19Jan

The time for reflection?

19th January 2023 David Whyte 4

Harris Hagan and Regulus Partners have set out over the course of four articles our concerns about the Gambling Commission’s (the “Commission”) consultation (the “Consultation”) on the proposed Customer Interaction – Guidance for remote operators (the “Guidance”). Of these many concerns, the principal one is that the Guidance is so obviously bad regulation. It may have been inspired by noble intentions, but a combination of loose drafting, weak evidence, legislative incompatibility and a failure to fully and adequately consider the consequences threatens to result in a costly, ineffective and incoherent regime. All of these issues can relatively easily be avoided if the Commission revisits the Guidance in the light of responses to the Consultation.

Drafting

Putting aside the fact that it is inappropriate, and arguably ultra vires, for the Commission to introduce formal requirements through guidance, the drafting of the Guidance is hopelessly ambiguous; key terms are either undefined or so highly generalised as to be meaningless. This creates scope for subjectivity, wildly divergent interpretation, market distortion and confusion about what constitutes compliance. Licensees are required, for example, to consider both “young adults” and “older adults” as vulnerable, but without any explanation as to when one stops being ‘young’, or starts being ‘older’. A customer using “multiple products” is said to be displaying an “indicator of harm or potential harm”, but the Guidance is silent on what a ‘product’ is, or what timeframe should be considered; is someone whose only gambling consists of annual punts on the Grand National and the FA Cup Final really exhibiting potentially harmful behaviour?

There is a lack of clarity as to what the Commission considers to be a “strong indicator of harm” in the Guidance. In the Consultation the Commission acknowledges previous concerns raised about this, and states that it “does not consider it appropriate at this time to set requirements which would remove the discretion or ability on the part of operators to tailor processes to their businesses and customers”. There is no easy way of prescribing precisely what may be a “strong indicator of harm”, however, if the Commission wishes to permit discretion, it could assist licensees by explaining to them how it will determine, during compliance assessments or enforcement action, what amounts to a “strong indicator of harm” so that they are appropriately informed when applying that discretion.

The Guidance appears to conflate “indicators of harm” with actual harm – requiring licensees to take action to correct customer behaviours regardless of whether they are in fact harmful. There is a clear distinction between “identifying harm or potential harm” and identifying customers “that may be at risk of harm”. In consequence, licensees are required to demonstrate impacts on behaviour, even where the customer is gambling without issues. This risks unjustifiably trampling on consumer autonomy, a dangerous precedent in regulation. It also makes it almost impossible for licensees to justify not conducting a safer gambling interaction based on either “indicators of harm”, “vulnerability” or both: a combination of the “indicators” applying to anyone who gambles.

Process

The second big problem is one of process. Whereas the Gambling Act 2005 recognises vulnerability as an exceptional state applicable to people unable to make properly informed or adult decisions, the Guidance conceives vulnerability to harm as being universal, with consumers divided between the victims and the vulnerable. The Commission’s revisionism has enormous implications for the functioning of the market and the interests of consumers as well as parliamentary sovereignty. It is not the Commission’s role to twist the law in order to accommodate moral inclination and the Consultation itself raises questions of process with certain aspects of the Guidance seemingly inviolate.

Neither the Consultation, nor the Guidance takes account of the practicability of the measures required, the cost implications, or the potential for negative unintended consequences.

The Guidance offers few clues as to what specific actions licensees should take in response to “indicators” and proposes a distinction between what operators ‘should’ do and what they ‘must’ do: a distinction that is likely to elude most compliance officers, as well as the Commission’s own enforcement officials.

Evidence

Very little evidence is presented by the Commission to explain the basis for selection of the “indicators”, and much of what is provided is highly selective and in some cases misleading: the classification of in-play betting as an “indicator” is an obvious example of this. The effect is that the regime appears arbitrary and deprives licensees who attempt to understand it of important context: understanding the specific basis for classifying something as an “indicator” would mean licensees are better placed to respond appropriately and to the benefit of consumers.

The Commission appears to have undertaken no research into consumer support for the measures that are being mandated or how they might react to them. One of the more alarming aspects is the characterisation of vulnerability in the Guidance based on broad generalisations about age (‘young’ as well as ‘older’ adults), disability (‘poor physical or mental health’) or educational attainment (‘poor literacy or numeracy skills’ and ‘knowledge’). This, along with the suggestion in the Guidance that licensees should harvest medical information about their customers, could be interpreted as unfairly discriminatory and introduces issues of privacy and data protection, with licensees encouraged to harvest and store highly sensitive information about a customer’s health or personal life. There is no demonstration within the Consultation that the Commission has considered the ethical or legal dimensions of this requirement, the extent to which licensees possess the requisite expertise to interpret such information, or whether this is even possible.

Timing

The Social Responsibility Code (which obliges licensees to take into account the Guidance) will be implemented in full from 12 February 2023, less than three weeks after the Consultation closes. This is an indecently short period for the Commission to weigh opinion and evidence and leaves licensees with little time to align safer gambling systems to the new rules. To date, it appears that very little, if any, effort has been made to understand the views of gambling consumers, or to consider the negative unintended consequences that seem almost certain to arise for them.

As the Commission has itself recently noted, many operators are “moving in the right direction and are looking to move their customers away from behaviours that present a higher risk to licensing objectives.” Whilst the Commission is admirably seeking to ensure that customers are not harmed from gambling, it is vitally important that its expectations are clear and evidence based if that positive progress is to continue. In its current form, the Guidance does not deliver in those areas: this is not only unfair on licensees, it is dangerous from a consumer protection perspective. In recent times the Commission’s actions have indicated a willingness to improve its engagement with licensees. This is a very positive change. Rather than rush to implement the Guidance, the Commission would be best served to consider all consultation responses, and revisit the Guidance, even if this means a delay.

Conclusion

There is common sense at the heart of the Guidance; but common sense tends to be context dependent and often resists codification. The Commission’s approach reflects a philosophy of market regulation by rules alone; something that is guaranteed to result in bad regulation and negative outcomes for consumers. Now is the time for reflection.

With thanks to Dan Waugh from Regulus Partners for his invaluable co-authorship.

10Jan

Department for Digital, Culture, Media & Sport Committee Call for Evidence on Gambling Regulation

10th January 2023 Ting Fung 8

The Department for Digital, Culture, Media & Sport Committee (“DCMS”) Committee is examining the Government’s approach to gambling regulation, including investigating the progress made by the Government in addressing the issues raised by Parliament, how to ensure that regulation keeps pace with innovations in online gambling and the links between gambling and broadcasting and sport.

As part of its inquiry, the DCMS Committee is inviting written evidence on the following questions by 5pm on Friday 10 February:

What is the scale of gambling-related harm in the UK?
What should the key priorities be in the gambling White Paper?
How broadly should the term, ‘gambling’, be drawn?
Is it possible for a regulator to stay abreast of innovation in the online sphere?
What additional problems arise when online gambling companies are based outside of UK jurisdiction?

DCMS Committee member, Julie Elliott MP, has stated:

“Gambling acts as an enjoyable pastime for large numbers of players, but regulation is struggling to keep pace with the rapidly changing way in which it happens today. This puts people at risk of the devastating harm it can sometimes cause to lives. The DCMS Committee’s inquiry will look at the scale of gambling-related harm in the UK, what the Government should do about it and how a regulatory regime can best adapt to new forms of online gambling, based both in and outside the UK.”

Figures from the Ernst & Young report (the “EY Report”) commissioned by the Betting and Gaming Council (“BGC”) and published last November, in The economic contribution of the betting and gaming sector: 2021-2022, also reflect gambling as a popular pastime through which the gambling sector contributed £7.1bn to the UK economy between 2021 and 2022. The EY report’s statistics also serve to highlight the wider context of gambling regulation reform, on which BGC CEO, Michael Dugher, commented last month:

“Our members pump billions into the economy, support the treasury with more billions and support over a hundred thousand jobs. But this contribution is never guaranteed. This industry needs to thrive if it is to maintain its status as a global leader.

“We urge the government to find an evidence-led, balanced white paper that protects the vulnerable, allows the vast majority who bet safely to continue to do so and, crucially, allows businesses to thrive.”

Certainly, the Government’s approach to regulation needs to be balanced and proportionate, however, as delays to the publication of the White Paper continue, a factor that remains to be addressed, is the timeliness of action. Question 2 of the Call for Evidence suggests the possibility of further delay of the White Paper, which was promised “in the coming weeks” for much of last year. The latest word on the street is that the White Paper will be published in February. However, we have learned to be somewhat sceptical about any gossip on this topic; certainly, the questions being asked by the DCMS Committee, and especially question 2, might suggest a longer timeline.

09Jan

Proposed Customer Interaction Guidance: The problems with common sense by decree

9th January 2023 David Whyte 9

The Gambling Commission (the “Commission”) is currently consulting (the “Consultation”) on the proposed Customer Interaction – Guidance for remote operators (the “Guidance”). While this exercise has not yet attracted the same attention as its 2020 predecessor (on remote customer interaction and affordability checks) it is potentially every bit as significant for licensees and consumers. Once implemented, it is likely that its strictures will in time bind non-remote gambling licensees and consumers too. Regulus Partners and Harris Hagan have written a series of co-authored articles to assist stakeholders responding to the Consultation. In the second of these articles, we described how the Guidance threatens to alter the meaning in law of “vulnerability” through its definition of “vulnerable persons”, by rendering universal what had formerly been considered exceptional. In this, our third article, we examine why this matters, in terms of both near-term regulatory compliance and longer term attempts to stigmatise participation in gambling.

The most striking feature of the Guidance is the extent to which it attempts to mandate common sense through a series of ill-defined rules – proposing a vast bureaucracy to facilitate and evaluate customer interactions. Having established a wide range of criteria for classifying customers as either “vulnerable” to, or “at risk” of, gambling harm; two concepts that appear to be definitionally similar but which the Commission, at different times, treats as both distinct and the same, the Guidance then requires licensees to configure a range of actions in response. The Guidance is, however, silent on what specific actions should be aligned to particular criteria (or clusters of criteria).

A little less conversation, a lot more interaction

Such is the breadth of the Commission’s conceptualisation of “vulnerability to harm” (there are literally millions of possible combinations of the “factors of vulnerability” and “indicators of harm” contained within the Guidance), it is inevitable that different licensees will take different actions in response to the same risk factors. More significantly and putting aside the inconsistent use of the differing terms “may be experiencing harm” and “may be at risk of harm” in the Guidance, licensees’ interpretation of what actions should be applied to any particular constellation of “indicators” is likely to differ from the Commission’s (and indeed, within the Commission, between one official and another).

In the absence of clearer direction, licensees will be left to learn from painful experience what “vulnerability” looks like through the eyes of Commission officials as well as what action or response should be considered appropriate (knowing that the Commission’s view on any given day is no guide to future interpretation). More cautious licensees may find themselves conducting customer interactions as a response to the vaguest suggestions of vulnerability; for example, being above or below certain, as yet unspecified, age thresholds. In this way, a degree of standardisation may eventually be achieved; albeit with thresholds set at successively lower levels.

Licensees who adhere to the Guidance, are exposed through a requirement that their staff “need to be trained on the skills and techniques they need to help them carry out customer interactions, including what to do if a customer becomes distressed or there is a risk of suicide.” There is no question of anyone in the gambling industry not wishing to prevent suicide. However, this wording implies that it is the responsibility of licensees or their employees to identify risk of suicide, and act upon it. Suicide risk is always the result of a complex array of factors, that may or may not, include an individual’s gambling. It is the responsibility of qualified professionals to identify that risk, not licensees, and it is dangerous on multiple levels, including in relation to the wellbeing of licensees’ employees, to suggest otherwise in formal Guidance.

The consequences of all this may be guessed at: enforcement action ramped up as the Commission weaves an ever more intricate web of compliance tripwires; licensees absorbing (or passing onto customers) substantial increases in the cost of doing business; and customers facing greater levels of intrusion and inconvenience based upon lifestyle preferences but also a range of factors beyond their control, such as age or disability.

Under the Guidance, licensees will be expected to conduct customer interactions according to a quota system based on DSM-IV and PGSI “problem gambling” prevalence rates from the Health Survey for England 2018 (the “Health Survey”). Online sportsbooks must therefore interact with at least 3.7% of their customers each year; while the minimum quota for online slots, casino and bingo operators is set at 8.5%. Licensees will be required to carry out monthly checks to ensure that they are on course to hit these targets.

The use of quotas raises a number of questions not addressed within the Consultation, which does not even canvass views on the wisdom of such a scheme. First, it reveals a discontinuity in the Commission’s logic – with “problem gambling” belatedly introduced as a proxy for “vulnerability to harm”. It should not, however, be assumed that someone with a DSM-IV or PGSI classification of “problem gambling” will meet the definitional criteria set out by the Commission for “vulnerability” or “harm”. This invites the question of just what problem is to be addressed and who, in particular, licensees are expected to protect: those whose gambling might be considered problematic according to recognised psychiatric criteria, or those who may meet the regulator’s often more nebulous definition of “harm”. The requirement that licensees use “specifically the problem gambling rates for the individual activities” exposes a basic misunderstanding of prevalence surveys. The Health Survey does not in fact provide “problem gambling” rates by discrete activity. Instead, it shows prevalence rates for people who participate in certain activities in combination with others, which is a rather different thing.

The Guidance becomes even more muddled in proposing interaction quotas for licensees with online sportsbooks and casinos – suggesting the use of a combination of problem gambling rates weighted for the percentage of revenue derived from each activity. It overlooks a simpler, more targeted and more logical method – using ‘problem gambling’ prevalence rates for customers who only use sportsbooks when gambling online, those who only play online slots, casino or bingo and those who do both. We have provided the figures below from the Combined Health Surveys for 2016: it would be a relatively straight-forward matter for the Commission to update these for 2018.

Activity	DSM-IV/PGSI ‘problem gambling’ rate (% of customers participating)
Online betting	0.4%
Online slots, casino & bingo	7.3%
Online betting and online slots, casino & bingo	8.7%

The Guidance states that these quotas may be recalibrated in the future – with particular reference to how “problem gambling” or “gambling-related harm” are measured. Here it should be recalled that the Commission is part-way through a process to wrest control of the measurement of gambling and “problem gambling” prevalence from the NHS – through the replacement of the Health Surveys with its own vehicle. The Commission’s Update: Pilot of survey questions to understand gambling-related harm published in May 2022 (the “Pilot Survey”) produced a combined PGSI problem gambling’ rate of 1.3% – more than three times higher than the result from the Health Survey. Analysis by Regulus Partners has highlighted previously a number of serious errors with the Pilot Survey (including a failure to carry out cross-checks with regulatory returns data; and overlooking the impact of Covid-19). The Commission has neglected to address these flaws and states, as an article of faith and without supporting evidence, that Health Surveys under-report “problem gambling”.

The Pilot Survey also contained questions about gambling-related harms, although the Commission has been rather selective in releasing these results. Some of these “harms”, as we explained in our previous article, include reduced attendance at the cinema, spending less time with loved ones or “feeling like a failure”. Rather unsurprisingly, they are experienced by a much larger group of gambling consumers than those likely to be classified as “problem gamblers”. Licensees may find therefore that interaction quotas are ramped up significantly in the future as a consequence of surveys controlled entirely by a regulator apparently intent on demonstrating that “problem gambling” or “gambling harms” are widespread in the population.

One obvious difficulty with issuing quota requirements is that they lead inevitably to a tick-box approach to compliance based on quota fulfilment. The Guidance sets out a very catholic definition of what might be considered an “interaction” – from generic safer gambling messages or pop-ups right through to treatment referrals and exclusion. Thus, in order to satisfy the quota, licensees may simply have to make sure that around one-in-five or one-in-ten customers receive a generic safer gambling message at least once a year – a figure that is likely to be well below current levels where responsible operators are concerned. In time therefore, the Commission may either drop the quota system or increase its complexity, with quotas for specific types of interaction (e.g. quotas for self-exclusion).

When combined, all of the above issues will make it incredibly difficult for licensees to act where there are “strong indicators of harm” as there is a lack of clarity in the Guidance as to what the Commission considers to be a “strong indicator of harm”. In the Consultation the Commission acknowledges previous concerns raised about this, and states that it “does not consider it appropriate at this time to set requirements which would remove the discretion or ability on the part of operators to tailor processes to their businesses and customers”. One might take the view that this is precisely what the Guidance does, particularly when it contains formal requirements.

Evaluation and Impact

The greatest area of complexity is likely to reside within the requirement that licensees conduct assessments in order to “understand the impact of individual interactions and actions on a customer’s behaviour”. The Commission is correct to highlight the importance of evaluation, even if it might strike some as hypocritical, given its own aversion to scrutiny, as safer gambling initiatives are often implemented or mandated on the basis of face validity rather than scientific observation. Evaluation is critical therefore if we are to improve and move beyond what should work in theory and understand what works in practice.

However, the implication here is that if the customer’s gambling activity does not change for the better (i.e. stop or reduce), they are suffering, or continue to be at risk of suffering harm. This cannot be correct: a customer may continue to gamble at previous levels or even increase their spend following an interaction for various reasons. There are several problems with the demand that licensees demonstrate the effect of changes to customer behaviour of every single customer interaction. First, it will be vastly bureaucratic and costly to implement, given the number of interactions that licensees will be encouraged to undertake. This might be acceptable if the benefits of such a system outweighed the costs, but this is unlikely to be the case. Gambling behaviour, and particularly disordered behaviour, is complex. To suggest that each individual licensee’s action might be separately assessed for discrete impact goes against the balance of research opinion as well as the Public Health whole systems approach. Neither the Guidance nor the Consultation give any consideration to proportionality, in direct contravention of the Responsible Gambling Strategy Board’s evaluation protocol.

This section of the Guidance gives rise to possible negative (and so presumably unintended) consequences. It fails to consider the substantial costs that such a system would impose on licensees or what this might mean in terms of customer experience where such costs are passed on through pricing. Most importantly, however is that it may impede efforts to protect consumers. Licensees swamped by assessing the impact of potentially millions of individual interactions may suffer a loss of perspective, impairing their ability to identify and understand what is happening to those at genuine risk of harm. People who fall under the Guidance’s discriminatory gaze (by virtue of being too old, too young, not physically fit enough or too trusting) may find themselves subject to repeated harassment by multiple licensees. Finally, there is the risk that a requirement to carry out evaluation on such a microscopic basis will in fact deter licensees from undertaking interactions over and above the level demanded by the quota system.

The Guidance of course, is not satisfied by requiring evaluations of every single customer interaction: licensees must also demonstrate impact. This stipulation reveals a fundamental flaw in the Commission’s thinking. As we explored in our second article, the basis for interaction in the Guidance is a range of “indicators” denoting “vulnerability” or “harm”; but indicators are not the same as actual vulnerability or harm. In demanding that all interactions must demonstrate impact, the Commission appears to conflate probability with certainty; and in doing so ignores the presence of false positives that are a feature of any diagnostic system. Under the Guidance, licensees will be required to demonstrate that interactions alter customer behaviour, regardless of whether reform is necessary, or to document, frequently, their decisions as to why such alteration was considered unnecessary despite the indicators identified. Worse, licensees will feel obliged to take progressively more heavy-handed approaches with such customers until a change is observed, the regulatory equivalent of factitious disorder imposed on another.

This impact becomes even more absurd when one considers the nature of some of the indicators in the Guidance that may trigger an interaction. To illustrate, we use the same hypothetical customer from our second article – a 24-year-old with dyslexia who bets in-play on football and cricket and typically spends slightly above the average for his age group. Now imagine this benighted individual suffers a bereavement. Displaying seven indicators of vulnerability or harm, some licensees may consider him an appropriate target for interaction – but what precisely should be the outcome? The licensee cannot alter his age, address his dyslexia or alleviate the distress of personal loss; and so must presumably either deter him from betting in-play (an activity branded an “indicator of harm” on the most spurious grounds, as we show in our next article) or encourage him to spend less. Even if a reduction in spending is achieved (via coercion of an individual displaying no actual symptoms of harm) the customer will still be considered vulnerable on four counts and at risk of harm on two – and therefore subject to further interactions in the future (until he ceases to be ‘younger’ or ‘bereaved’ perhaps). The consequences of such a regime are unlikely to be in the best interests of that customer; and while ‘black market’ risk can be overplayed, it seems legitimate to cite it where such blatantly anti-consumer logic is concerned.

These are the near-term implications of what the Commission proposes in its Guidance. It is possible too that the Guidance hints at longer term aims or outcomes: the addition of further regulatory restrictions which stigmatise betting and gaming as pastimes. The codification in the Guidance (which introduces “formal” requirements) of “younger adults” as intrinsically vulnerable, may in time be used to lobby for the legal age for gambling to be raised (with perhaps a new maximum age being introduced to address risk among “older adults”); while certain modes of gambling (most obviously in-play betting) may be curtailed or banned on the same basis.

The Guidance contains some useful insights but ultimately falls down in its attempt to inculcate common sense by diktat. In doing so, it fails to recognise the essence of common sense as something that cannot be circumscribed by rules. Whilst some of the factors set out in the Guidance are sensible and may have an effect on a customer’s powers of self-regulation, it is impractical to seek to enforce this in “formal” Guidance, particularly when that guidance is unclear. Further, there is no suggestion anywhere in either the Guidance or the Consultation that the Commission has taken the time to understand the basis of current licensee practices (a review of enforcement cases is, by definition, no way to assess the market as a whole); or to consider how desired behaviours might be encouraged rather than coerced. In our last two articles in this series, we will examine the evidence presented by the Commission for classifying in-play betting as an ‘indicator of harm’ in its own right; before closing with a summation of the reasons why all gambling licensees and consumers, alongside those concerned about personal freedom in other domains, should take the time to respond to this most worrying of consultations.

With thanks to Dan Waugh from Regulus Partners for his invaluable co-authorship.

09Jan

Chambers Gaming Law 2022 Global Practice Guide

9th January 2023 Adam Russell 8

Partners, Bahar Alaeddini and Julian Harris, have resumed their roles as Contributing Editors to the Chambers Global Practice Guide, with the latest edition of the Gaming Law 2022 eGuide now available online. Associate, Jessica Wilson, joined this year as a co-author.

Harris Hagan contributed to four parts of the publication

The esteemed publication spans over 30 jurisdictions and provides the latest regulatory information including: the availability and duration of licences; B2C and B2B licences; application requirements; affiliates; white labels; responsible gambling; AML legislation; restrictions on advertising; acquisitions and changes of corporate control; trends in social gaming; eSports; fantasy sports and blockchain; tax; and anticipated reform.

Key trends are covered by jurisdiction under the Trends and Developments section, and the publication also provides users with the opportunity to perform jurisdiction comparisons using the Compare locations tool.

Please use the above links to review their contributions and the rest of the eGuide at your leisure.

23Dec

Where is the harm? Implications of regulatory revisionism for customer interactions

23rd December 2022 David Whyte 12

In this – the second in a series of articles on the Gambling Commission’s (the “Commission”) consultation (the “Consultation”) on the proposed Customer Interaction – Guidance for remote operators (the “Guidance”) – Harris Hagan and Regulus Partners consider the concept of ‘vulnerability to harm’ that underpins the Guidance. The Commission proposes that licensees be required to identify “harm”, “potential harm” and “vulnerable states” by monitoring customer behaviour, scrutinising private information and making assessments based on a range of demographic characteristics. While licensees should always be sensitive to customer wellbeing, the Commission’s attempt to translate common sense into a bureaucratic checklist appears to be at odds with the intent of the Gambling Act 2005 (the “2005 Act”), regulatory coherence and the best interests of consumers.

Vulnerability and harm

The Guidance requires licensees to identify customers exhibiting “indicators of harm” as well as those who – for a wide variety of reasons – may be “vulnerable” to gambling harms. For these terms to be meaningful, it is important first to understand what the regulator wishes to convey by the term “harm”. While the Guidance itself is silent on this matter, the Commission has defined gambling harms in its Update: Pilot of survey questions to understand gambling-related harm as “the adverse impacts from gambling on the health and wellbeing of individuals, families, communities and society.” Emphasising the breadth of the concept, it adds that “these harms are diverse, affecting resources, relationships and health, and may reflect an interplay between individual, family and community processes. The harmful effects from gambling may be short-lived but can persist, having longer-term and enduring consequences that can exacerbate existing inequalities.”

To hammer home the scale of the problem, the Commission enumerates 27 “harms” experienced by gambling consumers and a further 13 “harms” to “affected others”. Some of these adverse impacts are incontrovertible – financial consequences such as problematic debt being the least ambiguous – but others are less clear-cut. The Commission, for example, defines having less money to go to the cinema or “other forms of entertainment” as a harm from gambling. Spending money on one pastime in preference to another – as the Australian academic, Professor Paul Delfabbro has pointed out – is “more akin to opportunity costs than true harm”. Its inclusion in the ‘Index’ suggests a moral judgement on those people who prefer to spend their own money on betting in preference to the movies or a meal out. Among the Commission’s other “harms”, we also encounter “feeling like a failure” which in its weakest form is a potential corollary of all unsuccessful wagers and “spending less time with people you care about”, a test that many activities, including going to work or attending a school or college, would fall foul of.

Are these the “harms” or “potential harms” that the Commission expects its licensees to identify? If so, how does it expect them to do so? Will licensees, for example, be required to scrutinise bank statements in order to understand whether or not customers are movie-goers? With what degree of regularity must customers be going to the flicks in order to satisfy the regulator? This may be a case of reductio ad absurdum – but it illustrates the fact that the Commission has in fact set some fairly absurd tests for what should be considered harmful. In the absence of clearer direction, operators are expected to make their own judgements about which of the “harms” listed by the Commission they should be attempting to identify.

A list of 21 prescribed “indicators of harm” are provided in the Guidance as a minimum – but not exhaustive – set of standards. The basis for the selection of these indicators is not made clear, supporting evidence is often not cited, and generally they lack all but the most conceptual definitions. For licensees, this presents a significant challenge in terms of operationalising the indicators. How, for example, should a licensee create a rule for “amount of money spent on gambling compared with other customers”? Is this intended to suggest that anyone spending above the mean (or median) is displaying an indicator of harm? As written, it could be used to describe anyone wagering more than the lowest-spending decile, which would be more than “other customers”. Another example is the “use of multiple products”, without any definition of what constitutes a “product”. Are football betting and tennis betting different “products” or a single product (i.e. sports betting)? Is a ‘Rainbow Riches’ slot game a different product to ‘Cleopatra’, as manufacturers would certainly contend? Where certain activities are concerned, any participation at all is considered potentially problematic. In-play betting is classified as an automatic indicator of harm. Although, as we will explain in a further blog, this appears to be based on the Commission’s misreading of its own evidence.

So much for harm; but what about “vulnerability”? Here, the Guidance does at least provide some kind of definition of what a “vulnerable person” is: “somebody who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”.

Harris Hagan has raised previously its concerns about the transformation of what the Commission considers to be “vulnerability” and its inclusion of a definition of the term in guidance. It is for Parliament, not the Commission to define a statutory term that is included in the 2005 Act and which Parliament did not find it necessary to define, having clearly considered the interpretation of vulnerability a straightforward matter. Reference in the third licensing objective firstly to children, and then to other vulnerable persons adequately sets out Parliament’s intention that the licensing objectives apply to those people not able to make properly informed or ‘adult’ decisions.

The operative phrase in the definition in the Guidance – “especially susceptible to harm” – implies that vulnerability is a rare or exceptional condition rather than a state shared by the majority. This conceptualisation is however, undermined by the Commission’s use of illustrative examples. “Young adults” are categorised as vulnerable (around 12% of the population are between the ages of 18 and 24 years); but so are “older adults” (23% of the population are 65 or older). Poor physical health denotes vulnerability (43% of adults have a long-standing medical condition); as does poor mental health; (17% have a common mental health disorder; 16% have an eating disorder). One is vulnerable if one is bereaved (15% of us each year), has caring responsibilities (13%) or has dyslexia (10%). Most perplexing of all, a “higher than standard level of trust or appetite for risk” – a quality that might be said to be a defining characteristic of any gambler – is also sufficient to qualify an individual as vulnerable.

The Guidance refers to the Financial Conduct Authority’s (“FCA”) observation that 46% of adults “display one or more characteristics of vulnerability” and indeed, the Commission’s definition of vulnerability is identical to that used by the FCA in its Guidance for firms on the fair treatment of vulnerable customers – February 2021 (the “FCA Guidance”). The FCA Guidance is, however, prepared to serve an entirely different purpose. It is issued under s139A of the Financial Services and Markets Act 2000 (legislation which, unlike the 2005 Act, makes no reference to vulnerability) and provides guidance on the FCA’s Principles for Business, which state that, “a firm must pay regards to the interests of its customers and treat them fairly”. Principle-based regulation of this nature almost certainly requires guidance and the FCA is justified in defining vulnerability in that context; that the Commission seeks to take an identical approach to the FCA, in an entirely different context, is not.

There is a difference between the FCA’s intention that regulated firms identify “characteristics of vulnerability” to ensure they treat their customers fairly and in accordance with their needs, and the Commission’s duty under the 2005 Act to permit gambling in so far as it thinks it reasonably consistent with, the licensing objective of “protecting children and other vulnerable persons from being harmed or exploited by gambling”. The Commission’s reinterpretation of “vulnerability” as a universal rather than exceptional state risks distorting and undermining the legislation that it is required to enforce – replacing parliamentary sovereignty with regulatory fiat. Furthermore, the Commission prescribes a requirement in SRCP 3.4.3. It therefore had the opportunity, following consultation, to set out precisely its definition of vulnerability when introducing that requirement. That it now seeks to widen the parameters of that requirement in the Guidance, is plainly wrong.

The concept of vulnerability

The suggestion that we are all vulnerable may be true at a certain banal level – but it is inconsistent with the intent of the legislation and also the Commission’s own conception of ‘especial susceptibility to harm’. A system of customer monitoring predicated on the idea of universal vulnerability risks failing those in genuine need of protection. There are a number of other practical considerations which the Guidance fails to address. For instance, it suggests, by way of reference to past enforcement cases, that operators must routinely scrutinise customer bank statements in order to harvest medical information, or risk facing sanctions for failing to do so. This raises complex ethical issues of discrimination and data protection. Should operators, for example, treat customers differently on the basis of a perceived medical condition (which they are expected to glean from banking data)? How might customers feel about betting companies holding information (however obtained and however accurate) about their health?

To illustrate the scale of the challenge presented by the Guidance, consider the following fictitious scenario. A 24-year-old with dyslexia who bets in-play on football and cricket and spends slightly above the average for his age group could plausibly be said to raise three ‘vulnerability’ flags and three ‘indicators of harm’. As we observe in the next in this series of articles, a licensee would be required to determine for itself whether or not the presence of six ‘indicators’ would necessitate an interaction, and if so of what variety. It is inevitable that operators will adopt widely divergent interpretations in such instances, with implications for market distortion. Perhaps more significantly, the Guidance creates ample scope for disagreement between licensees and the Commission about whether a customer is vulnerable or displaying genuine indicators of harm.

That “vulnerability” is to be determined by whether a “firm”, which we understand to mean a licensed operator (again the use of “firm” a reflection of the Commission’s use of the FCA’s definition), is “acting with appropriate levels of care”. The decision as to whether a licensee has acted with appropriate levels of care must ultimately rest with the Commission and therefore it seems that vulnerability will be determined subjectively by the Commission, almost certainly in hindsight. Further, by suggesting, incorrectly, that licensees have a duty of care at law to prevent customers from gambling if they are or might meet the Commission’s definition of vulnerability, the Commission risks improperly introducing such a duty in law, or at least exposing licensees to such a challenge. This is dangerous territory for any regulator, and for licensees.

Autonomy – a wider debate

Finally, there are some genuine ‘slippery slope’ consequences for the wider economy, privacy and personal freedom. One of the Commission’s key items of evidence for the proposed interactions regime is a survey carried out in 2020 by the Money and Mental Health Policy Institute (‘MMHPI’) included in the report A Safer Bet. The Commission states that 24% of people with mental health problems experienced financial problems in consequence of online gambling and 32% said that they had bet more than they could afford to lose. This representation of the findings is misleading (the survey was of people with mental health problems who had gambled online and not all people with mental health problems – an important distinction); as is the Commission’s repeated misuse of the Problem Gambling Severity Index item “bet more than afford to lose”, which is a risky behaviour rather than a harm.

Quite aside from matters of precision, there is an important omission of context. In the same year, the MMHPI also published the results of a survey on online shopping by people with mental health problems – with very similar, and in some cases more alarming, results. The MMHPI report, Convenience at a cost found that 29% of respondents had spent more than they could afford when shopping online while 63% “had cut back on essentials” and 56% “had fallen seriously behind on payments for bills or debt repayments as a result of not being able to control their spending.” In short, the basis for regulatory intervention on remote gambling could just as easily be applied to shopping with Amazon or Tesco. Context is important because it helps us understand whether state action in one domain is consistent with broader societal ‘rules’ – and so deters unfair discrimination against particular groups (in this case, people who enjoy gambling). The Commission’s deliberate exclusion of this information, which was brought to its attention as part of the original consultation, is unhelpful and reinforces the idea that the regulator is not in earnest in its use of public consultations.

The Commission’s obsession with vulnerability suggests a rather hopeless outlook on life. To the extent that we are all, to some extent vulnerable, we are all resilient too and possessed of broad powers of self-regulation. An exclusive focus on what makes us weak with no recognition of what makes us strong is distortive and may lead to negative consequences – most obviously through undermining individual agency, which is an essential ingredient for wellbeing.

The identification of harm and vulnerability set out in the Guidance is the basis for ramping up operator interactions with customers, which may in some cases be warranted. The practical implications of the requirements to interact, and to evaluate the effect of those interactions, is the subject of our next article.

With thanks to Dan Waugh from Regulus Partners for his invaluable co-authorship.

22Dec

Putting the Customer First: Why all licensees should the take the Consultation on Customer Interaction Guidance seriously

22nd December 2022 David Whyte 11

A little over two years on from the launch of its consultation and call for evidence on remote customer interaction requirements and affordability checks, the Gambling Commission (the “Commission”) has initiated a new public consultation (the “Consultation”) – this time on the proposed Customer Interaction – Guidance for remote operators (the “Guidance”). While the Consultation has so far not attracted the same attention as the 2020 exercise, the implications are potentially just as profound. In a series of co-authored articles, Harris Hagan and Regulus Partners will explore the key proposals in the Guidance, examining the evidence that underpins them and asking whether they are in fact proportionate, legal and in the best interests of consumers.

We appreciate that some of the more cynical readers of this article may think there is little point in responding to the Consultation as the Commission will take little or no notice of any feedback it receives from licensees. However, we consider it critically important that all licensees, including non-remote licensees, do respond to the Consultation. It is more difficult for the Commission to ignore numerous representations on common concerns, and experience suggests that similar guidance may be produced for non-remote licensees in the future. Recognising that the timeframe for the Consultation will include the holiday period, the Commission has extended the originally proposed six weeks to approximately nine weeks, and it will now close on Monday 23 January 2023.

There are a number of areas of the Guidance which licensees should be concerned about – Harris Hagan included some of these in previous articles in July and September 2022. In this article, the first of the series, we set out a summary of those issues, and analyse the “Introduction” and “General requirements” sections of the Guidance. In subsequent articles we will also consider the central theme of assessing ‘vulnerability to harm’; and how licensees will be expected to take action to address it.

Key areas of concern

Our key areas of concern about the Guidance, many of which we will explore in more detail in this series of articles, are:

It has been poorly drafted. Many key terms are either undefined or defined in a fashion so highly generalised as to be almost meaningless. An absence of precision in the way that regulatory requirements are described inevitably invites a high level of subjectivity in terms of how they will be interpreted by both licensees and the Commission.
The evidence that underpins key measures contained in the Guidance is either absent or highly selective – and, in some cases, it is misleading.
It appears to conflate “indicators of harm” with actual harm – requiring licensees to take action to correct customer behaviours regardless of whether they are in fact harmful.
The definition of key terms is so broad as to make it almost impossible for licensees to justify not conducting a safer gambling interaction based on either “indicators of harm”, “vulnerability” or both.
It takes no account of the practicability of the measures required, the cost implications, or the potential for negative unintended consequences.
The Commission appears to have undertaken no research into consumer support for the measures that are being mandated or how they might react to them.
One of its more alarming aspects is the suggestion that licensees should harvest medical information about their customers. There is no demonstration within the Consultation that the Commission has considered the ethical or legal dimensions of this requirement, the extent to which licensees possess the requisite expertise to interpret such information, or whether this is even possible.

Issues not addressed in the Consultation

The Commission makes it clear that the Consultation relates solely to the Guidance which is issued on Social Responsibility Code Provision (“SRCP”) 3.4.3. The requirements of SRCP 3.4.3 itself are not within scope, nor are “matters associated with unaffordable gambling and specific thresholds which should apply”, the “separate consultation on the three key financial risks” the Commission committed to in May 2021 (yet to materialise), or matters associated with “single customer view”.

General requirements

“How to use this guidance”

There are inconsistencies in the Guidance between “aims” and “formal guidance”, and it is difficult to ascertain whether the Commission expects licensees to “take into account” or “address” its aim in setting each requirement.

The impact of this inconsistency can be seen throughout the Guidance. For example, requirement 1 states that “icensees must implement effective customer interaction systems and processes in a way which minimises the risk of customers experiencing harms associated with gambling.” However, aim 1 states that “Licensees must have effective controls to minimise the risk of customers experiencing harms associated with gambling”. There is a clear difference between implementing effective systems and having effective controls, the latter being more easily determined subjectively by the Commission and with hindsight: the assumption likely being that if any customer has suffered or experienced harm (a highly malleable term as we will explain further in our next article), the controls were ineffective.

It is critically important that the Commission ensures uniformity in the Guidance. If ‘aims’ are within scope, then the language used for requirements and aims should be consistent: if ‘aim’ is not within scope, then the “How to use this guidance” section of the Guidance should be amended and reference to licensees being obliged to “address that aim” removed, to ensure that this is abundantly clear.

Formal requirements as guidance?

Harris Hagan has previously set out its view that it is inappropriate, and arguably ultra vires, for the Commission to introduce formal requirements through guidance. The Commission seeks to address such concerns in the Consultation where it states:

“On occasion, the proposed guidance document uses the language of ‘must’ or ‘the Commission expects’. This language is used in contexts where the guidance is intended to reflect the requirements or SR Code Provision 3.4.3. The proposed guidance document also uses the word ‘should’, which denotes an approach or action that is not required by SR Code Provision 3.4.3, but which operators are required to consider. We are interested in stakeholders’ views on the language used in the proposed guidance document in this respect.”

Despite this statement, there are several areas of the Guidance where the language used does not reflect the requirements set out in SRCP 3.4.3, goes beyond those requirements, or is inconsistent with those requirements. This is inappropriate, will cause confusion, and exposes licensees to the risk of broad or inconsistent interpretation by Commission officials during compliance or enforcement action.

By means of an example:

Requirement 4 states: “Licensees must have in place effective systems and processes to monitor customer activity to identify harm or potential harm associated with gambling…”;
Aim 4 is stated as being to ensure “that customers who may be at risk of harm are identified”; and
Formal Guidance 4 states that “icensees must identify customers that may be at risk of harm.”

There is a clear distinction between “identifying harm or potential harm” and identifying customers “that may be at risk of harm”: the latter arguably being impossible as it applies to anyone who gambles. We will discuss this in more detail in a subsequent article. The importance of the Guidance being easily distinguished from the prescriptive requirements set out in SRCP 3.4.3, and of ensuring consistency between requirements and aims and formal guidance, must not be overlooked.

“How the Commission will use this guidance”

The Commission refers under this section of the Guidance to its expectation that “licensees demonstrate how their policies, procedures and practices meet the required outcomes”. However, at no point has the Commission set out what those required outcomes are. SRCP 3.4.3 is not outcome-led; it is, at least in part, prescriptive – as is the Guidance. We would therefore suggest that “requirements” rather than “required outcomes” is the more accurate language to be used here.

“Amending this guidance over time”

Under this heading, the Commission sets out that “for the purposes of raising standards, protecting customer interests, and preventing harm to customers, will update and re-issue guidance”. Harris Hagan has previously raised concerns about this approach. We remain of the view that the Commission should consult on any changes to the Guidance, particularly if those changes introduce formal requirements, or if they explain how the Commission may interpret those formal requirements. The Commission is comfortable with short consultation periods; it originally proposed that the Consultation be open for six weeks. To conduct further short consultations before amending the Guidance is hardly an arduous task, particularly given the benefit of doing so, not only to licensees and stakeholders, but to the Commission itself.

In our second article, we will discuss the concepts of “harm” and “vulnerability” that underpin the Guidance.

With thanks to Dan Waugh from Regulus Partners for his invaluable co-authorship.

14Nov

Licensing, compliance and enforcement policy statement: Gambling Commission consultation response – the “under the radar” compliance and enforcement changes you may not (yet) have noticed – Part 2

14th November 2022 Gemma Boore 16

On 23 June 2022, the Gambling Commission published the response to its November 2021 consultation (the “Consultation”) on its Licensing, Compliance and Enforcement Policy Statement (the “Policy”) and this is our second blog on the response. The first blog can be accessed here.

Compliance Changes

Proposal 9. Remote compliance assessments

Proposal: Policy to explain that compliance assessments may be carried out remotely and clarify what this involves.

Respondents’ views: Although the majority of respondents agreed with the proposal, some noted that:

1. the digital privacy of licensees and their customers must be considered;
2. face to face meetings are more productive;
3. assessments conducted in a remote environment allow for items to be lost in translation, talk to be taken out of context and prevent the relevant parties from engaging in open conversation and dialogue.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission addressed comments that remote assessments may jeopardise privacy byconfirming it had “considered the proportionality and legality of using this method of assessment and satisfied that appropriate controls in place to ensure that laws relating to data protection are complied with”. The regulator acknowledged concerns regarding perceived disadvantages of remote assessments and confirmed that it would take a flexible approach, conducting assessments both face-to-face and via remote means.

Our view: This is another example of the Policy being updated to reflect current practice. Remote assessments were of course, a necessity during the Covid pandemic and in the same way as remote working has become commonplace across the globe, they are here to stay. As remote assessments carry just as much weight as in-person assessments, they must be given the same level of care and attention by the business. Licensees must ensure that training records, revenue reports, customer accounts and AML/safer gambling procedures/records and other key policies and procedures are on hand and ready to be discussed and/or disclosed if necessary. The key people that have been asked to attend and any other personal management licence holders, should be present, ready to answer the Gambling Commission’s questions and critically, show the Gambling Commission how they carry out their roles. Please get in touch if you have any questions regarding compliance assessments.

Proposal 10. Changes to assessment framework

Proposal: Policy to update assessment framework to reflect terms actually used by Gambling Commission officials to judge levels of compliance: namely, ‘Serious failings’, ‘Improvement required’ and ‘Compliant’.

Respondents’ views: Some respondents noted that:

1. the categories appear clearer but there should be subcategories in the improvements required section, to separate minor and/or major improvements;
2. the section entitled ‘Improvement Required’ should not stipulate that a licensee ‘just meets’ the Commissions requirements as this would mean they are technically compliant; and
3. sections of the framework could be more prescriptive.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission rejected arguments that additional subcategories and/or outcome descriptions would be useful. The regulator further clarified that ‘Improvement required’ is used “to reflect circumstances where a licensee may be in breach of a licence condition or social responsibility code, or any other requirement attached to a licence. However, we would not use this description where we judge that there is likely to be a significant impact on consumers, the licensing objectives, or the reputation of the industry. We would also expect clear assurances that a licensee will make immediate changes to ensure that there is no future risk.”

Our view: This is the only proposal that does not appear to have gained approval from at least 50% of respondents. A strange outcome, as this is another prime example of a policy amendment made to catch up with what is happening on the ground. In practice, we have seen this language used in the Gambling Commission’s communications with licensees regarding the outcome of compliance assessmentssince 2019. The only oddity is the delay in the Gambling Commission updating its own policies to reflect practice. It is also not particularly surprising, given how long these phrases have been used, that the Gambling Commission is rejecting suggestions for improvement to its own lingo.

Proposal 11. Introduction of Special Measures

Proposal: Policy to outline the circumstances in which an operator may be placed in special measures and the consequence of this.

Respondents’ views: Although the majority of respondents agreed with the proposal, some noted that:

1. the approach to divestment needs to be clearer and the Gambling Commission should consider whether funds can be divested back to consumers; and
2. licensees should be able to refuse to enter Special Measures and to defend its position if a review is then instigated.

Other respondents queried whether the Gambling Commission should publish when licensees enter Special Measures to ensure consumers could assess if their risk appetite is big enough to continue to use the services of such operator.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission rejected the assertion that it should publicise circumstances where a licensee enters Special Measures – an outcome that will bring relief for many. The regulator also took the position that comments regarding divestment fell outside the parameters of the consultation. It further noted that “While it is open to a licensee to refuse Special Measures, this would most likely mean that the licensee, based on the identified failings, would be considered for review of its licence. As part of that review process, we would want to understand why the operator was unwilling to work to achieve compliance at pace. The review process allows for the licensee to make representations about the Commission’s findings and proposed course of action.”

Our view: For better or worse, several licensees have now experienced the Gambling Commission’s Special Measures process and more will experience it yet. Although we remain of the view that much greater informal engagement by the Gambling Commission with individual licensees would be preferable and appropriate when compliance issues are identified (assuming, of course, the regulator is proportionate, consistent and appropriate in those dealings), it is encouraging to see the Gambling Commission introducing a less draconian form of engagement than commencing a licence review under section 116 of the 2005 Act. Please see our blog on 11 October 2022 on Special Measures for further commentary on the implications for licensees and whether a cautious welcome for the new process is justified.

Enforcement changes

Proposal 12. Right to issue further preliminary findings letter

Proposal: Policy to be updated to permit the Gambling Commission to issue a further consolidated preliminary findings letter in situations where the regulator is not in a position to proceed to determination after a licensee has made its representations on the Gambling Commission’s initial findings.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. there is potential for ambiguity of the interpretation of ‘flexible approach’ and the need to ensure procedural fairness;
2. a balance would need to be struck between sufficient investigation, obtaining and properly considering representations whilst also ensuring overall process is fair, transparent and managed within a reasonable timeframe; and
3. the revised approach should not unduly benefit the Gambling Commission at the expense of licensees.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission sought to alleviate respondents’ concerns by confirming that “it is not envisaged that this amendment would be utilised solely for the benefit of the Commission… …It is anticipated this would be used exceptionally, rather than routinely.”

Our view: This change in policy effectively allows the Gambling Commission two bites at the metaphorical cherry in terms of reaching preliminary findings. It has been by argued by some that this is unfair (including in our blog on 13 December 2021) and that the Gambling Commission should apply sufficient diligence in its initial investigation to prevent the need for a second consolidated set of preliminary findings except, possibly, in rare situations where significant new evidence has come to light. Now the amendment to the Policy has been made, we shall see whether this new tool will be used exceptionally (and fairly) – or become a more routine part of the Gambling Commission’s increasingly aggressive repertoire.

Proposal 13. Financial resource of group and UBOs considered for financial penalties

Proposal: Policy to be updated to permit the Gambling Commission to request information regarding the financial resources available to a licensee’s group companies and ultimate beneficial owners. The Policy further clarifies that in the absence of sufficient information, it will infer that the licensee has the resources to pay.

Respondents’ views: Some respondents noted that the amendments may stray beyond the legislative parameters under the 2005 Act. Others queried whether the calculation of fines should be standalone in reference to the breaches and evidence. There was a concern that the provision invites unfairness for larger gambling businesses who may suffer more than smaller companies.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission rejected arguments that the requirement expanded its regulatory remit claiming that “The Act stipulates that the Commission will have regard to the affordability of a proposed penalty. The Act is not prescriptive on the definition of financial resources but for a group structure where dividends and loans are available to move monies around the group it follows that a licensee has more financial resources available to it than a stand-alone company and should be assessed accordingly. In addition, consideration of the group finances removes the ability of the licensee to move monies available to fund a penalty out of reach during the investigation period.”

Our view: As discussed in our blog on 13 December 2021, we consider that the revised wording in the Policy goes significantly beyond section 121(7)(c) of the 2005 Act, which requires the Gambling Commission to take into account “the nature of the Licensee including in particular his financial resources” when calculating a financial penalty. The Gambling Commission has effectively interpreted the phrase “nature of” as including not only group companies but also piercing the corporate veil between the licensed companies and its shareholders. The explanation provided in the consultation response does not get close to providing a clear rationale for this seismic change from a group perspective and ignores it completely from a beneficial owner’s perspective. We expect future disputes (private and perhaps by more public means) if and when the Gambling Commission looks to rely on these provisions when determining financial penalties. Please get in touch if you would like any advice on dealing with the Gambling Commission.

Proposal 14. Regulatory Panel to consider challenges to licence suspensions

Proposal: Policy to be updated to clarify that challenges to interim suspensions of operating licences would be heard before the Regulatory Panel of Commissioners, who would list the matter for hearing as soon as reasonably practicable.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. the challenges of appealing a decision to officials when officials made the initial suspension decision;
2. the perceived lack of industry experience on the Commission’s Board;
3. the need to further clarify ‘as soon as reasonably practicable’, recognising time is of the essence; and
4. the Gambling Commission should be clear and provide information on what failings could lead to a suspension.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission attempted to address concerns regarding the independence and experience of the Regulatory Panel in its response by stating that “where such a decision is challenged it would be before different officials… …Commissioners are not employees of the Commission and afford a layer of separation from officials which will help act as a safeguard to test our decision making”. It did not address comments requesting further clarity on timing or the type of failings that could lead to suspension.

Our view: This change to the Policy enshrines the principle that a hearing relating to a licence suspension will be held as soon as reasonably practicable. This is, in principle, positive for licensees. Although it is not clear whether “reasonably practicable” means days, weeks, or months; uncertainty over licensed status is bad for business so getting before the Regulatory Panel quickly is a good thing. It is even more important when the Gambling Commission exercises its right, under section 145 of the 2005 Act, to disapply the rule that the licence suspension should be stayed while the licensee is given the opportunity to appeal the decision because it deems there is an important or emergency need to do so. In such cases, licences are suspended with immediate effect – causing catastrophic damage to player (and investor) confidence in the business.

Proposal 15. Regulatory settlements only considered at an early stage

Proposal: Policy to be updated to clarify that regulatory settlements would only be considered at an early stage in enforcement proceedings and that the Gambling Commission would not normally accept offers after the licensee had made representations on the Gambling Commission’s preliminary findings.

Respondents’ views: Although most respondents agreed with the proposal, some noted:

1. a need for greater transparency around calculation of penalties and/or settlement amounts, acceptance criteria and timescales for decisions;
2. the amendment being contrary to furtherance of gambling as a statutory objective;
3. it is not in the interests of fairness to preclude representations before a settlement offer;
4. settlements should be permitted at any time with mitigation being given to earlier settlements made and reflected in a discount; and
5. affording the licensee a chance to fully understand the Gambling Commission’s case and evidence before submitting a settlement offer, particularly if there has been a further preliminary findings letter issued.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission clarified that it “does not invite, nor negotiate settlements. If a licensee wishes to submit a settlement the Commission up until now has been duty bound to consider it, irrespective of the stage submitted however our view that settlement is a privilege and not a right remains”. The regulator goes on to clarify its new policy position only to consider settlements before representations are made. It further confirms that “if a further preliminary finding is issued by the Commission, the clock would be reset to the last preliminary findings”.

Our view: As noted in our blog on 13 December 2021, the representation stage in proceedings is without doubt, the most critical in putting forward a licensee’s case. By effectively bypassing this stage, the Gambling Commission is requiring a licensee to accept that it is right with all of its findings. This is particularly poignant given that the public statement that is released to announce the outcome of a settlement will invariably refer to “agreed failings” of the licensee. Going forward, a critical observer (and hopefully investor) will do well to query whether a public statement relating to a settlement with the Gambling Commission could have looked drastically different should representations by the licensee have been permitted. Please get in touch if you would like advice on making representations and/or reaching a settlement with the Gambling Commission.

The changes to the Licensing, Compliance and Enforcement Policy Statement took effect on 23 June 2022. Please get in touch with us if you would like assistance on any compliance or enforcement matters.

14Nov

Licensing, compliance and enforcement policy statement: Gambling Commission consultation response – the “under the radar” licensing changes you may not (yet) have noticed – Part 1

14th November 2022 Gemma Boore 17

On 23 June 2022, the Gambling Commission published the response to its November 2021 consultation (the “Consultation”) on its Licensing, Compliance and Enforcement Policy Statement (the “Policy”). The Consultation had sought views on several amendments to the Policy, as discussed in our previous blogs on this subject on 1 December 2021 and 13 December 2021.

The changes, which were wide-ranging and significant, were broadly grouped into three categories: licensing, compliance and enforcement.

The Gambling Commission received 66 responses to the Consultation from licensees, trade associations, members of the public, the charity and not-for-profit sector and “others”. Key examples of support for and objections to each proposal are detailed in the 34-page response document.

Despite (at least some) respondents raising what we consider to be well-founded concerns regarding the changes – which we discuss below – the Gambling Commission implemented its proposals almost invariably without amendment. As noted in our blog on the Gambling Commission’s partial introduction of its new customer interaction requirements; this “consult > issue response > implement as originally planned” cycle is now commonplace as we increasingly see the Gambling Commission revise its policies in line with its initial proposals, irrespective of consultation responses received.

In addition to deciding to implement without affording much regard to industry comments, the Gambling Commission announced, at the bottom of the response document, that the changes would take effect on 23 June 2022: the same day that the Consultation was published on the Gambling Commission website. Oddly, there was no associated notification published on the news section on the regulator’s website. Instead, this key update was published only as a new response (amongst many) on the consultation page of the Gambling Commission website and the Policy replaced swiftly thereafter, with the updated version dated June 2022.

This ‘under the radar’ approach to updating the Policy, which – as noted in our previous blog, is an important document that underpins every aspect of the licensing lifecycle – means that many licensees may not yet have noticed the changes.

The purpose of this blog is to bring to our readers’ attention the key amendments and provide insight into the implications that those changes have for those that hold gambling licences in Great Britain.

The Consultation Questions

The Consultation contained 15 proposals for specific changes to the Policy.

For each proposal, respondents were invited to indicate whether they ‘strongly agree’, ‘agree’, ‘neither agree or disagree’, ‘disagree’ or ‘strongly disagree’ to the amendment, and give reasons for their answer. Interestingly, the Gambling Commission noted in its response that “the majority of respondents” (i.e., >50%) agreed with all but one of the proposals (Proposal 10: Assessment framework being the only exception to this rule). It would be interesting to know how this was further split between the available five options.

Proposal 1. No dual regulation of financial products

Proposal: Policy to clarify that the Gambling Commission will not normally grant operating licences in respect of products that blur the lines between gambling and financial products.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. products could fall through a regulatory gap, with little or no consumer protection in place;
2. the approach would stifle innovation and economic growth; and
3. the approach amounted to a blanket ban on products of a certain type.

Other respondents queried whether refusing to license a gambling product due to its presentation was aligned with the Gambling Commission’s duty to permit gambling in so far as it is reasonably consistent with the pursuit of the licensing objectives.

Gambling Commission’s position: The original proposals were implemented as drafted. While the Gambling Commission acknowledged – but did not agree with – views that the approach may stifle innovation / growth and/or be inconsistent with its duty to permit gambling, it failed to comment on whether its position could result in products falling through a regulatory gap with little or no consumer protection in place. It also failed to comment on whether the approach would amount, in practice, to a ‘blanket ban’.

Our view: The Gambling Commission noted in its initial call for evidence that issues relating to the dual regulation of products may be better resolved via legislative change but that “this is unlikely to happen before the current Gambling Act Review is concluded”. The change to its policy position therefore seems to be little more than a stopgap: an interim solution to prevent further embarrassment (similar to that experienced in the wake of the BetIndex t/a Football Index scandal; see our 1 December 2021 blog for further commentary). Whether the White Paper will adequately address issues relating to the dual regulation of products is another question. In our view, this is a complex area and proper consideration of the advantages and disadvantages of permitting properly run and regulated versions of these products will be key to the debate. Although a blanket ban may be the easiest option, is it the best step overall?

Proposal 2. Right to reject incomplete licence applications

Proposal: Policy to reflect the Gambling Commission’s existing position to reject incomplete application forms with no refund of the application fee.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. application forms on the website are difficult to navigate or enter appropriate information;
2. the Policy or website should more clearly state what constitutes a complete application;
3. applicants should be able to engage with the licensing department prior to and during the application process; and
4. it is unreasonable for the Gambling Commission to retain the whole fee for rejected applications when the licence application process needs (considerable, in our view) improvement.

Gambling Commission’s position: The original proposals were implemented as drafted. However, the Gambling Commission acknowledged that information on its website / application forms could be improved and committed to take this forward in the new financial year. The Gambling Commission also clarified that where an application is considered incomplete, it will write to the applicant informing them of the information that is missing and give them 10 working days to provide it. The application will be rejected only if the information is not provided within that period. With regard to the suggestion that applicants should be able to engage with the licensing department prior to and during the licence application process, the Gambling Commission commented as follows:

“Suggestions that applicants should be able to engage with the Licensing team are noted. Engagement currently takes place through the application process however pre-application support is necessarily limited to general advice. The Commission is responsible for assessing and making decisions about applications and there would be a clear conflict of interest if we assist applicants by providing more detailed support and advice beyond the general advice. The Commission’s current fee structure supports our licensing, compliance and enforcement work but does not extend to pre-application services.”

Our view: As noted in our blog on 1 December 2021, the Gambling Commission’s position on rejection emphasises the critical importance of submitting full applications, whether they relate to new licences, variations of existing licences or changes of corporate control. The Gambling Commission often requests complex information in support of such applications including information relating to third parties – such as current or former beneficial owners and those providing funding to the business – that can prove difficult to provide within a 10 working day period. Although it is positive that the Gambling Commission is looking to improve the information and guidance available on its website so that the average applicant has better insight in terms of what is required, its efforts are yet to be seen given, at the time of writing, the Gambling Commission’s information requirements on its website differs from the application portal!

The skills and expertise of specialist gambling lawyers are key to ensuring the best chance of success and securing a licence as quickly as possible. Please get in touch if you would like assistance with any licence applications.

Proposal 3. Persons relevant to a licence application

Proposal: Policy to include further examples of persons relevant to an operating licence application: namely, shadow directors, persons or other entities who are controllers of the applicant and/or those that are its ultimate beneficial owners.

Respondents’ views: Although most respondents agreed with the proposal, others asked for further examples and guidance on who could be considered relevant persons, noting that the current examples gave the Gambling Commission significant discretion.

Gambling Commission’s position: The proposal was implemented using slightly different wording – see below. In response to comments that the wording gave the Gambling Commission significant discretion, it commented as follows: “The Gambling Act 2005 (the “ Act”) necessarily gives the Commission discretion as to who are considered relevant persons. It is an applicant’s responsibility to identify who might be relevant, bearing the Policy in mind, but the Commission will, on a case-by-case basis, identify and ask for information about who it considers may be relevant persons not identified by an applicant”.

Amended paragraph 3.10 (changes to proposal highlighted):

3.10 In considering operating licence applications the Commission will include assessment of the suitability of those persons considered relevant to the application. The persons considered relevant may vary depending on the information provided in the operating licence application and on company structure, but are likely to exercise a function in connection with, or to have an interest in, the licensed activities. It may also include shadow directors, persons or other entities who, whether or not likely to exercise such a function or have such an interest, are shadow directors, who are controllers of the applicant and/or those who are its ultimate beneficial owners. General guidance on who may be considered relevant is available on the Commission’s website and in regulations.

Our view: As noted in our blog on 1 December 2021, the Gambling Commission’s position on relevant persons highlights the importance of applicants and licensees ensuring their stakeholders – especially the owners of the business and those funding it – understand the relevant gambling law, regulatory and licensing requirements of being licensed in Great Britain, the Gambling Commission’s assessment process, and its wide discretion to request any information it considers relevant.

Proposal 4. Timescale for using a new licence

Proposal: Policy to clarify that the Gambling Commission will consider whether an applicant will use its / their licence within a reasonable period.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

the term ‘reasonable’ is subjective and should be clearly defined, for example 3 months;
the Gambling Commission should consider how long it may take a business to get certain things into place, for example banking arrangements;
the Gambling Commission should clarify whether this only applies to personal licence applicants who work for a company rather than act on a consultancy basis; and
personal licence holders may be between jobs that require a personal licence.

Proposal 4. Timescale for using a new licence

Proposal: Policy to clarify that the Gambling Commission will consider whether an applicant will use its / their licence within a reasonable period.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

the term ‘reasonable’ is subjective and should be clearly defined, for example 3 months;
the Gambling Commission should consider how long it may take a business to get certain things into place, for example banking arrangements;
the Gambling Commission should clarify whether this only applies to personal licence applicants who work for a company rather than act on a consultancy basis; and
personal licence holders may be between jobs that require a personal licence.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission rejected comments that a reasonable period should be defined because this would be considered on a per case basis. In respect of personal licence holders, the regulator maintained its position that personal licence applicants would be required to be employed in a role that requires a personal licence within a reasonable time.

Our view: Whilst it is unhelpful that the Gambling Commission has not defined the meaning of reasonable, in our view, the general expectation is that an operating licence is used within 6 to 12 months to demonstrate a genuine need for it, although this is not set out in the Policy and as the Gambling Commission notes it depends on each licensees’ circumstances. The consultation response suggests that the Gambling Commission may be moving away from granting personal licences to those providing consultancy services to gambling businesses, which would be welcomed news.

Proposal 5. Clarification on suitability criteria

Proposal: Policy to include further information on how the Gambling Commission assesses the suitability of an applicant to hold an operating licence.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. further examples and guidance are needed on who could be considered relevant persons and definitions of ‘shareholder’, ‘beneficial owner’ etc., and how suitability is assessed;
2. public companies do not choose their shareholders or who owns stock, suitability should focus on board and management team; and
3. the Gambling Commission should take a balanced and risk-based approach as some connected individuals may already be approved or regulated by another regulator.

Gambling Commission’s position: In the updated Policy, the Gambling Commission make what they refer to as a “minor amendment” – see below. With regard to requests that it take differing approaches with public (vs. private) companies and for any applicants / individuals that are regulated elsewhere, the Gambling Commission’s response was as follows: “It would not be appropriate to differentiate between public and private companies; the suitability criteria apply to all applicants although the Commission will take a risk-based and proportionate approach when applying the criteria. This includes whether individuals or entities are already approved by the Commission or another regulator.”

Amended paragraph 3.13 (changes to proposal highlighted):

3.13 When considering the suitability of an applicant the Commission will look beyond the applicant itself and may for example consider those connected with the applicant such as • persons relevant to an application by reason of their being likely to exercise a function in connection with; or likely to exercise such a function or have such an interest in the licensed activities;, • are shadow directors;, • persons or other entities who are controllers of the applicant;, and/or • ultimate beneficial owners. In respect of the applicant and others connected with the applicant the Commission has regard to the following elements and seeks evidence to support and enable an assessment to be made against each one:

- - Identity and ownership – This includes the applicant’s transparency in relation to the beneficial ownership of the applicant and those who finance and profit from its operation.
  - Finances – For operating licences this will include the resources likely to be available to carry out the licensed activities and the legitimacy of the source of the capital and revenue finance of the operation.
  - Integrity – Honesty and trustworthiness. Willingness to comply with regulatory responsibilities, uphold the licensing objectives and work cooperatively with the Commission.
  - Competence – Experience, expertise, qualifications, and history of the applicant and/or person(s) relevant to the application. Ability to comply with the regulatory responsibilities, uphold the licensing objectives and work cooperatively with the Commission
  - Criminality – criminal record of the applicant and/or person(s) relevant to the application.

Our view: The Gambling Commission’s unwillingness to tailor its information requirements when dealing with public (vs. private) companies will frustrate many, including us, as this is something we have lobbied on for many years. Publicly traded companies are subject to usual and regular trading on the public market and are generally regulated by both a securities regulator (such as the US Securities and Exchange Commission) and the national stock exchange (such as the New York Stock Exchange). By their very nature, their ownership is ever-changing and subject to market volatility meaning it can fluctuate daily or even hourly. In certain cases, applicants/licensees, or their ultimate parent companies, that are publicly traded, are simply unable to comply with the Gambling Commission’s information requirements, which are sometimes without gambling law, regulatory or licensing basis. We have significant experience dealing with such issues; please get in touch if you would like advice.

We also note that, while removing the bullet points in the first list in paragraph 3.13, the Gambling Commission has removed the reason why the applicant may be considered connected (i.e., by having an interest in the licensed activities). A typo or just lazy draftmanship? Unfortunately, this adds ambiguity to a section of the Policy which is already prone to wide interpretation.

Proposal 6. Requirement to provide evidence of source of funds

Proposal: Policy to confirm that the Gambling Commission will request evidence of the source of finance for a new gambling business at the application stage in order to satisfy itself the operation is not being financed by the proceeds of crime and that profits would not be used to fund criminal activity.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. it would be beneficial to include examples of documents that would satisfy evidence requirements;
2. use of word ‘tainted’ is pejorative;
3. there should be specific mention of terrorist financing and sanctions; and
4. the reference to the Gambling Commission being ‘fully satisfied’ may indicate that it is going beyond its scope in terms of acting reasonably and proportionately in line with legislation.

Gambling Commission’s position: In this instance, the Gambling Commission took comments regarding the phrase “tainted by illegality” into account and replaced it with wording more closely aligned with the first licensing objective – see below. The first paragraph of the proposal was implemented as originally drafted. The Gambling Commission was clear in its response that it does not intend to provide further examples of documents that satisfy its evidence requirements. It also reiterated its policy to take a “risk-based and proportionate approach, including in respect to the amount and detail of information an applicant is required to provide.”

Amended paragraph 3.28 (changes to proposal highlighted):

As stated above, the Commission will also wish to be satisfied as to the sources of the applicant’s finance to satisfy itself that such funds are not ~~tainted by illegality~~ associated with crime or disorder.

Our view: As noted in our blog on 1 December 2021, it has long been the Gambling Commission’s policy to request evidence from applicants to satisfy itself that the business will not be financed by the proceeds of crime or used to finance criminal activity. Such requests unfortunately, often meet resistance as stakeholders, particularly institutional ones, are reluctant to share information on funding structures and/or individual investors – so it has been unhelpful that until now, there has been little mention of the regulator’s requirements in its policy documents. We therefore welcome this change to the Policy as it at least now reflects the Gambling Commission’s practices and will therefore put potential licensees (and their stakeholders, to the extent they are adequately informed) on notice that the regulator will, in detail, query and request evidence relating to, the source of finance for the proposed business. Please get in touch if you have any questions regarding the financial evidence that needs to be provided to the Gambling Commission.

Proposal 7. Clarification that licensees have ongoing reporting obligations

Proposal: Policy to include examples of the types of matters that should be notified to the Gambling Commission from time to time including changes in ownership/control, regulatory returns and licence variations if a licensee is likely to exceed its fee category.

Respondents’ views: Although most respondents agreed with the proposal, some noted that:

1. further examples could be added, for example changes to corporate and/or governance structures, change of name and/or organisation, changes to ‘natural persons’ benefitting from the gambling operations, all key events etc.;
2. the Policy suggests the onus is on the applicant to self-police the correctness of the licence when the Commission is operating for this specific reason; and
3. content in new paragraph is already covered elsewhere, for example in the Licence Conditions and Codes of Practice (“LCCP”)so not needed here and there is no rationale to explain the inclusion.

There was also a suggestion that licences should have an expiry date and require review (at the applicant’s cost) on a periodic basis.

Gambling Commission’s position: The original proposals were implemented as drafted. The Gambling Commission rejected requests for further examples claiming that the inclusion of examples was not intended to provide an exhaustive list of all matters that the licensee should report. The regulator acknowledged however, that the examples cited were already set out in the LCCP and/or on its website but complained that “some licensees are not reporting these changes, submitting regulatory returns, or submitting variation and/or change of control applications in the required timescales. We remain of the view that the addition of some key examples highlights to licensees the importance of these matters and, by extension, the importance of reading and understanding their licence conditions thoroughly and putting in place mechanisms to comply”. The regulator further noted that licences do not have an expiry date and a change of this nature would require an amendment to the 2005 Act.

Our view: It is essential that licensees consult the LCCP to understand their reporting requirements, including what types of changes in ownership/control are reportable as key or other reportable events. We agree with the Gambling Commission that all too often, we hear stories of licensees notifying the regulator months or years after changes of corporate control have occurred and/or a licensed entity has exceeded its fee category. It is important that licensees have controls in place to monitor such activities and ensure compliance with requirements. This is critical if a change of corporate control may have occurred given the risk of revocation for non-compliance with section 102 of the 2005 Act. Please get in touch if you have any questions regarding reporting requirements to the Gambling Commission.

Proposal 8. Minor updates to reflect changes in internal policies

Proposal: Several minor updates to the Policy.

Respondents’ Views: Respondents made a number of comments in connection with these changes including the following requests:

1. that online guidance be made available as a complete document;
2. that the Gambling Commission further define company structure and give further details about whether this means within the licensed entity group or the full group structure; and
3. that the Gambling Commission’s expectations on revenue from other jurisdictions be made clearer.

Gambling Commission’s position: The Gambling Commission acknowledged comments that online guidance would be better placed in one downloadable document and confirmed that “this improvement will be explored in the new financial year, as part of continuous improvement, and taken forward as soon as practicably possible”. Requests for more clarification on company structure were however, refused on the basis that this is a policy document and company structures can vary enormously. There was no response to the request for revenue notification requirements to be made clearer.

Our view: We look forward to the day when online guidance can be downloaded into one downloadable document – but query how long this will take. As an aside, we also agree with the Gambling Commission’s observation that company structure can vary enormously. If you are in any doubt regarding disclosure requirements, please get in touch with us and at an early stage if you are submitting an operating licence application to the Gambling Commission.

The changes to the Licensing, Compliance and Enforcement Policy Statement took effect on 23 June 2022. Please get in touch with us if you would like assistance on any licensing matters.

10Nov

The Legal 500 Country Comparative Guide 2022 – Gambling Law

10th November 2022 Adam Russell 20

Partner Bahar Alaeddini acted as the contributing editor, and together with Associate Francesca Burnett-Hall jointly contributed the UK chapter, to The Legal 500: Gambling Law Comparative Guide (the “Guide”).

UK Chapter Download

The esteemed publication (which currently spans 16 jurisdictions) provides an overview of gambling law, regulatory and licensing requirements in the UK, including: key gambling legislation; types of gambling licences with the associated application procedures; prohibited gambling products; gambling advertising; marketing affiliates; penalties for unlawful gambling; Licence Conditions and Codes of Practice; relevant anti-money laundering requirements; responsible gambling requirements; shareholder reporting and approval thresholds; enforcement powers; and tax rates. A critical commentary on key trends affecting the gambling industry is also covered.

The Guide provides readers with the opportunity to compare jurisdiction here.

11Oct

Gambling Commission Special Measures: Trick? or Treat?

11th October 2022 Julian Harris 18

For better or worse, a number of licensees have now experienced the Gambling Commission’s special measures process. Although we remain of the view that much greater informal engagement by the Gambling Commission with individual licensees would be preferable and appropriate when compliance issues are identified, it was encouraging to note the Gambling Commission introducing a less draconian form of engagement than commencing a licence review under section 116 of the Gambling Act 2005 (“the Act”). We now examine those measures, the implications for licensees and whether a cautious welcome for the new process is justified.

The background

Following the completion of an operating licence review under the Act, the Gambling Commission have specifically granted powers to:

suspend or revoke an operating licence
attach an additional condition to an operating licence
give the holder of an operating licence a warning
require the holder of an operating licence to pay a financial penalty.

To that armoury the Gambling Commission have added certain lesser measures over the years since the Act came into force, including issuing advice as to conduct to licensees.

Whilst the Gambling Commission say in their Enforcement Report for 2020 to 2021 (the 2021 Report”) that these measures served a useful purpose, they did not always result in swift intervention and remediation.

To counter this, as part of its regulatory toolkit, from September 2020, the Gambling Commission piloted the use of special measures, “to bring operators to compliance at pace” following the identification of failings during a compliance assessment. The 2021 Report stated that the pilot scheme was used in relation to eight licensees.

In the 2021 Report, the Gambling Commission explain that the special measures process was introduced for “isolated situations” where the Gambling Commission had a high level of confidence that, for example the licensee had accepted its failings, as identified by the Gambling Commission and is committed to raising standards.

Of late, those situations have become less isolated and have become more common in their application to licensees where, whilst there have been infractions or failings, there has been no criminal spend, serious consumer harm, or systematic failure to comply.

The current position

The new special measures process formed part of the consultation for the revised Licensing, Compliance and Enforcement Policy Statement published on 23 June, 2022. The process is now embodied in and included as part of that revised official Gambling Commission policy without any changes from the pilot scheme previously being trialled.

The requirements

If considered appropriate by the Gambling Commission, the process of special measures is commenced following a compliance assessment in which serious failings are identified. The Gambling Commission explains in the 2021 Report that “special measures are appropriate where the licensee has reached the threshold for a section 116 review but determines a very high level of confidence that there is no, or limited, ongoing risk of consumer harm, with demonstration of early acceptance of failings and a clear, proactive commitment to swiftly remediating the failings.” In order to qualify for the special measures process, the licensee must meet the following requirements:

the licensee must acknowledge and accept the failings;
a formal action plan detailing improvements to be made must be submitted within five days; this plan should implement controls that immediately mitigate the risk of consumer harm; and
key persons must attend a formal meeting and explain why there are failings and what will be done immediately to mitigate the risk of consumer harm.

The process

The Gambling Commission will consider the submitted action plan and decide whether it appears acceptable. A further short extension may be given if some alterations are required (not more than two days) to enable agreement on the suggested revision. Thereafter, the licensee is required to adhere to the following requirements and timetable:

report weekly on the progress against the action plan and meet the deadlines proposed
complete the action plan within three months
pass a further compliance assessment after three months
calculate how much they have financially benefited from non-compliance and propose how they will divest themselves of this amount.

Cases which the Gambling Commission do not consider suitable for special measures will not enter this process and will be subject to the usual suite of regulatory action. Where there is evidence that consumers may be at significant risk of harm, the Gambling Commission will consider suspending licensable activity immediately and special measures will be deemed inappropriate.

If the licensee fails to agree an action plan, or fails to implement the agreed action plan, the Gambling Commission is likely to proceed to review the licence. Importantly, the Commission specifically state that “compliance with the action plan does not prevent the Commission from reviewing the licence in any event, but that such compliance will be treated as a mitigating factor”: this point is dealt with further below. Where the licensee has fully complied with the action plan, it may request release from Special Measures. The Gambling Commission will consider such a request following a further compliance assessment.

Treat?

The process of special measures deserves a cautious welcome, especially if the alternative is a full licence review, with all that entails for licensees: the cost, the length of the review, the management time involved, the potential for substantial financial penalties, warnings, public statements, as well as the ever-present threat of suspension or even loss of licence. Against that background, the alternative of special measures is an attractive one.

For licensees, a further advantage of the process is that the Gambling Commission cannot impose either a financial penalty or warning. However, they will usually expect a divestment proposal, which we address below.

From the Gambling Commission’s perspective, the process produces quick results in relation to perceived failures in compliance, particularly in relation to anti money laundering and safer gambling issues, specifically in securing the lowering of thresholds. The nature of the process means considerably less work for the Gambling Commission, but this applies also to licensees, many of whom have now been through the process.

It is well known that the Gambling Commission has concerns throughout the industry with the level of customer losses before customer interactions, affordability (often linked to AML) or EDD enquiries are undertaken. The special measures process is a much less formal one than a licence review and can be less antagonistic. It goes some way to answer the call from many independent advisers to the industry, including Harris Hagan, for greater opportunity for discussion between regulator and licensee to resolve issues, though, as we have said, there is more to be done in this regard.

In our experience, the meetings are relatively good spirited, with the Gambling Commission sticking mainly to the points raised in the findings letter following the compliance assessment, looking for broad insight into the failings identified, and seeking to understand what actions have been and or are being taken to address those concerns. Given that the licensee will have submitted an action plan by the time of the meeting, it can serve as a sensible agenda for discussion in the meeting.

Trick

Whilst special measures may not be a Trojan horse, neither are they a gift horse. Inevitably there are downsides and traps for the unwary. The special measures process is not in reality an attempt by the Gambling Commission to “trick” licensees. However, there are difficult decisions to be made during the process, for which careful judgement is required.

A licensee may refuse Special Measures; however, this would probably mean that the licensee, based on the identified failings, would be subjected to a review of its licence. As part of that review process, the Gambling Commission would want to understand why the licensee was unwilling to work to achieve compliance quickly. Such a refusal could be prejudicial to the outcome of the review, so a compelling explanation would need to be offered.

There is also potential risk associated with the necessary acceptance of alleged failings, as well as in the preparation of an action with remedial measures. Both may result in the licensee admitting more and promising more than it necessarily agrees with. There is no option to challenge alleged failings without the attendant risk of a licence review, where the Gambling Commission’s findings can be challenged in the licensee’s representations. Therefore, there is potential prejudice for the licensee’s position should a licence review follow.

As mentioned above, there is no power for the Gambling Commission to impose a financial penalty or warning as part of the process, but only where a licence review has been commenced; however, there is an expectation for divestment where there is a finding of potential harm to customers. Any proposal for divestment is therefore voluntary, but that proposal must be balanced against the risk of the Gambling Commission deciding to commence a review.

The Gambling Commission will not only expect a quantum assessment, but also a report setting out how that quantum has been reached. It is important that this report is carefully considered as (1) it needs to be realistic and justifiable (2) it needs to meet the Gambling Commission’s expectations, (3) with an eye on the risk of regulatory action, licensees will not want to acknowledge and divest for failings beyond those with which they agree, and (4) it is important that any divestment is no more than strictly necessary. This is because, in the event of a future licence review, this could result in a financial penalty and an attendant risk of having to pay twice for the same failings.

There is no formal methodology for calculating any proposed divestment. Identifying an appropriate figure is best achieved through judgement and experience, combined with an analysis of the findings identified. Here lies the conundrum: start too low and the figure may be interpreted by the Gambling Commission as not demonstrating sufficient insight into alleged failings and/or that it may aggravate the Gambling Commission. Go too high and the point at (4) above may apply.

Formulating the correct approach therefore requires careful thought; it will vary according to the circumstances and to the nature and extent of the Gambling Commission’s findings: identifying an appropriate figure is best achieved through judgement and experience, combined with an analysis of the findings identified.

It should also be remembered that special measures can be an interim process: it is not a fixed alternative to a licence review, which remains an option available to the Gambling Commission. It may follow up both in relation to proposed actions and divestment. Most frequently, the greatest difficulty often is satisfying the Gambling Commission as to the level of thresholds in operation, or in relation to proposed divestment in relation to certain customers.

But the greatest risk is that a licensee fails to meet the Gambling Commission’s expectations at the three-month revisit and assessment. This inevitably risks the threat of suspension and/or the commencement of a licence review.

Licensees should be aware that in the event of an unsuccessful special measures process, with a subsequent licence review, the Gambling Commission may seek to introduce failings identified on the first assessment. It is therefore important that in carrying out this exercise, a licensee does not provide the Gambling Commission with the opportunity to point to comments or admissions made during the special measures process in any subsequent review process.

Final word

In conclusion, our view is that perhaps two cheers, rather than three, are raised for special measures; the new process is often effective both for the regulator and for the licensee. However, the licensee should always bear in mind that a licence review may follow, and act accordingly. Great care needs to be taken from the very beginning. Our advice to licensees is therefore to seek legal advice as soon as notification of special measures is received from the Gambling Commission.