brochures, purchasers will have sufficient knowledge, information or alertness of the implications of the availability to them of the pre-determined services and facilities in terms of costs and choice.
4. Implications of bundling on consumer welfare
4.1. A bundling arrangement may assume little prominence at the particular point of a prospective purchaser making a buying decision on property, but it is in fact a long-term commitment with significant implications, especially to purchasers who are not aware of it. They are:
- cost implications to consumers
Bulk purchase may have cost savings in theory, but residents should pay attention to the contract sum and the terms to see whether unilateral increase in charges would be allowed during the contract period. This would assist residents' assessment of whether the financial benefit to be gained from the bundled agreement would compensate the loss of consumer choices. - fairness to all
The Real Estate Developers Association (REDA) representatives indicated that the telecommunications charges bundled with management fee are not higher than the market rate. However, other patrons of the particular telecommunications service provider may raise a question of cross-subsidization due to absence of transparency of cost information and lack of association/affiliation with the same developer which would enable them to bargain for the same lower rates. - quality of service
A service contract having been arranged by a third party may not reflect the diverse needs of individual residents. Moreover, other issues related to quality of service, such as the speed and network security problems may arise if the selected broadband services are in the nature of a shared service. - service contracts bind property owners
- Lengthy service contract (3 years plus option to renew by the telecommunications provider for 2 years in one case) signed by the management company/developer on behalf of residents will bind individual residents regardless of whether the service is satisfactory.
- Provisions in the DMC and the Building Management Ordinance will bind unit owners and subsequent buyers to payment of management fee (bundled with telecommunications service charge); there is no opting out.
- Owners' committee (OC) will be able to represent views of residents but will still be bound by length of the service contract. Formation of OC takes time and developer has strong influence through large management shares in hand for staged developments. Moreover, in new developments, the management company will usually also be an associated company of the developer.
For existing tenement buildings (versus new developments), OC or Incorporated Owners may make decision on bulk purchase through a transparent and fair bidding process. It is for wider discussion for the consumers at large whether broadband services should be regarded as an essential service appropriate for bulk purchase.
5. Impact of bundling telecommunications service charges with management fees on the market, and its effect on consumer welfare and choice
5.1. TA's investigation report concluded that competitors of the bundled service providers have been rendered unable to compete on a level playing field in providing services to the Banyan Garden residents.
5.2. The Council considers that use of the network carve-out but charges-bundled arrangement mentioned in paragraph 2.2 above may enable the service providers to bypass the various safeguards that the Telecommunications Ordinance has in place to ensure that all licensed carriers have equal access to consumers, in particular, provision that govern Class Licenses for In-building Telecommunications Systems under section 7B(2) of the Ordinance. This is because even if competitors have access to the building infrastructure, building unit owners are highly unlikely to subscribe to "duplicate" services or make alternate arrangements which would entail substantial connection and leasing charges in order to take advantage of any offer of service from another competitor.
5.3. Yet it was the management company or property developer that has made the arrangements in question and the TA has no jurisdiction under the Telecommunications Ordinance over the conduct of non-telecommunications licensees.
5.4. The bundling of telecommunications service charges with building management fees will represent a drastic change of emphasis in the market. Telecommunications service providers will not be competing with each other to attract individual consumers to take up their telecommunications services through cheaper prices, higher quality services, and more choices that are directed at individual consumer needs. Instead, they will be competing with each other to attract management companies and property developers to select them as the 'pre- arranged service provider' to provide a standardized set of service that could meet the requirements of the management companies and or property developers concerned. Whilst marketing of essential services and facilities such as lifts and air-conditioners in such a mode is widely accepted, it is subject to debate whether telecommunications services should be treated likewise. This is because the purchaser needs only to pay for lift maintenance and air-conditioners charges in one development, whilst with bundled telecommunications service paid through management fees, the purchaser with a pre-existing contract with another service supplier will have to pay more for duplicate service.
5.5. Moreover, the limitation in the TA's jurisdiction and the inadequacy of the sector specific approach are also highlighted in the complaint against the carve out case. The current regulatory regime does not provide for the assessment of potential competition issues that arise from the arrangements discussed in this report, as borne out by TA's report:
"The TA has no jurisdiction under the Ordinance over the conduct of non-telecommunications licensees, even though the conduct may prejudice competition in a telecommunications market. There is no general competition law in Hong Kong and conduct which could be unlawful if engaged in by a telecommunications licensee, would be perfectly legal for a non-licensee." ( paragraph 86 of TA report )
"In the absence of a general competition law in Hong Kong, the application of sector specific telecommunications laws outside their designated area would be cause for concern. Accordingly, potential competition issues that may be identified outside the scope of present regulations may suggest that a broader regulatory framework would be beneficial to the economy." ( paragraph 70)
6. Property concerns
6.1. Apart from the telecommunications issues highlighted, the Council is concerned with the possibility of a much wider application of developers reserving or carving out essential facilities which can effectively place such facilities and areas out of reach of property owners. If, in extreme cases, essential facilities such as lifts and security system could be confined within areas carved out of the common areas and made subject of a lease, individual unit owners could become captive customers liable to payment of a monthly access charge fixed entirely at the will of the lease holder. This calls into issue the necessity of putting measures in place to safeguard the rights of individual unit owners and the need to take steps to forestall innovations like the carve-out lease.
6.2. The Council has raised, for safeguarding building owners' rights in the selection of contractors to carry out work inside one's own unit, the important principle that building management should not arbitrarily limit unit owners' access to those contractors who can fulfill the required qualifications. The Council considers that the principle, and the protection of unit owners from inappropriate tendering conduct in regard to building maintenance work, should be equally applied in regard to unit owners' choice of service provisions in buildings.
7. Recommendations
Recommendation 1 - defining 'essential facilities and services' that should be provided by developers and paid for through management fees
The Council urges the government to take all necessary steps, such as through imposing conditions in the land lease and issuing guidelines on the definition of common facilities and services in DMCs, to ensure fundamental protection of the rights of individual owners to have access to the essential facilities and use of common areas.
The Council proposes the formation of a task force comprising the relevant government departments/bureaux, REDA, relevant professional bodies such as the Institute of Surveyors, the Law Society and Bar Association, and property management association etc. to discuss with a view to drawing up guidelines on what should or could constitute essential facilities and services in a property development project and making them applicable to all purchasers of undivided shares of properties alike.
The definition of essential facilities should be reviewed periodically to ensure that it is in line with changing life-style and that the state of technological advances can be allowed for.
Recommendation 2. - ensuring consumer choice and fair access to telecommunications and other services
On telecommunications services, the Council recommends that:
a. DMCs should explicitly state whether telecommunications facilities form part of the common facilities. Whilst the developer or property manager may select the supplier of telecommunications facilities, whether the telecommunications service providers should be selected on behalf of the residents should depend on circumstances. It may be determined after considering factors such as the sophistication and up-market features of the property to be delivered to purchasers.
b. Any such contract entered into for provision of the relevant services should be limited to a minimum duration to enable residents to readily change to another operator if deemed necessary through the decision of the owners' committees.
c. There should be express and prominent reference of bundling arrangements in sales brochures for the information of prospective purchasers and details on costs are to be given.
d. Where building managers have arranged for bulk telecommunications service provision in existing buildings (as against uncompleted or newly completed buildings), individual unit owners should be allowed to exercise a right to opt out of the service.
On other services, the Council recommends that building managers should give unit owners the right of choice in regard to contractors of maintenance and repair work.
Recommendation 3 - ensuring transparent and responsible practice of property developers and property managers
a. In light of unequal bargaining powers between developers and small purchasers, the Council has approached REDA and urged it to manifest self-regulatory function by developing a code of best practice, which should cover accuracy of representations in sales brochures, transparent and fair practices in administering tenders for facilities, and in all matters concerning uncompleted residential properties which will have implications for small purchasers.
The Council requests that the relevant government bureau should facilitate REDA's initiatives in this respect and to monitor progress.
b. The Council considers that property manager acting on behalf of building owners should likewise observe good practice in administering tenders.
Recommendation 4 - maximising consumer protection by ensuring fair competition could take place in residential buildings
a. The Council supports strengthening the enforcement of 'level playing field' principles in the Telecommunications Ordinance to require all licensees to deal with associated companies in an arms length manner and to ensure a fair and transparent procedure in administering tender bids.
b. The Council also invites the government to consider whether to expand the scope of section 19B of the Telecommunications Ordinance to enable challenge of schemes of arrangements that serve to restrict access to telecommunications infrastructure. Also consideration can be given to prohibiting, by conditions of a land lease, developers from granting lease(s) of portion(s) of the land that may have the effect of denying individual building owners control over essential facilities constructed on the land.
Recommendation 5 - addressing consumer concerns in the broader economy
The Council requests COMPAG to consider whether the sector specific approach to competition is most appropriate in dealing with consumer concerns that may arise across different sectors as services become increasing converged.
Consumer Council Survey
Sales Brochures between January 2002 and August 2004
Appendix 1: Illustrative examples of representations made in sampled sales brochures on telecommunications services
[1] "Home Automation System: The leading edge of home automation technology coupled with the broadband network, setting a new standard in tomorrow's living."
"智能家居系統:先進智能家居科技及寬頻網絡，開拓新一代優越生活!"
[2] "To keep you in touch with the world at large, each unit has built-in broadband access, through which you can even book clubhouse facilities and request professional household services, ...."
"住客可透過完善的寬頻網絡，與外界時刻溝通連繫、預訂會所設施與專業家居服務。"
[3] "Homes equipped with broadband network for easy connection. ... Residents can book clubhouse facilities and receive management notices via the internet."
"特設寬頻網絡，配合每個單位內的Cat.5 線路，讓住客以高速上網。...網上 24 小時預訂會所設施及接收管理處通告。"
[4] "The management fee of residential unit includes the monthly service charges for 24-hour unlimited broadband internet communication service."
"所有住宅單位之管理費用已包括使用安裝於住宅單位內之二十四小時寬頻上網通訊服務之費用。"
[5] "住戶毋須額外付款，即可享受 24 小時寬頻上網服務" *
[6] "The management fee of residential units includes the monthly service charges for 24-hour unlimited Broadband Internet and communication services"
"所有住宅單位之管理費用已包括使用安裝於住宅單位內之二十四小時寬頻上網及通訊服務之費用"
[7] "... 除24小時免費寬頻上網服務外，另設6星級專家居服務...。" *
[8] "... a Lease made between the Developer and X Limited in respect of certain conduits, pipes and areas in the Development for the installation and operation of common aerial broadcast distribution network and telecommunication network in the Development."
"發展商已與X Limited訂立一份租約，將物業內有關管道、導管及範圍租予X Limited 作安裝及操作公共天線網絡及通訊網絡用途。"
[9] "Transmission and distribution telecommunication equipment will be installed by X Limited and Y Limited in the Development for strengthening the use and enjoyment of the residents."
"X有限公司及Y有限公司在物業範圍內設有電訊傳輸及分配網絡設備提供服務予住客。"
[10] "Residents can access the world of information and entertainment programmes through X broadband services including M plus the Y TV services, offering numerous new and exclusive channels in Hong Kong and Asia."
"住戶可選用X寬頻服務接收來自世界各地的各類型娛樂及資訊，觀賞M節目及使用其Y TV服務，收看多個在香港甚至亞洲首播的節目頻道。"
[11] "屋苑內並已預設寬頻固網光纖，讓每戶可享用集團提供之寬頻服務。" *
( * there is no corresponding English version in the sales brochures)
