21Sep

New remote customer interaction requirements take effect…in part

21st September 2022 David Whyte 4

On 12 September 2022, the Gambling Commission’s new Social Responsibility Code Provision (“SRCP”) 3.4.3, partly came into effect. For now, however, the Customer interaction guidance – for remote gambling licensees (Formal guidance under SR Code 3.4.3 (the “Guidance”) will not take effect.

Background

In its update of 2 September 2022, the Gambling Commission states that the delay in the implementation of parts of SRCP 3.4.3, and the Guidance, takes into account a request from the industry for “an extension to the timeframe for implementing these new measures”. Further, it “considers it would be beneficial to use the time now available to conduct further consultation on matters to be addressed in the guidance associated with SR Code 3.4.3 by way of a consultation on the guidance document itself”: something which, as we pointed out in July, it should have done in the first place.

The Gambling Commission describes the Guidance as a “living document which is intended to be amended over time”: we have previously set out our concerns about the Gambling Commission’s introduction or amendment, without consultation, of guidance that has the effect of a licence condition. The Gambling Commission states it is “particularly interested to hear about good practice in implementing the requirements, based on the lessons learned by operators during the period between April and September and to hear about any implications arising out of recent research, evidence and casework”. A cynic may suggest that its focus on good practice implementation is indicative that, following the consultation, any revised guidance issued is likely to be very similar to the Guidance, irrespective of any consultation responses submitted: a cycle that has become commonplace in recent times.

The Gambling Commission states that the consultation is “set to be launched during late September and will last six weeks” (rather than the usual 12). Its provisional intention is to “publish the guidance on requirements in December 2022 with it taking effect approximately 2 months after publication”. Whether it meets that deadline remains to be seen.

We strongly encourage all licensees to respond to the Consultation when it is launched.

The Guidance – delay and confusion

The Gambling Commission’s decision, at this late stage, to delay implementation of parts of SRCP 3.4.3 and consult on the Guidance is surprising, as is the fact that pending its consultation it will not require that remote licensees take into account any guidance whatsoever. It seems to us that the latter of these issues has largely been influenced by two factors. Firstly, the fact that the previous Customer interaction: formal guidance for remote gambling operators (the “Previous Guidance”) was issued under the old SRCP 3.4.1, which is also now no longer in effect. Secondly, the Gambling Commission is unable to amend the new SRCP 3.4.3 and require that licensees adhere to the Previous Guidance without further consultation.

This last-minute change creates a lacuna that will last until at least February 2023, which will confuse some remote licensees and infuriate others. Remote licensees are left in the unenviable position of being without any customer interaction guidance whatsoever at a time when, by its recent admission, the Gambling Commission’s “focus on customer interaction has been there for some time now and will certainly be continuing over the coming months”. There must surely also be a risk that consumers could be negatively impacted due to this lack of clarity.

The Guidance – fairness and reasonableness

It has been a requirement that remote licensees “take into account the Commission’s guidance on customer interaction” since 31 October 2019. As any licensee who has been subject to a compliance assessment or regulatory action will attest, in practice the Gambling Commission interprets “take into account” as “strictly adhere to”. This is clear not only from the actions of the Gambling Commission, but also from the affirmative language, such as “must” and “required”, that is contained in guidance it has issued in relation to customer interaction. The Previous Guidance has therefore, at least to some extent, had the effect of a licence condition.

Various regulatory sanctions have been imposed, or regulatory settlements agreed that can be linked, at least in part, to remote licensees’ failure to take into account the Previous Guidance. Those licensees may, rightly, feel aggrieved that a combination of convenient timing and poor regulatory governance, means that they were exposed to such sanctions when, contrastingly, their peers, who may be subjected to compliance assessments or regulatory action now, are no longer obliged to adhere to similar standards. Whether those licensees choose to challenge this unfairness remains to be seen and may depend on the Gambling Commission’s action during this hiatus.

Non-remote licensees remain subject to the requirement, by virtue of SRCP 3.4.1, to “take into account the Commission’s guidance on customer interaction”. This guidance, Customer interaction: formal guidance for premises-based operators (the “Non-remote Guidance”), sets out very similar requirements to the Previous Guidance. This difference in required standards is likely to aggravate non-remote operators, particularly if the Gambling Commission continues to take action against them based on a failure to take into account the Non-remote Guidance. They will also likely be concerned that their already diminishing pool of customers will continue to migrate to the remote sector, which, at least in the short term, is held to a lower standard or can justify non-compliance more easily.

We question whether the Gambling Commission has given adequate thought to the possible impact of this last-minute U-turn and the consequential risk of challenge:

What will the position be for those licensees currently subject to regulatory action for failing to adhere to the Previous Guidance, or for those subjected to a compliance assessment in a period that straddles the change? What standards will they be held to?

Will the Gambling Commission now expect licensees to adhere only to the literal wording of SRCP 3.4.3, ignoring not only the delayed Guidance but also the Previous Guidance?

What are the current affordability requirements? Those requirements, in particular the requirement to consider ONS data and national average salaries when assessing affordability, were set out in the Previous Guidance and repeated in the Guidance. On what basis does the Gambling Commission propose to hold remote licensees who fail to meet those standards to account during this period?

The Gambling Commission has almost certainly opened a can of worms through this seemingly haphazard change. Licensees, consumers, stakeholders, and Government are all likely to have varying concerns. Whilst it is pleasing to see that the Gambling Commission has identified the risks linked to bringing all the requirements under SRCP 3.4.3 and the Guidance into effect without consultation, these issues could have been avoided if the Gambling Commission had given earlier credence to comments made by licensees, or industry stakeholders and advisors. The lateness of this change is embarrassing and the consequential complexities that now follow should be carefully navigated or the Gambling Commission may be exposed to challenge.

Next steps and SRCP 3.4.3

It is the Gambling Commission’s intention, subject to consultation, to introduce the remaining requirements of SR Code 3.4.3 and the associated guidance on 12 February 2023.

In the meantime, we encourage remote licensees to ensure that their policies, processes, and procedures comply with the existing requirements.

To assist licensees, we set out below SCRP 3.4.3 with deletions for those requirements not brought into effect on 12 September 2022.

Customer interaction 

All remote licences, except any remote lottery licence the holder of which does not provide facilities for participation in instant win or high frequency lotteries1, remote gaming machine technical, gambling software, host, ancillary remote bingo, ancillary remote casino, ancillary remote betting, remote betting intermediary (trading rooms only) and remote general betting limited licences.

Licensees must implement effective customer interaction systems and processes in a way which minimises the risk of customers experiencing harms associated with gambling. These systems and processes must embed the three elements of customer interaction – identify, act and evaluate – and which reflect that customer interaction is an ongoing process ~~as explained in the Commission’s guidance (see paragraph 2)~~.
~~Licensees must take into account the Commission’s guidance on customer interaction for remote operators as published and revised from time to time (‘the Guidance’).~~ 
Licensees must consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified. Licensees must take account of the Commission’s approach to vulnerability as set out in the Commission’s Guidance.
Licensees must have in place effective systems and processes to monitor customer activity to identify harm or potential harm associated with gambling, from the point when an account is opened. 
Licensees must use a range of indicators relevant to their customer and the nature of the gambling facilities provided in order to identify harm or potential harm associated with gambling. These must include: 
- customer spend
- patterns of spend
- time spent gambling
- gambling behaviour indicators 
- customer-led contact 
- use of gambling management tools
- account indicators.
In accordance with SR Code Provision 1.1.2, licensees are responsible for ensuring compliance with the requirements. In particular, if the licensee contracts with third party business-to-business providers to offer any aspect of the licensee’s business related to the licensed activities, the licensee is responsible for ensuring that systems and processes are in place to monitor the activity on the account for each of the indicators in paragraph 5 (a-g) and in a timely way as set out in paragraphs 7 and 8.
A licensee’s systems and processes for customer interaction must flag indicators of risk of harm in a timely manner for manual intervention, and feed into automated processes as required by paragraph 11. 
Licensees must take appropriate action in a timely manner when they have identified the risk of harm. 
Licensees must tailor the type of action they take based on the number and level of indicators of harm exhibited. This must include, but not be limited to, systems and processes which deliver:
- tailored action at lower levels of indicators of harm which seeks to minimise future harm
- increasing action where earlier stages have not had the impact required
- strong or stronger action as the immediate next step in cases where that is appropriate, rather than increasing action gradually
- reducing or preventing marketing or the take-up of new bonus offers where appropriate
- ending the business relationship where necessary. 
~~Licensees must prevent marketing and the take up of new bonus offers where strong indicators of harm, as defined within the licensee’s processes, have been identified.~~
Licensees must ensure that strong indicators of harm, as defined within the licensee’s processes, are acted on in a timely manner by implementing automated processes. Where such automated processes are applied, the licensee must manually review their operation in each individual customer’s case and the licensee must allow the customer the opportunity to contest any automated decision which affects them.
Licensees must implement processes to understand the impact of individual interactions and actions on a customer’s behaviour, the continued risk of harm and therefore whether and, if so, what further action is needed.  
Licensees must take all reasonable steps to evaluate the effectiveness of their overall approach, for example by trialling and measuring impact, and be able to demonstrate to the Commission the outcomes of their evaluation.
Licensees must take account of problem gambling rates for the relevant gambling activity as published by the Commission, in order to check whether the number of customer interactions is, at a minimum, in line with this level. For the avoidance of doubt, this provision is not intended to mandate the outcome of those customer interactions.

05Jul

Lexology – Getting the Deal Through, Gaming 2022

5th July 2022 Harris Hagan 8

As Harris Hagan continues its contribution to the Lexology GTDT Gaming publication, we are pleased to share with our subscribers, complimentary access to the full reference guide which is now available online.

Our Associate, Jessica Wilson, remains the author of the United Kingdom report, which covers a range of British regulatory insights including land-based and remote gambling and quasi-gambling activities, including legal definition; anti-money-laundering regulations; director, officer and owner licensing; passive/institutional ownership; responsible gambling; taxes; advertising; supplier licensing and registration; change of control considerations; and recent trends in the industry.

The reference guide also allows for side-by-side comparisons with other local insights from jurisdictions such as Australia, Brazil, Germany, Hong Kong, Japan, Macau, Nigeria, South Africa and the USA.

We invite you to review the reference guide at your leisure.

18Feb

The Gambling Commission’s emerging money laundering and terrorist financing risks – 10 February 2022 update

18th February 2022 David Whyte 35

The Gambling Commission released its most recent update on emerging money laundering and terrorist financing risks on 10 February.

The Gambling Commission reminds licensees on its website that they are required, by licence condition (“LC”) 12.1.1(3), to “keep up to date with any emerging risks that the Commission publishes”. This update covers three emerging risks that we set out in detail below.

1. Improvements needed to money laundering and terrorist financing risk assessments

The Gambling Commission points out that it expects to see licensees significantly improve their money laundering and terrorist financing controls, flagging that there are “too many instances being identified where licensees are failing to meet the requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 [(as amended) (the “MLR”)] and the LCCP”.

It reminds licensees of the mandatory requirement under LC 12.1.1 that they “conduct an assessment of the risks of their business being used for money laundering and terrorist financing and have appropriate policies, procedures and controls in place to mitigate the risk of money laundering and terrorist financing”.

In warning licensees that it will take regulatory action where it identifies significant failings (which, it also reminds licensees, can include suspension and revocation) the Gambling Commission directs them to its most recent compliance and enforcement report, Raising Standards for consumers – Compliance and Enforcement Report 2020-2021 (the “2021 Report”), within which it has identified and included examples of good practice to consider.

Having seen first-hand the Gambling Commission’s punctilious expectations of licensees’ money laundering and terrorist financing risk assessments, and noting some differences between the good practice examples set out in the 2021 Report and our own practical experience of its expectations, we recommend licensees consider the following:

Ensure that you review your risk assessment in the light of this emerging risk update. If the Gambling Commission has cause to raise concerns about your approach in the future, it will almost certainly point to this update as an opportunity for you to have improved your risk assessment sooner.
Ensure that you also review your risk assessment “as necessary in the light of any changes of circumstances”, including the examples set out in LC 12.1.1(1).
Methodically work through the Gambling Commission’s AML guidance for casinos (in particular paragraphs 2.12 to 2.39) or other gambling businesses (in particular section 18) (together the “AML Guidance”) when completing or updating your risk assessment. Gambling Commission officials seem to use the guidance as a checklist when reviewing risk assessments during compliance assessments.
Ensure that your risk assessment accords with the Gambling Commission’s own money laundering and terrorist financing risk assessments. As with the AML Guidance, Gambling Commission officials will likely cross check the content. Should your assessment of any individual risk differ from the Gambling Commission’s, it will likely expect you to be able to explain why. Please note that the Gambling Commission sets out in its 2020 risk assessment its expectation that you also refer to its 2018 and 2019 risk assessments “[a]s part of your commitment to anti-money laundering and the prevention of terrorist financing”. We therefore recommend that, if you haven’t already, you cross check your risk assessment against all three documents, as together they form a catalogue, rather than superseding each other.
Include reference to all theoretical risks included in the AML Guidance and the Gambling Commission’s own risk assessments, irrespective of whether you consider those theoretical risks to present any actual risk to your business. We have seen Gambling Commission officials criticise licensees who have, justifiably, considered it sensible to omit theoretical risks from their risk assessment because they simply do not exist in their operation and therefore cannot be assessed. By means of an example, even when cryptocurrency it is not accepted, the Gambling Commission has stated it expects details to be included in a risk assessment, including about how this payment method is prevented. Whilst this may be something that can be explained and/or corrected at a later stage, the time and effort required in doing so is best avoided if possible.
Ensure that your policies, procedures and controls are prepared having regard to your risk assessment and cross refer to it where appropriate. By means of an example, a key area of concern often raised by Gambling Commission officials is that there is no explanation in the risk assessment about why triggers and thresholds were set at current levels. Putting aside any argument that policies, and not risk assessments, are the best place for this explanation to be recorded (as how else could those policies – and therefore the triggers and thresholds – have regard to the risk assessment?) the Gambling Commission will be looking for evidence of such consideration.
Ensure that you have a clear methodology for your risk assessment and that you can show that your approach has been applied logically to the risks. If you are unsure on an appropriate methodology to use, consider applying the same methodology that is used by the Gambling Commission in its own risk assessments.
Ensure that you are risk profiling customers from the outset of the business relationship.
Take into account when completing your risk assessment the risks presented by unaffordability, problem gambling or gambling addiction that leads to crime (for example increasing spend inconsistent with apparent source of income). Similarly, as part of a balancing exercise, be careful not to conflate those risks with those presented by money laundering and the financing of terrorism.
Include clear and detailed explanations of risks and mitigation rather than vague references.
Ensure that you do not reference any out-of-date Gambling Commission guidance and/or advice. The Gambling Commission sets out in the 2021 Report its expectation that licensees keep up to date with any guidance and/or advice it provides and then update their risk assessment and polices, procedures and controls based on that guidance and/or advice.

2. Due diligence checks on third party business relationships and business investors

The Gambling Commission sets out that it has become aware of instances of licensees failing to conduct sufficient due diligence in their business relationships, including where licensees have entered white label partnerships (which are noted as high risk in the Gambling Commission’s 2020 risk assessment, specifically for AML failures) or received third-party investment.

Again, the Gambling Commission reminds licensees to refer to the AML Guidance, within which it asserts that increased risks are posed by the jurisdictional location of the third-party, as well as by transactions and arrangements with business associates and third-party suppliers, such as payment providers, including their beneficial ownership and source of funds. Examples given are insufficient checks on the source of funds from an investment that had originated from cryptoassets that was converted to sterling when invested into the gambling business, and repeated failures to consider jurisdictional risk in relation to third-party business relationships.

The Gambling Commission advises licensees to remind themselves of the content of its April and July 2020 e-bulletins for more information on these risks.

This is not the first time the Gambling Commission has raised this issue and as such it is indicative that it may be preparing to widen its practical examination of licensees’ approaches to money laundering and terrorist financing risk, to concentrate further on their transactions in higher risk jurisdictions.

We recommend that licensees, in particular those in white label or B2B arrangements, review their approach to due diligence and risk in anticipation of additional scrutiny. As the Gambling Commission points out, failure to do so could amount to a breach of the MLR, the Proceeds of Crime Act 2002, the Terrorism Act 2000 or LC 12.1.1.

3. Scottish notes and pre-paid cards

Having set out in its 2020 risk assessment “the significant, potential money laundering risks associated with the use of Scottish notes and pre-paid cards” the Gambling Commission points out the increased risk of Scottish notes being used to top up pre-paid cards. It reminds licensees to “remain curious as to the source of customer funds and conduct ongoing monitoring to ensure that customer spending levels align with your knowledge of their affordability to gamble”.

It would be sensible for licensees to take this into account when reviewing their risk assessments, and to be mindful of the Gambling Commission’s concerns if they are accepting pre-paid cards.

Please get in touch with us if you would like any assistance on compliance or enforcement matters.

06Jan

Gambling Commission Compliance and Enforcement Report 2020-2021

6th January 2022 Ting Fung 33

The Gambling Commission’s latest Raising Standards for consumers – Compliance and Enforcement report 2020 to 2021 (the “Report”) was published on 9 December 2021, the first since Neil McArthur’s departure, and details “one of the busiest [years] for [its] Enforcement and Compliance teams…”. Unsurprisingly, the focus of the Report remains on social responsibility and anti-money laundering failings. It also includes designated sections on licensed operators and financial stability, special measures and licence suspensions, personal management licence (“PML”) reviews and illegal gambling. However, surprisingly, and unlike the Raising Standards for consumers – Compliance and Enforcement report 2019 to 2020, affordability is not featured as a key theme despite the continuing and increasing focus by the Gambling Commission across its compliance enforcement work.

Certainly, this is reflected in the Gambling Commission’s summary of its compliance and enforcement work:

15 financial penalty packages or regulatory settlements totalling £32.1 million;
262 security audits;
57 personal licence reviews were finalised; and
82 website reviews conducted; and
30 full assessments of online and non-remote operators.

Alongside an acknowledgment of the challenges of the pandemic upon consumers and businesses, the foreword concludes that:

“Looking back at enforcement in 2020 to 2021 we see the same two weaknesses in almost every case – operators failing to adhere to social responsibility and anti-money laundering rules…The reasons for these failings are almost as concerning as the failings themselves. Our casework reveals that operators are either not making suitable resources available or are simply putting commercial objectives ahead of regulatory ones…As the Great Britain’s regulator for the gambling industry, we still see far too many breaches of regulations where everyone in the industry agrees we should not see them. The industry has the resources, skills and knowledge to change this.”

We strongly encourage applicants and licensees to review, carefully, the Gambling Commission’s identified common poor practices, case studies, notable enforcement cases, guidance and lessons learned and health-check good practices.

Summary of other key areas from the Report:

Anti-money laundering and counter terrorist financing

“The Commission is finding increasing instances of gambling operators failing to consider how problem gambling can be linked to ML and TF despite both the Commission’s Guidance for remote and non-remote casinos: The prevention of money laundering and combating the financing of terrorism and Duties and responsibilities under the Proceeds of Crime Act 2002: Advice to operators (excluding casino operators) stating:
a pattern of increasing spend or spend inconsistent with apparent source of income could be indicative of money laundering, but also equally of problem gambling, or both.”

The common poor practices which led to “avoidable failings” were cited as:

inadequate due diligence measures;
failure to account for the Gambling Commission’s various guidance documents;
failure to consider the full range of circumstances in which enhanced due diligence (“EDD”) is to be applied;
over reliance on third party providers to conduct due diligence (“CDD”) checks;
delayed customer identification checks;
commercial considerations overriding the need to comply with anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) provisions;
operators having no clear methodology in place in their money laundering (“ML”) and terrorist financing (“TF”) risk assessments;
vague references made in ML and TF assessments;
not considering how problem gambling can be linked to ML and TF;
high financial thresholds in place before CDD or EDD measures take place;
high financial thresholds based on losses, deposits, or winnings only; and
the ML/TF risk assessment not being fully used to inform policies, procedures and controls.

The Gambling Commission highlighted the need for licensees to:

apply a risk-based approach;
conduct robust CDD and EDD checks;
ensure that their ML/TF risk assessment along with their policies, procedures and controls sufficiently mitigate the risk of ML and TF;
ensure that they are compliant with and stay up to date on customer interaction requirements, and that they take account of the current formal guidance for their sector; and
deliver robust and up to date employee training.

Licensed operators and financial stability

“It is not surprising given the significant challenges the pandemic has posed globally, that we have observed a significant increase in gambling operators, particularly land-based operators, experiencing extreme financial difficulty. In such situations it is imperative that operators, and their representatives are mindful of what is required of them in relation to the Licensing Objectives and customer protections. We urge licensees who are encountering financial stability issues to engage with the Commission at an early stage.”

Key takeaways from this section are:

responsibility for regulatory compliance remains – at all times – on the licensee, whether this is the gambling business or an appointed administrator;
in the case of administration, all regulatory responsibilities continue and vest in the administrator; and
operating licensees and PMLs were reminded the Gambling Commission will remain focused on ensuring licensees are treating consumers fairly. Fair treatment includes but is not limited to ensuring that segregated funds with medium and/or high-risk customer protection measures are ring fenced and not used to pay business expenditure.

The unsurprising consequence of either improper closedown or not adhering to continuing regulatory responsibilities are risks to any continuing operating licences PMLs. The Gambling Commission further emphasised that any adverse outcomes “may” affect future applications both in Great Britain and with other regulators abroad.

Special measures

As part of its regulatory toolkit, the Gambling Commission has been piloting the use of special measures, since September 2020, “to bring operators to compliance at pace” following the identification of failings during a compliance assessment.

During the special measures process a licensee makes various commitments to, and is supervised by, the Gambling Commission in “a closely managed and monitored timetable to achieve compliance over a relatively short period of time.” Wide-ranging, significant and immediate improvements are required to the licensee’s policies, procedures and controls, generally, within a challenging timeframe. Once the Gambling Commission is satisfied improvements have been made and there is no risk to the licensing objectives, particularly consumers, the special measures will be lifted.

The Report highlights that the pilot scheme has used in relation to eight licensees. The Gambling Commission has found special measures highly effective in incentivising licensees to make quick and substantial improvements (and divestments!) to avoid a licence review, and that it why they are being formalised (as noted below). The shared objective of the dangled carrot is to avoid a section 116 licence review, and in the case of the licensee, the uncertainty, huge stress and cost that they bring!

The Gambling Commission is currently consulting on special measures, to make them a permanent feature of their regulatory toolkit, as part of its consultation on the Licensing, compliance and enforcement under the Gambling Act 2005: policy statement. Read more about the consultation and special measures process in our blog on 13 December 2021.

PML reviews

“Businesses do not make decisions – people do. This is why the Commission continues to ensure that personal licence holders are held accountable, where appropriate, for the regulatory failings within the operators they manage.”

Key failings identified through casework included:

inadequate source of funding or source of wealth checks;
record keeping – lack of adequate documentation and audit trails to demonstrate properly informed decision making;
reporting criminal offences – delays or failures to report Schedule 7 offences as a key event;
nominated officer/ MLRO poor practice; and
senior management lacking oversight.

The associated casework has resulted in the following outcomes:

10 licence revocations – eight Personal Functional Licenses (“PFL”) and two PMLs;
11 PML warnings issued;
One PML warning with conditions;
21 PML advice as to conducts; and
10 PMLs surrendered.

Illegal gambling

“We are particularly focused on identifying and disrupting websites which are targeted at young or vulnerable people, those who experience significant harms from their gambling and self-excluded gamblers. The most widely reported complaints from members of the public related to the allowance of gambling. This accounted for 62% of all unlicensed remote reporting for the financial year 2020 to 2021 representing a 17% increase compared to the financial year 2019 to 2020.”

There were 99 reports of unlicensed remote operators in the financial year 2020 to 2021, some of which accounted for the same illegal website. In addition:

consumers’ inability to withdraw funds remained a prevalent issue;
there was a rise of illegal lotteries on social media;
the Gambling Commission continues to work with social media outlets and other regulators internationally to counteract the risks posed by illegal lotteries;
the Gambling Commission is also assessing its need for further legislative powers to counteract illegal gambling and will report any conclusions to the Department of Culture, Media and Sport as part of the Gambling Review.

What’s next?

The Gambling Commission’s foreword concludes that:

“The reasons for [licensees’] failings are almost as concerning as the failings themselves. Our casework reveals that operators are either not making suitable resources available or are simply putting commercial objectives ahead of regulatory ones.
This is simply unacceptable and will be seen as such by others in the industry who work hard to achieve compliance.
…
Our Enforcement and Compliance work will continue to focus on customer protection, as consumers have every reason to expect. This will vary from paying very close attention to novel products to checking that operators are looking after their customers by meeting the LCCP requirement and taking into account the current Commission guidance on anti-money laundering and customer interaction”.

Compliance and enforcement action will continue unabated.

Updated and consolidated guidance on AML and customer interaction is due to be issued “shortly” following the Gambling Commission’s consultation that ended nearly a year ago on 9 February 2021.

We strongly encourage applicants and licensees to review, carefully, the Report and the Gambling Commission’s identified common poor practices, case studies, notable enforcement cases, guidance and lessons learned and health-check good practices.

22Jun

Consultation response: Gambling Commission fees to increase from 1 October 2021

22nd June 2021 Jemma Newton 72

On 14 June 2021 the UK Government issued its response to a consultation by the Department for Digital, Culture, Media and Sport (“DCMS”) in relation to proposals to increase the fees which are payable by gambling operators in Great Britain to the Gambling Commission (the “Commission”).

The Government’s response set out that the consultation had proposed an increase in fees in order to enable the Commission to continue to “recover its costs and address regulatory challenges”.

The Government confirmed it intends to proceed with implementing the proposals outlined in the consultation, which were to:

increase annual fees for remote operating licences by 55% from 1 October 2021;
increase all application fees by 60% from 1 October 2021;
make other changes to simplify the fees system, including removing annual fee discounts for combined and multiple licences, from 1 October 2021; and
increase annual fees for non-remote operating licences by 15%, with implementation of these increases delayed until 1 April 2022.

The Government also confirmed that two minor amendments will be made to fees regulations:

to “ensure fees regulations are consistent with the provisions of UK GDPR and the Information Commissioner’s Office’s guidance”, no variation fee will be charged where individuals exercise their right to have inaccurate personal data rectified; and
the fee for an application for a Single Machine Permit will be increased, from £25 to £40, “to ensure that the Commission recovers its costs in processing these applications”.

The Government’s full response can be viewed here.

The Commission released a response to the Government’s confirmation of an increase in fees, stating that it “welcomes publication of [the] consultation response on the funding of gambling regulation”, and clarifying that the much needed changes to its fees income “will enable [us] to continue to regulate effectively”. The Commission’s response can be viewed here.

What does this mean for licensees?

As set out above, in addition to a significant increase to licence application fees, remote licensees will be required to pay considerably higher annual fees to the Commission from 1 October 2021. Notably, the increase in annual fees for non-remote licensees will be delayed until 1 April 2022, to account for the Government’s recognition of the impact COVID-19 restrictions have had on the non-remote sector. The Government’s response sets out that:

The majority of non-remote operators are required to pay their annual fees in August or September each year, meaning that the new annual fee levels for much of the non-remote industry will not be due until August 2022.

16Jun

Update on the Remote Customer Interaction Consultation

16th June 2021 Jemma Newton 74

Background

On 25 May 2021, the Gambling Commission of Great Britain (“the Commission”) provided an update regarding its Remote Customer Interaction Consultation.

The update referenced the Commission’s consultation, which took place earlier this year, which is concerned with identifying and protecting customers at risk of harm. The update also referred to the Commission’s current requirements, which place a duty on remote operators to monitor gambling, and to take action where there is a risk of harm, and the Commission’s finding that operators were not always acting swiftly enough. The Commission confirmed that it has been analysing the approximately 13,000 responses it received.

Confirming that it had considered what the respondents said, the Commission states that:

Many people think there should be protections in place for the most vulnerable and that appropriate checks should be in place to identify and prevent cases of clearly unaffordable gambling. Many respondents emphasised that measures should be proportionate and targeted at those at risk of harm. At the same time, customers were also concerned about privacy and freedom of choice. We take that seriously.

What are the Commission’s priorities and intentions?

The Commission confirms that it is aiming to achieve the correct balance, and that it has listened to concerns about what could be seen as an unnecessary assessment of time and money spent gambling. However, it goes on to state that it has seen serious failings by operators towards customers, and (somewhat surprisingly given the extensive responses it has to review) it has concluded that it needs to take action now to address the most significant risks, including excessive spending in short periods of time and harm to vulnerable customers.

The Commission states that it has concluded that stronger requirements are needed for operators to identify a range of indicators of harm, and to take action earlier and more often.

The Commission states that it has identified three key risks that it is prioritising for action:

Significant losses in a very short time

Cases where customers have been able to spend many thousands of pounds in short periods, including minutes, without any checks. These cases are relatively rare but have very significant impacts on the consumers affected. For example, in a recent case a customer lost four thousand pounds in six minutes following sign-up.

Significant losses over time

Where customers have significant losses over a period of time without sufficient assessment of whether they are being harmed. Significant losses over time are experienced by a relatively small proportion of customers and it is appropriate to require checks for these customers. An example of this in our casework was where a customer lost thirty-five thousand pounds over two months, without sufficient checks being carried out.

Financial vulnerability

Where information is available that shows when customers are particularly financially vulnerable and likely to be harmed by their level of gambling.

The Commission then sets out its next steps, which will be to:

- Publish its full response this summer, which will set out the detailed actions on the areas on which it has previously put forward proposals for consultation. Such areas include the requirement to take action where customers are known to be in a vulnerable situation, to take action in a timely manner, and, where appropriate, for that action to be automated. The Commission clarified that it will also proceed as planned with a consultation on thresholds for operators to take action and guidance as to what those actions should be.
- Continue to work closely with the Department for Digital, Culture, Media and Sport (“DCMS”) by providing advice and evidence for the Government’s Gambling Act Review (the “Review”) and recognising broader public policy questions about how to protect people from harm which will be considered as part of the Review.
- Continue to engage with consumers, the financial sector and the gambling industry about information on customers that should be available to gambling businesses.
- Continue its work to support the prevention of harm, including working to ensure that existing tools for setting deposit limits are used more widely and effectively.

Points of note for licensees and what should they do in the meantime?

1. The Commission’s update clarified that remote licensees should continue to meet the Commission’s current customer interaction requirements. The Commission’s requirements and current expectations are set out in the Licence Conditions and Codes of Practice, customer interaction guidance issued under SR Code 3.4.1 and in the Commission’s Compliance and Enforcement Report 2019-20. We discuss these requirements further in our blog.

1. Operators should note the three ‘key risks’ flagged by the Commission that are being prioritised for action. Monitoring “significant losses in a very short time” and “significant losses over time” should not be an overly burdensome task for licensees and they should consider taking steps now to introduce monitoring of these risks if they do not already do so. The third key risk, “financial vulnerability” is somewhat more nuanced; until such time as the Commission makes its position clear, licensees should note the increasing focus by the Commission on the risks presented by customers who are financially vulnerable.

1. Despite the apparent step backwards, which the Commission’s update indicates it has taken in relation to its future plans for affordability, licensees should note that in practice, the Commission continues to expect them to consider affordability in both their approach to safer gambling and in their approach to anti-money laundering and combating the financing of terrorism.

13May

The Personal Management Licence regime: An impossible tightrope?

13th May 2021 David Whyte 75

This article was co-authored by Tom Orpin-Massey from QEB Hollis Whiteman Chambers.

Introduction

Personal management licences (“PMLs”) issued by the Gambling Commission of Great Britain (“GBGC”) are held by those occupying specified management roles at licensed gambling operators. They are the key individuals at operators responsible for overall strategy, finance, marketing, information technology, oversight of day-to-day management of certain premises, regulatory compliance, and anti-money laundering.

The PML licensing regime for these senior managers creates a personal responsibility for regulatory compliance, both in the way that they conduct themselves in their role, and the way in which they have management responsibility for the behaviour of the operator for whom they work.

Their jobs are rarely easy. On top of the stresses and pressures of working for licensed gambling operators in a fiendishly competitive market, they must also navigate an ever-evolving regulatory landscape. In addition, the GBGC has been signalling for the past few years that it will increasingly focus on the role played by PML holders when undertaking compliance and enforcement investigations into operators.

The statistics reflect this; in the period April 2019 – March 2020, 49 separate licence reviews were undertaken into PMLs, primarily due to safer gambling or anti-money laundering (“AML”) failures identified at the operator at which they were employed. We expect that figure to increase by the time of the publication of the GBGC’s next annual Enforcement Report for 2020-21 later this year. Recently published GBGC action taken includes:

The CEO of an operator receiving a warning and an additional licence condition due to safer gambling and AML failures identified at the operator.
12 PML holders at an operator receiving warnings, advice to conduct letters, or surrendering their licence following notification that their licence was under review, due to safer gambling and AML failures identified at the operator.
A further 19 PML holders at that same operator surrendering their licence or receiving advice to conduct letters outside of the licence review process due to safer gambling and AML failures identified at the operator.

Prefacing the GBGC’s last Enforcement Report, then CEO Neil McArthur wrote that “holding an operating or a personal licence is a privilege, not a right”. He went on to say that the GBGC had indicated in the summer of 2017 that its focus was shifting towards PML holders and that “those in boardrooms and senior positions need to live up to their responsibilities and we will continue to hold people to account for failings they knew, or ought to have known about”.

Is personal regulatory liability within a management framework straightforward?

The GBGC’s position seems, on the face of it, a reasonable one. Who else, other than their senior management and PML holders, are responsible for the behaviour of operators? It therefore follows that where PML holders have failed to meet the GBGC’s standards and/or to adhere to their responsibilities, they should be held to account.

However, as is frequently the case when seeking to apportion blame for a mistake, matters are often more complicated than they may seem. Factors of note include:

The GBGC’s regulatory framework evolves constantly.

The GBGC’s regulatory framework and guidance is often said to be difficult to follow and poorly communicated.

Employees who are not PMLs may be responsible for mistakes and oversights. Whilst these mistakes may expose the operator and its PMLs to criticism, it does not always follow that they are due to a PML’s ignorance or incompetence, and thus holding them responsible for shortcomings on a strict liability basis may not be fair or reasonable.

PML holders are subject to a licence condition that they take “all reasonable steps to ensure the way in which they carry out their responsibilities in relation to licensed activities does not place the holder of the operating licence … in breach of their licence conditions.” It does not always follow that, because an operator is in breach of licence conditions, a PML holder will also be in breach personally. In many cases, a PML holder may have taken “all reasonable steps”.

Inevitably, operators and PML holders’ views will not always be aligned. PML holders, who in our experience are generally trying to do the right thing, often find themselves facing complex challenges and caught between the GBGC’s requirements and the operator’s commercial interests, with their personal livelihood and reputation at risk. This should be borne in mind by the GBGC, particularly in the current economic climate.

PML licence reviews are not always carried out by the GBGC in a consistent manner. In some cases they are commenced at the same time as, or during, an operating licence review, but more often than not they are commenced once an operating licence review has concluded. Licence reviews can take years rather than months to reach a conclusion. PML holders are therefore left in the unenviable position of having to recall events that have taken place years ago when trying to defend themselves. This is if they are lucky enough to have access to the information required in order to aid their recall. If, for any reason, they have left the business, this may not be possible.

The GBGC does not set out clearly its approach to PML reviews when they are linked to operating licence reviews. PML holders are often expected by the GBGC to disclose information or answer questions about matters relating to an operating licence review that may have an impact on their PML, without having been clearly informed of the risks or consequences of doing so. The fact that in some cases a PML holder may be accused of breaching a licence condition, which is a criminal offence under the Gambling Act 2005, increases further the exposure to personal risk. This is despite the GBGC’s policy position that, as a general rule, it will not pursue a criminal investigation into a licensee, as in most cases the matter is likely to be capable of being dealt with by exercise of its regulatory powers.

In an age where mental health is at the forefront, all would benefit from giving thought to the impact regulatory action may have on the mental health of PMLs, the vast majority of whom are well-intentioned and want to do right by both their operator and their regulator. Competing interests, reputational harm, the unintentional consequences of their actions and future employability are all factors that will weigh heavily on the shoulders of a PML holder subjected to regulatory action. Expedited investigations should be prioritised, processes and procedures clearly outlined, and legal rights clearly communicated.

PML reviews that take years to resolve, often following prolonged operating licence reviews, are of no benefit to the GBGC, nor to the individual concerned. Swift reviews and clear processes will not only serve to limit the impact on the individual concerned but may also improve the efficacy of regulation.

A PML under review: some things to think about

GBGC investigations and licence reviews of operators often expose PML holders to the risk of similar action in a personal capacity. This puts PML holders in the invidious position of not only responding for and on behalf of the operator, but also having to consider their own professional interests and reputation.

We suggest five things a PML should consider in this situation.

First and foremost, when a PML holder learns that the GBGC is investigating a matter relating to either their own or their operator’s licence, they should seek appropriate legal advice and support immediately.

Before commencing a licence review the GBGC is obliged to put an operator or PML on notice, but a PML may become aware of GBGC interest from an early stage, for example through enforcement enquiries. If so, advice should be obtained at this point. This is important because often the interests of the PML do not necessarily align with those of the operator, even if they act very much as part of the “controlling mind” of the operator, and interests seem at the time to be indivisible.

Secondly, PML holders should be mindful of their own position when saying anything on the record to the GBGC. This is not to say that they should be anything other than honest, open and transparent: it is merely about ensuring that the process is fair to them too.

A typical step in the review of an operator’s licence will be a preliminary meeting with senior management. In some cases, this may be followed or replaced by a regulatory interview (sometimes under caution). These meetings and interviews are usually recorded and transcribed by the GBGC. Anything that is said in them may be used in both the investigation into the operator, and also in any subsequent review of the PML holder.

In practice, PMLs themselves should be warned, or in some cases cautioned, in an individual capacity if they themselves might be investigated. Appropriate advice can help PMLs navigate the difficult situation in which they have to respond on the record on behalf of an operator, whilst ensuring their own position is also protected.

Thirdly, if unsure of timescales and/or the review process, PMLs should ask the GBGC to clarify its position. Whilst the GBGC may not always be able to provide a definitive answer, the fact that the request has been made is an important point of record.

Fourthly, if, after an operating licence review has concluded, perhaps with a number of failings identified and regulatory action taken, the PML is unfortunate enough to be notified that their PML is being reviewed as a consequence of their role in the identified concerns, it is vitally important that they are given fair and proper disclosure. Without it they will find it very difficult to understand the case against them, and properly defend themselves. This can become more complicated if the PML no longer works at the operator concerned.

We recommend that the PML do all they can to seek disclosure from the GBGC and the operator in relation to the matter concerned. What material is the GBGC relying upon? What representations did the operator make? Should the GBGC or the operator be reluctant to hand over material relevant to them, there are options open to them to challenge this.

And finally, a PML should always be open and honest with the GBGC, and remember that they also have a personal duty to uphold the licensing objectives and act with integrity in the review process. Any obfuscation will do them no favours in the long term.

Conclusion

PML holders who make genuine mistakes when trying to do the right thing, particularly those in compliance roles, should in appropriate cases be supported by the GBGC and viewed as people who can assist in raising standards. Prioritising support and guidance over targeted regulatory action when such mistakes occur may be more productive and is less likely to deter highly competent individuals from holding PMLs because of the risks associated with doing so.

Whilst competing commercial and regulatory interests mean that being a PML is becoming tougher, there are things that PML holders can do to help themselves, and to protect their interests when the GBGC become involved. Legal advice should be sought at an early stage.

Tom Orpin-Massey is a barrister at QEB Hollis Whiteman specialising in crime and regulatory law. He was seconded to the GBGC in 2016 for seven months and continues to be instructed in a broad range of gambling work, both for the Commission and for operators and PMLs.

11May

The Affordability Debate (3): Regulating beyond its means?

11th May 2021 Julian Harris 89

This is the third in a series of articles considering different aspects of the affordability debate. We have already considered the right to protection, personal responsibility and freedom of choice (in article 1), and recently (in article 2), what the Gambling Commission (“the Commission”) has sought to require of operators at present, with an analysis of the manner in which it has done so. In this article, we turn to the wider powers of the Commission and consider whether they have been exceeded, or at least stretched, in relation to its approach to affordability.

The Customer Interaction Consultation

The Commission launched its ‘Remote customer interaction – Consultation and Call for Evidence’ (the “Consultation”) on 3 November 2020 and the Consultation closed on 9 February 2021. Further to our criticism in our 18 May 2020 article (‘New Gambling Commission Guidance for Online Operators: Changing the Basis of Regulation?’) of the Commission’s introduction of its ‘Customer interaction – Additional formal guidance for remote operators during COVID-19 outbreak’ (the “Covid-19 Guidance”) without consultation, and more generally its use of formal guidance as a means of expanding its Licence Conditions and Codes of Practice (“LCCP”), it was encouraging that on this occasion, the Commission did consult.

Whilst there is no impropriety in the Commission having a review on customer interaction, to include the consideration and gathering of evidence in relation to affordability, we remain concerned about the Commission’s increased use of guidance as a means of adding layers to existing formal requirements, and also about the nature and content of the Consultation. Firstly, whilst there may be cogent arguments in favour of guidance being used to explain and set out reasonable and proportionate expectations of requirements contained in the LCCP, it should not exceed this purpose to the extent that it is difficult to distinguish between requirements outlined in the LCCP and those contained within purported guidance. Secondly, when consulting, it is important that the Commission analyses all information available to it, rather than seemingly interpreting the information in its possession as a means to its ends.

The core proposal in the Consultation in relation to affordability is for the introduction of mandatory financial thresholds for affordability assessments. The evidence on which the need for such assessments is based is flimsy and unconvincing when properly analysed, which the Consultation does not attempt. In addition, the Commission relies on the 2018 Health Survey for England. This the Commission prays in aid of the proposition that “there is evidence to indicate that there is a large-scale issue with remote gamblers betting more than they can afford to lose and experiencing issues with their gambling”. The basis for this sweeping statement is a finding that 21% of respondents stated that they had bet more than they could afford “sometimes” when asked to choose between four options, the other three of which were “never”, “most of the time” and “almost always”. Without further questioning and analysis, this is hardly a basis for swingeing new regulations restricting the liberty of adults to make their own choices without having to prove their financial wellbeing; indeed, it could be that many of those who ticked that box occasionally bet more than they felt was wise, a position that most people would experience with many different kinds of spending: it is certainly not a guaranteed indicator of vulnerability or harm.

Of even greater concern is the scant regard which the Commission appears to have had for the 2018 Consultation Principles. These require, inter alia, that consultations by government authorities:-

1. Include “validated impact assessments of the costs and benefits of the options being considered….where proposals have an impact on business…”;
2. Consider whether “informal iterative consultation is appropriate using….open, collaborative approaches”;
3. “Publish responses with 12 weeks of the consultation or provide an explanation why this is not possible.”

It is disappointing that the Commission has in recent times shied away from informal engagement with the industry on matters of interest and importance to it and to its licensees. Whilst there has been some collaboration with the Betting and Gaming Council, this has on occasion been preceded by the threat of action and then followed by negative comments by the Commission. Moreover, collaboration underpinned by threat is not informal engagement. This, and the Commission’s apparent failure to consider the impact of its proposals on the industry and other stakeholders, such as the sports organisations, could once again lead an observer to question its motives, and ask if the consultation is really intended to open a debate and answer certain questions about safer gambling, social responsibility and affordability, or whether the Commission is simply going through the motions to tick the consultation box, with the intention, whatever the evidence produced, of imposing its own agenda. Perhaps it is for this reason that the Commission relies on questionable evidence from the 2018 Health Survey without mentioning that it also found that the incidence of problem gambling had fallen from 0.7% in the 2016 Survey to 0.5%.

As licensees are only too aware, and as we set out in our previous article on this subject, whilst the Commission has not formally imposed the proposals in the Consultation, it has sought to require operators to abide by them, or variants of them, outlined in its Enforcement Reports, by exerting pressure, threatening regulatory action and generally creating a climate of fear. That fear has been exacerbated by the uncertainty as to what the Commission actually requires.

This is the unfortunate consequence when a regulatory authority fails to have proper or sufficient regard for the statutory framework within which it is required to operate. We have already analysed the difficulties faced by the industry in trying to ascertain what is actually and properly required of it by law and regulation. The Commission has the power, and indeed the duty, to prepare codes of practice and impose appropriate licence conditions to regulate the way in which licensees operate. It is required to undertake consultation on such codes of practice. But in the case of affordability, the Commission expects licensees to abide by a series of “requirements” described, not in the LCCP, but in their Enforcement Reports and their existing Customer Interaction Guidance. Breach of a Code under section 24 of the Gambling Act, 2005 may properly be taken into account by the Commission in the exercise of its statutory function, but acting contrary to whatever opinions it expresses in its Enforcement Reports, or in speeches, may not. There can therefore be no basis for the Commission, when raising safer gambling concerns, to refer to those Enforcement Reports in its compliance assessment findings, licence review threats or regulatory actions, as it is increasingly doing.

It follows that similarly there can be no basis for the Commission to claim that affordability assessments are somehow already a requirement of the LCCP. Were that to be true, there would have been no need to write in different terms in the 2020 Enforcement Report from what was said in the 2019 Report, or in its current Customer Interaction Guidance (see article 2 for details), or indeed for the Consultation itself. Yet in reality, at present this is the only way the Commission could argue it properly makes these requirements of licensees.

Statement of Principles

The Commission publishes a ‘Statement of Principles for licensing and regulation’ (the “Statement of Principles”), as is required by section 23 of the Gambling Act 2005 (the “2005 Act”). This is expressed to have had regard to various documents, including the ‘Regulators’ Code (July, 2013: in force from 2014)’ (the “2013 Code”). Whilst the Commission makes reference to the principles included in the 2013 Code in the Statement of Principles, these are more clearly expressed in the 2013 Code, which requires, inter alia, that:-

“1.1 Regulators should avoid imposing unnecessary regulatory burdens through their regulatory activities and should assess whether similar social, environmental and economic outcomes could be achieved by less burdensome means. Regulators should choose proportionate approaches to those they regulate, based on relevant factors including, for example, business size and capacity.

1.2 When designing and reviewing policies, operational procedures and practices, regulators should consider how they might support or enable economic growth for compliant businesses and other regulated entities, for example, by considering how they can best:

- understand and minimise negative economic impacts of their regulatory activities;
- minimising the costs of compliance for those they regulate;
- improve confidence in compliance for those they regulate, by providing greater certainty; and
- encourage and promote compliance.

5.1 Regulators should provide advice and guidance that is focused on assisting those they regulate to understand and meet their responsibilities. When providing advice and guidance, legal requirements should be distinguished from suggested good practice and the impact of the advice or guidance should be considered so that it does not impose unnecessary burdens in itself”.

We do not know and cannot speculate as to whether the Commission has given careful thought to these obligations when preparing the Consultation. However, we cannot be satisfied that the level of burdensome proposals included in the Consultation and their probable economic impact, are demonstrably considered in the Consultation and this calls into question whether the Commission has had adequate regard to the requirements of the 2013 Code.

The vulnerable

When considering the Commission’s powers, the starting point is the licensing objectives, set out in section 1 of the Gambling Act, 2005 (“the 2005 Act”). These are:

“(a) preventing gambling from being a source of crime or disorder, being associated with crime or disorder, or being used to support crime;

(b) ensuring that gambling is conducted in a fair and open way; and

(c) protecting children and other vulnerable persons from being harmed or exploited by gambling.”

The Commission is required, by virtue of section 22 of the Act:

“(a) to pursue, and wherever appropriate to have regard to, the licensing objectives, and

(b) to permit gambling, in so far as [it] thinks it reasonably consistent with pursuit of the licensing objectives.”

The licensing objectives were not entirely new inclusions in the 2005 Act, having been carried forward from the Gaming Act, 1968, albeit somewhat reworded. The third licensing objective – “protecting children and other vulnerable persons from being harmed or exploited by gambling” is relevant, as the basis for affordability checks. In the Statement of Principles, the Commission at 5.26 states that:

“With regard to ‘vulnerable persons’, whilst the following list is not exhaustive, the Commission considers that this group will include:

- people who spend more money and/or time gambling than they want to;
- people who gamble beyond their means;
- people who may not be able to make informed or balanced decisions about gambling, for example because of health problems, learning disability, or substance misuse relating to alcohol or drugs.”

The wording of the third licensing objective refers firstly to children, and then to other vulnerable persons. The use of that word “other”, and the position in which it appears in the wording of this licensing objective is significant: it is there for a reason. Children are, by law, incapable of making adult informed decisions. Gambling is an adult activity, again by law, as is the consumption of alcohol or the use of tobacco products. In our view the use of other is to indicate that this is the standard by which vulnerability is to be judged; i.e, that it means people who are unable to make a properly informed, or ‘adult’, decision. Plainly, that would include those referred to in the Commission’s third bullet point above. It might include some in the second, though this is too widely expressed. The same point applies to the first. But both of these would depend upon fact and degree: who amongst us has not at some time spent more than we set out to do, carried away by the moment, in a pub, restaurant, or shop? It does not necessarily follow that we are vulnerable people.

In recent years the Commission has interpreted “vulnerable persons” increasingly broadly in its publications and speeches, to include not just those who demonstrate a problem with gambling, or even those who are at risk of being problem gamblers, but to include those “who may be at risk of harms associated with gambling”. In reality, this could include everyone who indulges in gambling at any level. Despite the fall in the percentage of problem gamblers in recent years, or perhaps because of it, the Commission has expanded the class of people whom it considers to be vulnerable. This is not what the legislation intended. Moreover, it is the exercise of arbitrary power with no Parliamentary oversight. The absence of this oversight is all the more concerning when the progress of the 2005 Act through Parliament is considered.

Volume I of the Joint Committee Report on the Draft Gambling Bill (Session 2003-04) was produced by the Joint Committee on the Draft Gambling Bill, appointed by the House of Commons and the House of Lords to consider and report on any clauses of the draft Gambling Bill. It includes, at Annex 1, a schedule of detailed comments on the draft Bill. It is of note that, in response to a comment made by the Gordon House Association, that “the concept of protecting children and the vulnerable must be extended to include those whose lives are detrimentally affected by problem gambling”, the Department of Culture, Media and Sport (“DCMS”), indicated that it did not expect “vulnerable persons” to be interpreted so broadly when it stated:

“DCMS does not consider that the protection afforded by the Bill needs to extend to this wider group or persons who may be affected by the gambling of others.”

As a result of this ambiguity, the proposal in the Consultation on affordability to amend the Social Responsibility Code to require that licensees “must take account of the Commission’s definition of vulnerability”, amounts to an inappropriate suggestion that the Commission should make legislation, thereby assuming for itself that which is the prerogative of Parliament. The duty of the Commission is to uphold the licensing objectives, not to rewrite them, particularly when this rewriting appears to extend the ambit further than Parliament intended.

It follows that those who are not in fact vulnerable should be free to enjoy their gambling without interference, intrusive interrogation, or, worse still, demands for the provision of highly sensitive private financial information. For the Commission to seek to introduce measures to require such an invasion into the rights of individuals appears to be contrary to their duty to permit gambling where it is consistent with the licensing objectives.

The Gambling Review

Early in December the Government announced the Gambling Review. At the same time, DCMS published its Response to the House of Lords Committee recommendations (the “Response”). In relation to affordability, DCMS commented:

“However, we are not waiting for the Gambling Act Review to take action in this area. The Gambling Commission is, as recommended by the Committee, already consulting and calling for evidence on proposals to strengthen requirements on licensees to identify and interact with customers who may be at risk of harm. Alongside clear expectations on affordability checks, this consultation includes questions for discussion around markers of harm, how to identify and respond to vulnerability and how best to respond to risks for customers in particular situations.”

As we and other commentators, notably Regulus Partners have said, affordability affects every aspect of gambling structure and licensing objectives and potentially profoundly impacts them. In addition, it has massive implications for the cost of compliance and the economic health of the industry, as well as worrying implication for the liberty of consumers. There is therefore a very strong case for the type of affordability measures being proposed by the Commission to be considered as part of the Gambling Review. That affordability requirements were being introduced before the conclusion of the Consultation and before the Gambling Review, potentially renders much of the discussion and evidence irrelevant. By the time that Government and Parliament come to consider new legislation, the Commission will have pre-empted the process, with the consequence that the industry may already have been transformed beyond recognition, and not for the better.

In the Response, the Government – rightly in our view – said that addressing the risk of gamblers spending more than they can afford would involve a number of considerations, “including the need to strike an appropriate balance between player protection and the freedom of individuals to choose how they spend their money”. These are matters which embrace constitutional and human rights questions, which fall outside the statutory remit of the Commission. It is for the Review, and subsequently Parliament, to determine the future course of gambling legislation and regulation, not the Commission. Whilst the duty of the Commission is to regulate, it cannot be within its power to determine the level of regulation.

It seems to us that the Commission, by its commendable but unrealistic desire to abolish all gambling related harm, is at the root of the problem; it has lost sight of what the then Government recognised in developing the Bill which became the 2005 Act, when it stated in paragraph 7.3 of “A Safe Bet for Success”: “It is impossible to do away with problem gambling; and excessive controls could make matters worse by encouraging the growth of illegal gambling.” The Commission is dubious about the second part of that statement, but it certainly needs to accept the first part.

In the light of recent rumours, it is to be hoped that the process will now be halted, pending the Gambling Review. The issues raised are, in our opinion, too fundamental to fall within the purview or power of the Commission. This is not to say that the exercise was wasted; the evidence gathered can form part of the material for consideration as part of the Review.

The first stage on the road to recovery from any addiction, be it gambling, alcohol or drugs, is recognising and admitting the problem. This is a lesson which the Commission, which might be said to be at risk of developing a problem with regulation, would be wise to learn, or it may have to be taught by others: Government, Parliament or the courts.

With thanks to David Whyte for his invaluable co-authorship.

22Apr

The Affordability Debate (2): Ambiguous Regulatory Requirements

22nd April 2021 David Whyte 93

Following the closure of the Gambling Commission’s (the “Commission”) consultation Remote customer interaction – Consultation and Call for Evidence (the “Consultation”), on 9 February 2021, which yielded some 13,000 responses, we are now in the midst of an ‘affordability debate’. However, this debate is largely focused on the future, to the detriment of the present. At a time when licensees are proactively striving to improve their standards and prioritising their approach to safer gambling, it is apparent that licensees are unsure as to precisely what they need to do to remain compliant with present Commission affordability requirements, what those requirements are, and where they are specified.

Tim Miller, in his speech at the CMS Conference in March 2021, stated that “the process of giving detailed consideration to all the evidence is still ongoing with extensive further work and engagement likely to be needed.” Mr Miller went on to state that “clarifying existing rules will be our immediate priority in any next steps.” What Mr Miller does not say, however, is when that will be and what is going to happen in the interim.

A cynic may say that this lack of clarity operates to the benefit of the Commission in its pursuit of its affordability objectives as outlined in the Consultation. Two consequences are clear. Firstly, there are signs that the Commission is subjecting licensees to a series of requirements, none of which are clearly set out in licence conditions, codes of practice, or formal guidance issued by the Commission under its statutory remit.

Secondly, licensees concerned to ensure that they adhere to the Commission’s expectations are likely to interpret the limited formal guidance on affordability cautiously; many in our experience even taking into account the Consultation itself. This can only be to the advancement of the Commission’s affordability objectives. We will deal in a later article with the impact of this precipitate action by the Commission on the Consultation and the Gambling Review.

Current position

Despite what some licensees may have experienced when engaging with the Commission, the measures proposed in the Consultation are not in force. The Commission’s present requirements are instead spread across its last two annual enforcement reports and one formal guidance document, in addition to its published regulatory sanctions and/or settlements.

The Commission takes the view that its enforcement reports serve as indicators to licensees of its expectations, for which licensees can be held to account; these reports therefore arguably contain policy positions that, if enforced, are more akin to licence conditions or code provisions. We have discussed previously our concerns that the Commission may be making indirect changes to licence conditions and/or code provisions through its introduction of requirements to adhere to guidance and this is perhaps another, somewhat broader, example of the same.

We do not agree that the enforcement reports carry the weight of formal guidance. It is clear from the content of the licence conditions and codes of practice (“LCCP”) that in cases where the Commission expects licensees to adhere to formal guidance, it says so. Social Responsibility Code Provisions 2.1 (anti-money laundering – casino) and 3.4 (customer interaction) are examples of the Commission explicitly requiring licensees to adhere to, or take into account, specific formal guidance, the latter requiring that licensees take into account the Commission’s formal guidance on customer interaction. Nowhere in the LCCP is there any reference to the enforcement reports carrying such weight: the closest the Commission comes to this is in licence condition 12.1.1 (3) which, solely in relation to licensees’ obligation to ensure they have appropriate policies, procedures and controls to prevent money laundering and terrorist financing, requires that they:

“… take into account any applicable learning or guidelines published by the Gambling Commission from time to time.”

Putting aside the breadth by which this statement may be interpreted, it is clear that this obligation relates to anti-money laundering and not directly to safer gambling or affordability. This appears to be the cause for ambiguity in this area; an evolution of affordability from its apparent origins as a money laundering concern – historically some licensees’ customers having been identified as having gambled with criminal spend – to it now being central to the Commission’s expectations from a safer gambling perspective.

This is further evident from a consideration of the Commission’s introduction to its section on affordability in Raising Standards for Consumers – Enforcement report 2018-19 (the “Enforcement Report 2019”) where it states:

“Some of these individuals have funded their gambling activity through the misappropriation of monies from businesses, the taking out of unaffordable loans and misappropriating the funds from vulnerable people.”

The obligation, as outlined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, that licensees who hold casino operating licences obtain evidence of source of funds and source of wealth on a risk-based approach in order to mitigate money laundering risks will of course extend to their consideration of affordability. However, this should be as a risk factor that may, when subjectively assessed, increase the risk of money laundering and the financing of terrorism and trigger further enquiries. It is not at present a requirement at a certain level of spend.

When affordability is considered solely from a safer gambling perspective, a formal requirement to obtain evidence of affordability is impossible to identify and the Commission’s expectations are ambiguous at best, even more so given our contention that the enforcement reports may not operate as formal guidance on this matter. How then, is it reasonable for the Commission to hold licensees to account for failings in this area?

1. Enforcement Report 2019

The Enforcement Report 2019 outlines various open-source data sources that may help licensees to “assess affordability for its GB customer base and improve its risk assessment and customer interventions.” This data focusses largely on Office of National Statistics (ONS) and YouGov data highlighting average annual salary and monthly personal disposable income. The report goes on to state that:

“The above disposable income data identified clear benchmarks that should drive Social Responsibility (SR) triggers which will help to identify gambling-related harm by considering affordability.”
“Benchmark triggers should be a starting point for engaging with customers and are not intended to definitively demonstrate a customer is suffering from gambling related harm – but they can help identify instances when an operator needs to understand more about a customer, their play and affordability.”
“If an operator is going to set specific triggers for a customer base not representative of the general public, various documents sources should be relied upon, but they must contain sufficient information to substantiate the trigger level set.
In conclusion, we would recommend that operators revisit their framework on triggers and consider their customer base and their disposable income levels as a starting point for deciding benchmark triggers.”

It is of note that there is no recommendation in the Enforcement Report 2019 that licensees should obtain evidence of affordability from customers whose losses reach national average incomes. As we have discussed above, this requirement, it seems, comes from the Commission’s interpretation of money laundering legislation and certain licensees’ obligations to obtain, on a risk-based approach, evidence of source of funds and source of wealth. Rather, the Enforcement Report 2019 focusses on disposable income data being used to set “benchmark triggers” as a starting point for engagement.

2. Customer interaction – formal guidance for remote/premises based gambling operators – July 2019 (the “CI Guidance”)

When describing the Commission’s expectations as to how licensees must identify customers who may be at risk of experiencing harms associated with gambling, the CI Guidance refers to affordability and states:

“Operators should aim to identify those experiencing or at risk of harm and intervene to try to reduce harm at the earliest opportunity. Reliance on deposit or loss thresholds that are set too high will result in failing to detect some customers who may be experiencing significant harms associated with their gambling. It is therefore imperative that threshold levels are set appropriately.

Open source data exists which can help operators assess affordability for their GB customer base and improve their risk assessment for customer interactions. Thresholds should be realistic, based on average available income for your customers. This should include Office of National Statistics publications on levels of household income.”

Again, as with the Enforcement Report 2019, there is no suggestion in the CI Guidance that licensees should be obtaining evidence of affordability from customers whose losses reach national averages, rather it suggests that affordability is a factor that should be considered when developing customer interaction policies and aiming to identify customers who may be experiencing or at risk of experiencing harm. There is a significant difference between “[intervening] to try to reduce harm at the earliest opportunity” and requiring customers to produce extensive evidence to justify their level of spend when they reach a threshold.

3. Raising standards for consumers – Compliance and Enforcement report 2019-20 (the “Enforcement Report 2020”)

The Enforcement Report 2020 was published three days after the Consultation – a decision that will not have helped licensees to understand what is, and what is not, required. In referring to the recommendations it made in the Enforcement Report 2019, and considering customers who have “demonstrated gambling related harm indicators and been able to continue to gamble without effective engagement”, the Commission states:

“Furthermore, these individuals have funded their gambling without satisfactory affordability checks and appropriate evidence being obtained.”

The Enforcement Report 2020 goes on to outline various open source data sources that can help licensees to “assess affordability for GB customers and improve [its] risk assessment and customer inventions”. Again, the data presented primarily focusses on average annual salary as outlined in the ONS survey of Hours and Earnings. The Commission goes on to state that:

“Open source information is an important element of an affordability framework because it is a parameter to consider when setting benchmark triggers that will drive early engagement with customers.”
“We are concerned licensees are creating complex and convoluted matrices and mappings within their affordability framework to place customers into trigger groups well over the gross earnings stated above, before disposable income is factored in. Of more concern, these trigger groups are set without any sort of customer interaction to influence their true affordability determination.”
“Operators must interact with customers early on to set adequate, informed affordability triggers to protect customers from gambling related harm. Failure to do so could render the operator non-compliant.”
“Customers wishing to spend more than the national average should be asked to provide information to support a higher affordability trigger such as three months’ payslips, P60s, tax returns or bank statements which will both inform the affordability level the customer may believe appropriate with objective evidence whilst enabling the licensee to have better insight into the source of those funds and whether they are legitimate or not.”

Importantly, outside of the Consultation, this is the first occasion on which the Commission makes any reference to licensees requiring customers to provide information or evidence in relation to affordability. This time, suggesting evidence is required only when customers wish to “spend more than the national average”. The obvious question here, and a conundrum which we know licensees have been struggling with, is “to what national average does the Commission refer?”

There is a significant difference between the national average salary (stated as c£30,500) and average weekly gross earnings (stated as c£585.00). Should customers be evidencing affordability for losses exceeding £585 per week, or for losses exceeding £30,000 per year; or is there another average that is relevant?

What is expected now?

In his Speech at the CMS Conference in March 2021, Tim Miller suggested in that he did not expect the Commission to be announcing its plans on affordability imminently. Mr Miller also stated:

“…in our casework and compliance activity we continue to see example after example of operators who have allowed people to gamble amounts that are clearly unaffordable with very limited or no customer interaction until a very late stage. Just to be clear, we are not talking about grey areas here. We are talking about clearly unaffordable levels of gambling.”

Some of the handpicked examples in the enforcement reports demonstrate what almost all would agree are, without evidence of affordability, “clearly unacceptable levels of gambling”, for example a customer losing £187,000 in two days with no regular source of income. However, other examples of which we are aware are not so straightforward and are certainly not at, on any reasonable interpretation, “clearly unacceptable levels”. This is, in practice, most certainly a grey area. The consequence is that licensees who have prioritised safer gambling and, due to their misunderstanding of the Commission’s expectations, are at best criticised, or at worst subjected to regulatory action, because of a failure to meet those expectations in relation to affordability.

Since the publication of the Consultation, we have heard of licensees being criticised during compliance assessments for failing to obtain evidence of affordability from customers who have exhibited no clear signs of problem gambling, are at a low risk of harm, have never raised any concerns themselves, and who have informed licensees that they are comfortable with their gambling spend. This is not to say that licensees should not adhere to the CI Guidance and conduct customer interactions with these customers when and if they reach internally identified thresholds. It is also not to say that licensees should not take affordability into account and discuss the same with customers; but when are they required to evidence affordability?

Ambiguity inevitably leads to inconsistencies. Can “benchmark triggers” or “trigger groups” roll over and/or reset monthly/annually or are they expected to be final? Spend of say £60,000 presents very differently when it has taken place at a consistent rate over 10 years. The same applies to losses of £5,000 in a 3–6-month period when there are no other reasons for concern; yet examples such as these are being raised as concerns by the Commission. These customers are not spending “above the national average”, whatever average to which the Commission means to refer in the Enforcement Report 2020, and therefore it is at least reasonable for licensees, to decide at their discretion that there is no need to require evidence of affordability in these cases.

Licensees’ use of open-source data is also criticised for being inadequate, even in cases where this data more than adequately mitigates risk by demonstrating income at or above the national average, despite reference in the Enforcement Report 2020 to the same being “an important element of an affordability framework”.

The result of this ambiguity is that in our experience Commission activity demonstrates a much lower tolerated threshold than the CI Guidance and enforcement reports suggest; a threshold more aligned with the Consultation. In the current climate, this not only exposes licensees to unreasonable criticism from the Commission, but also places those licensees who are unlucky enough to undergo a compliance assessment at a time of such uncertainty, at a commercial disadvantage; a diligent response to criticism being to reduce thresholds and require evidence of affordability sooner, even if this is neither deemed necessary nor yet a formal requirement. One may question whether the Commission has overlooked its statutory obligation to “permit gambling, in so far as [it] thinks it reasonably consistent with the pursuit of the licensing objectives”.

The impact

It is no secret that licensees are frustrated and confused, and understandably so. Discretion has given way to prudence; licensees are in the unenviable position of having to second guess what the Commission really expects and compliance assessments are becoming one-sided affairs where, in the main, Commission employees attend with an almost preconceived view as to what is and is not acceptable application of discretion. Nobody is perfect and, due to ambiguity, it is easy enough to call into question individual cases. This is not to say, however, that the vulnerable are not being protected. A very large proportion of the customers whose accounts are reviewed by the Commission never have and never will identify as problem gamblers; they are simply spending their money as they wish, even if at a level that Commission considers inappropriate.

Of course, the regulatory framework permits licensees to challenge the Commission’s findings. The reality, however, is that few choose to do so. Commercial realities, protracted Commission investigations, publicity considerations, cost and perhaps shareholder influence, result in most licensees entering into regulatory settlements with the Commission or accepting its findings. This is often their decision whatever the merits of their case. It would not be unreasonable to suggest that a general consensus amongst licensees is that the ultimate sanction will likely be the same anyway, particularly given the ambiguous guidance, so why incur further costs and prolong the inevitable?

Rather than regulate an industry that operates in fear: not the fear of deserved punishment, but fear of a being chosen and inevitably sanctioned for failing to do something it did not fully understand, the Commission would be better placed regulating an industry that is clear on what is expected of it. The present regulatory expectations in relation to affordability are grey and unclear. The Commission has acknowledged as much by consulting on prescriptive requirements. That Consultation now appears stymied, and it is incumbent upon the Commission to back up Tim Miller’s positive acknowledgement that “clarifying existing rules will be [the Commission’s] immediate priority” and act with urgency to clarify the existing requirements against which it is enforcing. The Commission had no reservation in moving quickly to issue additional formal guidance for remote operators during the Covid-19 outbreak last year, albeit without consultation, so it is capable of acting in haste.

Better understanding will raise standards and could easily be achieved through clarity in guidance. Informal engagement and discussion with the industry, and even possibly training (both internally and externally) controlled, prepared or delivered by the Commission would also be of benefit. How better to put effectively to use some of the £30 million paid in financial penalties and regulatory settlements in the past 12 months? In the meantime, what is absolutely not acceptable is for the Commission to wield its powers through compliance assessments to impose affordability requirements upon licensees which it has so far failed to implement through statutory consultation.

With thanks to Julian Harris for his invaluable co-authorship.

24Nov

Gambling Commission – AML Guidance Update and Advice

24th November 2020 Ting Fung 128

Updates have been made to The prevention of money laundering and combating the financing of terrorism Guidance for remote and non-remote casinos: fifth edition. The revised edition was published on the 13 November 2020 and includes amendments to paragraph 1.55 to incorporate the new licence conditions 15.2.3(2) and (3). The new licence conditions came into effect under the updated Licence Conditions and Codes of Practice (“LCCP”) on 31 October 2020 and introduced the following reporting requirements:

Licensees must, within 14 days of the appointment, notify the Commission of the identity of the individual appointed as:
the officer responsible for the licensee’s compliance with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on Payer) Regulations 2017 (regulation 21(1)(a)),
the nominated officer (regulation 21(3)),

and any subsequent appointment to either of those positions.

Licensees must, within 14 days of the departure or removal of any individual appointed to the positions mentioned in 2 above, notify the Commission of such departure or removal.

A minor typographical correction was also made to paragraph 6.120.

In addition, the Duties and responsibilities under the Proceeds of Crime Act 2002: fourth edition was also revised at paragraph 5.2 to highlight new reporting requirements in the latest LCCP, and correct a typographical error at paragraph 20.54.

Both of the documents came into effect immediately.

Anti-Money Laundering