18Jul

Customer interaction guidance for remote gambling licensees (formal guidance under SR Code 3.4.3)

18th July 2022 David Whyte 11

Following its announcement, in April 2022, of the introduction of a new Social Responsibility Code Provision (“SRCP”) 3.4.3 that comes into effect on 12 September 2022, the Gambling Commission (the “Commission”) published its customer interaction guidance – for remote gambling businesses (formal guidance under SR Code 3.4.3) (the “2022 Guidance”) on 20 June 2022, which comes into effect at the same time as SRCP 3.4.3. To date the Commission has made no reference to the revision of its guidance for premises-based businesses and therefore those licensees remain in the dark about any changes that may be introduced in the future.

However, the Commission’s reference to “[n]ew consumer protection guidance” in the press release for the 2022 Guidance demonstrates further its self-driven evolution into a consumer protection body and, given that the requirements set out in SRCP 3.4.3 require action across licensees’ entire customer base, the Commission’s reference to “new rules on action for at risk customers” in the release for the new SRCP is a further indication that the Commission considers all gamblers to be “at risk”. It is therefore likely that revisions to the requirements for premises-based licensees will follow. As we know from the affordability issue, whether formal inclusion of these licensees occurs or not, the Commission is not averse to applying guidance to the entire industry. As we have explained before, the Commission’s approach is difficult to reconcile with the licensing objectives set out in section 1 of the Gambling Act 2005 (the “2005 Act”) and in the Commission’s statutory obligations under section 22 of the Act:

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

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

The Commission is not charged with protecting all consumers, however admirable that may be; it could be the purpose of an ombudsman if appointed as part of the changes to gambling legislation. It was certainly not the intention of Parliament when passing the 2005 Act that the third licensing objective – “protecting children and other vulnerable persons from being harmed or exploited by gambling” apply to all customers who, at some point in time, may be “at risk”.

The 2022 Guidance, which we recommend licensees review in detail, reveals an apparent ignorance on the Commission’s part of various concerns that have been raised in the past about its approach, thereby exposing it to the risk of challenge. This article does not attempt a detailed critique of the entire 2022 Guidance; rather we have sought to identify the most salient points which we believe may have the greatest impact on licensees, or where we believe the Commission’s approach is misconceived.

Section A – General requirements

Paragraphs 1 and 2 – Formal guidance?

The Commission maintains its previous approach in paragraphs 1 and 2 of SRCP 3.4.3, requiring licensees to “embed the three elements of customer interaction – identify, act and evaluate”. Its replacement of the previous requirement to “interact” with a requirement to “act to minimise harm” illustrates its expectation that licensees do more than simply engage with customers and that tailored, proactive steps are taken to minimise the risk of harm.

The 2022 Guidance is more prescriptive than the existing guidance documents that the Commission has issued in relation to customer interaction, and it is certainly less outcome focussed. It requires licensees to undertake specific measures, for example that “licenses must understand that there are many reasons a person may be in a vulnerable situation” or that “licensees must identify customers that may be at risk of harm using all of the information available about the customer.” The use of words such as “must” and “required” have no place in guidance: they are the language of statute, conditions and codes of practice. We will leave for now the bigger issue that this prescription undermines the entire premise of the 2005 Act, which introduced a principles and risk-based system, as opposed to the prescriptive regime of the Gaming Act 1968 which it replaced.

It is of note that paragraph 2 requires that licensees “take into account the Commission’s guidance on customer interaction … as published and revised from time to time…” and that the Commission makes similar reference in the 2022 Guidance, stating that “for the purposes of raising standards, protecting customer interests, and preventing harm to customers, [we] will update and re-issue guidance.” It is intriguing how the Commission considers that future updates to guidance “intended to support compliance with LCCP SR code 3.4.3” can raise standards or prevent harm. Unless, that is, the Commission intends to use the “formal” 2022 Guidance to implement “formal” requirements.

For a number of reasons, the Commission’s attempt to make a silk purse out of a sow’s ear is evident from the questionable foundations upon which the evolved 2022 Guidance is based. Firstly, and somewhat unsurprisingly, the Commission continues to ignore previous concerns raised, not least by us, about its use of guidance: guidance that enables the Commission to outline its expectations to licensees to assist their understanding of licence conditions or codes of practice is sensible. However, the Commission continues to introduce formal requirements through its use of guidance and without consultation, which is wrong. The Commission’s powers are controlled by statute and are therefore the preserve of Parliament. The 2005 Act requires that the Commission must consult before specifying a licence condition (section 76) and before issuing or revising a code of practice (section 24). Guidance must therefore be easily distinguished from a licence condition or code of practice (including those that carry the weight of a licence conditions such as SRCP 3.4.3) and should not prescribe additional requirements.

The distinction is not more apparent than real. Aside from the fact that it exceeds the Commission’s powers to introduce a licence condition or code of practice without consultation, by using guidance which should only be explanatory rather than mandatory, the distinction has very different consequences. Breach of a licence condition or code of practice carrying the weight of a licence condition is a criminal offence and allows the Commission to prosecute or resort to its full armoury of penalties through licence review. By contrast, licensees must “take into account” guidance and therefore not following it should not be an automatic breach. It is therefore wrong, and confusing, for the Commission to include specific requirements in the 2022 Guidance, particularly when it has very recently consulted on the introduction of SRCP 3.4.3 and has thus had the opportunity formally to introduce whatever further formal requirements it wished at that time. Reference to “formal” guidance in the title of the 2022 Guidance is indicative that it knew what it was doing.

Secondly, if the Commission is willing and able to circumvent statutory controls now, and not for the first time (it introduced its Covid-19 guidance very quickly and not alongside a change to the SRCP or consultation), it is likely to do so again. This leaves licensees and other stakeholders exposed to the risk of further change without fair notice or the ability to challenge.

Thirdly, whilst it may seem somewhat hypocritical to challenge now this prescription when licensees have been desperate for clarity for many years, a more thorough analysis of the 2022 Guidance reveals that, despite it being more prescriptive, it is unlikely to provide licensees with the clarity that they desire and will certainly lead to a continuance of the ‘flexible interpretation’ experienced by licensees during compliance assessments and subsequent regulatory investigations. One might argue that, like licensees, the Commission has also struggled to identify what specific controls and thresholds will adequately identify who might be at risk of harm and balance those controls against the freedom of choice.

It seems that in recent times, guidance, formal guidance and licence conditions have become one and the same thing in the belief of the Commission, the only difference being that the former two contain requirements that the Commission have found inconvenient.

Section B: Identify

Paragraph 3 – Transforming vulnerability

Paragraph 3 requires that “Licensees must consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified. Licensees must take account of the Commission’s approach to vulnerability as set out in the Commission’s Guidance.” Prior to the publication of the 2022 Guidance, the wording of paragraph 3 indicated that the Commission may have taken a step back from its intention, set out in its consultation, to require that licensees “take account of its definition of vulnerability”. However, it is clear in the 2022 Guidance that this is not the case: the requirement remains but it is drafted more subtly. The Commission sets out in “Aim 3” (which reads as more of an obligation than an aim – a theme that runs throughout the 2022 Guidance) that “[we] require operators to take action when they are aware that a customer is in a vulnerable situation”, and sets out its own definition of a vulnerable person as

“somebody who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”.

The Commission requires (amongst other things) that “licensees must understand that there are many reasons a person may be in a vulnerable situation…” explaining that a vulnerable situation “can be permanent, temporary or intermittent, and may be related to health, capability, resilience, or the impact of a life event such as a bereavement or loss of income”.

In recent years the transformation of what the Commission considers to be “vulnerability” is bewildering. Parliament clearly considered the interpretation of vulnerability a straightforward matter: it did not find it necessary to include a statutory definition in the 2005 Act. This is understandable: as we have discussed previously, the reference in the third licensing objective firstly to children, and then to other vulnerable persons, adequately set out Parliament’s intention that the licensing objective apply to those people who are not able to make properly informed or ‘adult’ decisions.

Most worrying, however, is that vulnerability as now defined, is to be determined by whether a “firm”, which we understand to mean a licensed operator, is “acting with appropriate levels of care”. Given that the decision about whether a licensee has acted with “appropriate levels of care” rests with the Commission, it seems that vulnerability will be determined subjectively by the Commission, in hindsight, most likely during compliance assessments, and based primarily on a licensee’s actions and controls in relation to each individual customer. In referring to those “appropriate levels of care” the Commission also suggests incorrectly that licensees have a duty of care at law to prevent customers from gambling if they are or might be vulnerable and risks improperly seeking to introduce such a duty in law, or at least exposing licensees to such a challenge based on its definition.

Matters are likely to become further complicated when the Commission launches its further consultation on the ways to tackle what it considers to be three key financial risks for consumers: binge gambling, significant unaffordable losses over time, and risks for those who are financially vulnerable (the “Financial Risks Consultation”). Licensees who are hoping that this consultation will provide clarity about affordability expectations may be disappointed and faced with a further definition to consider, this time of “financial vulnerability”. Based on its current approach, the Commission is likely to permit itself a similar level of hindsight, the focus of its decisions being on action taken and controls implemented.

The Commission apparently considers itself lawmaker on a par with Parliament: it will determine who is and who is not vulnerable, and will further amend its definition without consultation, whenever it sees fit.

Paragraphs 4 and 5 – Affordability?

Paragraphs 4 and 5 require licensees to “have in place effective systems and processes for monitoring customer activity” and set out a range of indicators which must be operated by licensees. The 2022 Guidance expands on these requirements, making it clear that the Commission expects a mix of automated and manual processes and that systems should “draw on all available sources of data”.

The 2022 Guidance does nothing to clarify the uncertainty about affordability, with the Commission’s position largely replicating the previous guidance. In setting out examples of indicators which should be used by licensees (some of which have now been made requirements) the Commission refers to “[A]mounts spent compared with other customers, taking account of financial vulnerability”. It is of note that in its reference to the Financial Risks Consultation, the Commission indicates that further “guidance” will follow. Again, given that the Commission has considered it necessary to define “vulnerability”, this is an indication that a further definition for “financial vulnerability” seems likely.

Section C – Act

Paragraphs 8, 9, and 11 – An absence of prescription or guidance?

These paragraphs require that licensees take “appropriate action in a timely manner when they have identified a risk of harm” and that this action is tailored “based on the number and level of indicators of harm exhibited.” The 2022 Guidance obliges licensees to have a suite of actions in place ranging from “early generic action” to “very strong” action (this essentially amounting to ending the business relationship). The Commission does not, however, specify which indicators of harm it considers lower level and which it considers strong. Rather, strong indicators must be “defined within the licensees’ processes”. Prescription, when most likely to be helpful, is absent. The resulting inevitability of inconsistent standards and expectations being applied during compliance assessments will further frustrate licensees.

The requirement not only to “implement automated processes”, but also when those automated processes are applied to “manually review their operation in each individual customer’s case” is burdensome, impracticable, counterproductive and undermines the benefits of automation. The limited guidance – in its true sense – in relation to this requirement and the lack of clarity about when any manual review must take place, is indicative that the Commission has not considered fully how it is “consistent with data protection requirements”.

Section D – Evaluate

Paragraphs 12, 13 and 14 – Impact?

Evaluating the impact of each customer interaction is no easy task. As licensees have already experienced, it doubles the operational impact, with additional and equivalent resource required to follow up on the original interaction. The Commission fairly points out in the 2022 Guidance that “not every customer who receives an interaction will require a follow up” however it overlooks the fact that not every interaction will require evaluation. The Commission states that “by impact we mean a change in the customer’s gambling activity which could be attributed to the interaction”. 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. Some customers will, for various reasons, simply continue to gamble at previous levels, or may even increase their spend, particularly if they are winning (as is commonplace when most people gamble). This is certainly not always an indicator of harm. This lack of clarity will mean that licensees will continue to feel obligated to ensure that on every occasion they interact with a customer they see a change in behaviour, and where this is not the case will feel bound to take further action whether or not any such action is wanted by a customer or thought necessary to prevent harm.

The requirement that licensees evaluate the effectiveness of their overall approach maintains the current requirements, however the Commission sets out in more detail its expectations. The new obligation to “take account of problem gambling rates for the relevant activity published by the Commission in order to check whether the number of customer interactions is, at a minimum, in line with this level” is something of a step away from the tailored approach of other requirements in SRCP 3.4.3 and the 2022 Guidance. To avoid criticism, licensees will need to be acutely aware of any updated publication of problem gambling rates by the Commission, however questionable that data may be, and ensure that this is reflected in their approach.

Conclusion

Whatever the Commission’s intention, and however strongly it feels that licensees are not going far enough to protect consumers, it is vitally important that it acts within its statutory remit. Not for the first time, the 2022 Guidance reveals a willingness on the Commission’s part to act beyond its powers, this time under the guise of the new SRCP and its intention to introduce “stronger and more prescriptive” rules. The Commission’s willingness to continually use guidance as a means of introducing formal requirements through the back door is concerning and it may only be a matter of time before it faces challenge. In the meantime, licensees should ensure that they take steps to ensure that they are able to adhere to both the SRCP and the 2022 Guidance to mitigate the risk of regulatory action.

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

07Jul

The Affordability Debate (4): The Commission Unmasked

7th July 2022 Julian Harris 22

Readers may recall the three articles we have previously written analysing the Gambling Commission’s (the “Commission”) covert operation to introduce a requirement on operators to conduct evidenced affordability checks. Whilst we cannot claim that it is as a result of those publications, it is encouraging that the Commission has finally and “officially” been taken to task on this controversial issue by no less a body than the Digital, Culture, Media and Sport (the “DCMS”) Committee of the House of Commons (the “Committee”). On the penultimate day of the Committee’s Inquiry on What next for the National Lottery? (30 June 2022), the Committee heard evidence from Commission CEO, Andrew Rhodes and its Executive Director, John Tanner. Whilst much of the questioning by the Committee related to the subject matter suggested by the title of the Inquiry, the Committee then turned to the subject of affordability checks and then customer interaction.

We can all sympathise with being taken off guard by unanticipated questioning, but less so with Mr Rhodes’ apparent denial of responsibility for, or even knowledge of, matters that occurred before his appointment, especially in relation to such a critical issue for consumers and the industry.

Even less worthy of sympathy was his apparent inability to explain the relationship between the newly published Customer interaction guidance – for remote gambling licensees, the November 2020 Consultation and call for evidence – Remote customer interaction (the “Consultation”) on which the Committee interrogated Mr Rhodes, and the issue of affordability which was the basis for the questioning. This is particularly the case given that the core and most contentious of the Commission’s ever evolving proposals in relation to affordability, the introduction of mandatory financial thresholds for affordability checks, was introduced in the Consultation.

Secrecy v transparency

To quote Jeremy Bentham, “secrecy, being an instrument of conspiracy, ought never to be the system of a regular government.” summarises neatly the Committee’s displeasure – to put it mildly – at the Commission’s failure to publish the results of its Consultation. As the Chair, Julian Knight MP, put it:

“This is important work. Affordability and affordability checks are of great public interest. It seems to be very strange that this has not been made publicly available. I do not know what is so secret about it that it needs to be handed over covertly to DCMS and then inform the White Paper. We have a right to see it as well and so does the general public, because we pay for you.”

Mr Rhodes denied knowledge of the reasons, on the basis that it pre-dated his appointment. Now that he has been the CEO for a year, one would expect that he knew, or ought to have known, about the Commission’s handling of an important document relating to a key Commission policy that has been disclosed to DCMS, which has been the subject of numerous licence reviews conducted by the Commission, is of critical importance to those whom the Commission regulates and to consumers, and which has been the subject of very substantial commentary. As the Chair commented:

“It does seem to be very strange that you should announce a consultation in November 2020 on such an important area, which frankly does need scrutiny more widely than just DCMS and the Department, and that was not released publicly. I thought that would be of interest to parliamentarians, rather than for it just to be handed covertly to officials at DCMS. That seems a very strange approach and lacking in transparency, frankly.”

Strange indeed. A lack of transparency on the part of the Commission has unfortunately permeated this issue; coupled with the Commission’s sleight of hand in introducing affordability requirements outside due process, this has left operators confused by the relationship between their regulatory obligations in law and the Commission’s expectations, as explained in more depth in our second article (The Affordability Debate (2): Ambiguous Regulatory requirements). Mr Rhodes again pleaded ignorance:

“I was not at the Commission at the time, so I am very happy to look at what the reasoning was for it not being published. My understanding since I have joined the Commission is that we have fed into the White Paper that affordability checks will be considered as part of the White Paper’s recommendations, rather than have essentially two bites at that.”

More disappointing is that he did not explain what the Commission is doing now in relation to affordability. Given that the Committee referred to this as being “such an important issue”, we consider this to be somewhat disingenuous: it does not reflect the degree of transparency which the Committee felt entitled to expect, nor to the level which the Commission expects of its licensees.

Realpolitik

As operators are painfully aware, the Commission has for some three years done rather more than, in the word of Mr Rhodes, “…fed into the White Paper…”. The Consultation was followed just three days later by the Compliance and Enforcement Report 2019 to 2020 (6 November 2020) (the “2020 Enforcement Report”). In fact, even earlier – in its Compliance and Enforcement Report 2018 to 2019 (27 June 2019) (the “2019 Enforcement Report”) – the Commission outlined various open-source data that may help licensees to “assess affordability for its GB customer base and improve its risk assessment and customer interventions.” In referring to the recommendations it made in the 2019 Enforcement Report, and considering customers who have “demonstrated gambling related harm indicators and been able to continue to gamble without effective engagement”, the Commission opined that: “Furthermore, these individuals have funded their gambling without satisfactory affordability checks and appropriate evidence being obtained.” [Emphasis added]. The 2020 Enforcement Report proceeded to outline various open-source data that can help licensees to “assess affordability for GB customers and improve [its] risk assessment and customer inventions”. Similar to the 2019 Enforcement Report, this data primarily focuses on average annual salary as outlined in the ONS survey of Hours and Earnings.

The core, critical “requirement” is that:

“Operators must interact with customers early on to set adequate, informed affordability triggers to protect customers from gambling related harm. Failure to do so could render the operator non-compliant.”

“Customers wishing to spend more than the national average should be asked to provide information to support a higher affordability trigger such as three months’ payslips, P60s, tax returns or bank statements which will both inform the affordability level the customer may believe appropriate with objective evidence whilst enabling the licensee to have better insight into the source of those funds and whether they are legitimate or not.” [Emphasis added]

The Commission takes the view that its Enforcement Reports serve as indicators to licensees of its expectations, for which licensees can be held to account; these reports therefore arguably contain policy positions that, if enforced, are more akin to licence conditions or code provisions. We have discussed previously our concerns that the Commission may be making indirect changes to licence conditions and/or code provisions through its introduction of requirements to adhere to guidance and this is perhaps another, somewhat broader, example of that. Aside from the fact that the Commission is not adopting a risk based and proportionate approach, the evidential basis for the Consultation included research in which customers admit to having sometimes lost more than they can afford, rather than their gambling being unaffordable. The Commission cite the Enforcement Reports as evidence in support of their proposed measures, when in fact the Enforcement Reports deal with “clearly unaffordable” gambling, whilst the proposed affordability constraints go far beyond customers losing tens of thousands, extending to affordability checks after lifetime losses of as little as hundreds of pounds; a point not missed by the Committee, when the Chair referred to “consumers potentially having to submit bank statements or tax returns to bet as little as £100 a month.”

We do not agree that the Enforcement Reports carry the weight of formal guidance. It is clear from the content of the Licence Conditions and Codes of Practice (the “LCCP”) that in cases where the Commission expects licensees to adhere to formal guidance, it says so. Social Responsibility Code Provisions 2.1 (anti-money laundering – casino) and 3.4 (customer interaction) are examples of the Commission explicitly requiring licensees to adhere to, or take account of, specific formal guidance. Nowhere in the LCCP is there any reference to the Enforcement Reports carrying such weight, as we have previously explained (The Affordability Debate (2): Ambiguous Regulatory requirements).

So, in the case of affordability, the Commission expects licensees to abide by a series of “requirements” none of which are clearly set out in licence conditions, codes of practice, or formal guidance issued by the Commission under its statutory remit, but in their Enforcement Reports and the existing Customer Interaction Guidance and more broadly the Consultation. Breach of a Code under section 24 of the Gambling Act, 2005 may properly be taken into account by the Commission in the exercise of its statutory function but acting contrary to whatever opinions it expresses in its Enforcement Reports, or in speeches, may not. There can therefore be no basis for the Commission, when raising safer gambling concerns, to refer to those Enforcement Reports in its compliance assessment findings, licence review threats or regulatory actions, as it is increasingly doing.

A Bridge Too Far

As licensees know from sometimes bitter experience, and as we explained in our second article on this subject, whilst the Commission has not formally imposed the proposals in the Consultation, it has sought to require operators to abide by them, or variants of them, referred to in its Enforcement Reports, by exerting pressure and threatening regulatory action for failing to implement affordability checks. This is clearly inconsistent, unfair and possibly exceeds its powers. Operators subjected to regulatory action have been pressured by the Commission to adopt affordability checks as if they were a legal requirement. The consequence, aside from placing them at a disadvantage to competitors, has been to create a climate of fear.

This has been exacerbated by confusion as to what the Commission actually requires. Moreover, despite the fact that the Consultation contains proposals for such checks to be applied solely to the online industry, the Commission is requiring such checks also from the land-based industry. The Commission has not merely pre-empted the Government’s decision, it has taken upon itself the role of Government and Parliament, i.e. that of lawmaker.

The whole truth

Mr Rhodes was unambiguous in saying that the issues relating to affordability checks “are something for the White Paper.”

Against the background explained above, it is reasonable to ask how he found himself able to make this statement. He was certainly correct in his pithy summary of how the Commission should have addressed affordability. However, he failed to explain that the Commission has been acting on many of the proposals on which it purported to consult for some three years, without reference to any higher authority. We find this strange indeed, not least given the Committee’s obvious interest and concern about the subject and the Chair’s statement that “affordability and affordability checks are of great public interest.” Given this “public interest” in the issue and the Committee’s concern as to lack of transparency on the part of the Commission, the Committee should have been informed of the Commission’s existing enforcement on the whole industry of affordability checks.

There is little point in speculating as to the reason for this absence, but it is reasonable to question whether (1) Mr Rhodes did not consider it relevant; (2) he was unaware of it and of the numerous licence reviews in which affordability has been an important feature; or (3) he chose not to mention it. If (1) obviously his view was misconceived; if (2) this would be a cause to question his grasp of the Commission’s work; and if (3) one wonders why not.

In the first article on affordability (The Affordability Debate: Protection, Responsibility and the Right to Choose), we commented that in disregarding the Consultation and pre-empting the results, the Commission had become the emperor that had no clothes. He has now been defrocked.

A question of trust

In conclusion, the Committee Chair asked Mr Rhodes if the Commission “have any measures or metrics in place to decide exactly how you are trusted by your licensees, for instance? Is there an overarching survey of that?” His answer was: “Not presently, no. There isn’t.” The answer from Mr Rhodes was correct: an answer that the Committee probably found disappointing.The fact of the question being asked hints at the possibility that the Committee considered there could be a negative response to such a survey.

There are stronger remarks that leave little doubt as to the Committee’s opinion; in questioning on metrics to determine whether the National Strategy to Reduce Gambling harms works, the Chair described the approach set out by Mr Rhodes as “very slipshod”. Having then heard Mr Rhodes admit there were no metrics to determine whether the £40 million spent does any good, the Chair concluded the hearing by saying:

“What do you do? There seems to be money going out the door and no accountability for that money, apart from when you make the award. This money just splashes out there and you have no idea in terms of what this impacts [sic] with the licensees. I am struggling to think precisely as an organisation how you are doing your job, because these seem to be key measures and indicators of whether you are successful.”

It is not for us to speculate on the views of licensees, who are quite able to make their views known themselves, but this withering criticism from the Committee reflects what was said by the All-Party Parliamentary Group on Betting and Gaming: there is reason to suppose it may well be shared by others.

As we know from experience, the degree of engagement between the Commission, those whom it regulates and even independent advisers, is negligible. The Commission seems interested in canvassing the views of those whom it knows to be anti-gambling or have reason to dislike the industry. This has been demonstrated by its formation of a group of people with “lived experience”, which meant only those who had suffered a problem with gambling. The Commission has never, to the best of our knowledge sought views from the vast majority who enjoy gambling as an adult leisure activity. For most licensees, the only real engagement with the regulator is through regulatory reviews or other confrontational issues.

In short, this issue demonstrates the need for the Commission to go on an “improvement journey”, be put into “special measures”, or even the equivalent of a “licence review” to establish whether it is fit, able and prepared to carry out the function with which it is charged under the Gambling Act, 2005 and not to make law according to its own whims.

05Jul

Lexology – Getting the Deal Through, Gaming 2022

5th July 2022 Harris Hagan 8

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

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

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

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

06Apr

Change of Corporate Control Reminder

6th April 2022 Julian Harris 21

The Gambling Commission has issued a reminder in its fortnightly E-bulletin (4 April 2022) about the requirements on a Change of Corporate Control (“CoCC”), indicating a tougher approach where applications are late.

Under section 102 of the Gambling Act 2005, a CoCC takes place when a new person or other legal entity becomes a new “controller” of the licensee. The definition of a controller stems from complex financial services legislation and, broadly speaking, it means a person or entity that holds:

10% of more of the shares in the licensee or in a parent company of the licensee (i.e. directly or indirectly);
10% of more of the voting power in the licensee or in a parent company of the licensee; or
less than 10%, but able to exercise significant influence over the management of the licensee.

The Gambling Commission is reminding licensees that a CoCC must be notified to them, via eServices, by means of a key event within five working days of the event happening. They must also submit a CoCC application within five weeks of the event occurring.

At present, where an application for a CoCC is late, licensees are able to explain the delay and obtain an extension of time for the application, in the words of the Gambling Commission, where an “adequate and reasonable” explanation is provided.

From July 2022, the Gambling Commission have warned that their approach to late submissions will become stricter, due, they claim, to an increase in the complexity and number of applications. Where the explanation is not considered to be “adequate or reasonable”, there will be a refusal to grant an extension and revocation of the licence where the new controller is unknown to the Gambling Commission (i.e not already a licensee) and is not:

Regulated by the Financial Conduct Authority; or
An immediate family member entering a small family business.

This is important because of the binary choice facing the Gambling Commission in determining a CoCC application; they may, in law, only grant the application, or refuse it. If the latter, the licence is revoked. The consequences for licensees are therefore potentially catastrophic. It is therefore to be regretted that the apparent reasoning for this change on the part of the Gambling Commission is the burden of their own workload. The consideration of a CoCC application is a statutory duty for them, and the subject of often huge application fees. Ironically, the complex applications which concern the Gambling Commission are generally those pertaining to larger, often international, licensees regulated in numerous well-respected jurisdictions. These licensees are very often owned by publicly traded companies, who submit numerous CoCC applications, in relation to their blue-chip institutional investors or acquisitions they have made in the sector. A stricter approach that could put the licences of such licensees at risk merits greater justification than the workload of the Gambling Commission.

The Gambling Commission have never provided an explanation of their view as to what constitutes an “adequate or reasonable” explanation, nor do they offer any guidance now as to its meaning, or as to what the change will mean in practice or who will make such a determination. The Gambling Commission’s Corporate Governance Framework (last revised in January 2022) states that an out of time extension request may be granted by a “Regulatory Manager or above”. However, it does not state who has the delegated authority to refuse such a request and issue a “minded to revoke” letter. The framework goes on to say “[w]here, in response to such a letter, the licence holder requests a hearing, this will be before an Executive Director who will determine the case, otherwise a Senior Manager or above may take the decision.”

In our experience, the Gambling Commission have generally been understanding as to missed applications, particularly in complex, often international corporate groups, where restructuring somewhere in the chain of ownership may not necessarily be notified to those responsible for compliance in Britain, or where shares are publicly traded on a stock exchange with quarterly reporting periods.

In her blog last year, Changes of Corporate Control: The Basics, Bahar Alaeddini recorded our then experience that the Gambling Commission had become stricter in their approach to application deadlines, recommending that licensees take steps to ensure awareness of changes of control and ensure their ability to comply with application deadlines. Bahar recorded then that “the Gambling Commission is no longer generous in giving extensions, sometimes with extension requests being refused, so their goodwill cannot be relied upon.” This statement by the Gambling Commission confirms the reality of what we had experienced.

It may be that the Gambling Commission will continue to be sympathetic to inadvertent failures to meet the statutory deadline on a CoCC application, particularly where the delay is short, or due to share fluctuations, and in circumstances where, as frequently happens, the same institutional investors from time to time trigger a new CoCC. Where we suspect they will look less favourably on late applications, is when licensees discover several CoCCs missed over a considerable period of time or repeated failures; this the Gambling Commission might regard as evidence of more serious governance and compliance failure. In any event we strongly advise all licensees to check that they have appropriate means of identifying and addressing CoCCs. In the unfortunate event that any are or have been missed, immediate legal advice should be sought.

Please get in touch with us if you believe you have failed to comply with the statutory deadline or require assistance preparing a CoCC application.

28Feb

Chambers Global 2022 – Four Lawyers Ranked

28th February 2022 Ting Fung 29

Harris Hagan continues to have four lawyers individually ranked for Chambers & Partners’ Global Market Leaders Rankings (Gaming & Gambling).

As always, we are proud to have the quality of our work in the gambling industry recognised by the prestigious legal directories and will always strive for the highest standards.

Julian Harris (Band 1), was recognised as one of the leading gaming specialists in the UK and venerated for his “considerable experience advising on multi-jurisdictional gaming and gambling matters.”

John Hagan (Band 1), was recognised as having “significant expertise” advising “leading gaming and gambling clients on complex regulatory matters”, for which market sources have praised him as being “absolutely excellent”.

Bahar Alaeddini (Band 2) has been exalted for her “considerable strength” advising clients on a broad spectrum of regulatory and licensing complexities.

Last but certainly not least, Hilary Stewart-Jones occupies the esteemed position of Senior Statesperson. Commentary has emphasised her status as being both “well-respected” and “international”, with wide-ranging transactional and regulatory experience.

18Feb

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

18th February 2022 David Whyte 35

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Scottish notes and pre-paid cards

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

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

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

13Dec

Gambling Commission consultation on the Licensing compliance and enforcement policy statement: Proposed changes to compliance and enforcement

13th December 2021 Bahar Alaeddini 52

On 17 November 2021, the Gambling Commission launched a consultation proposing changes to its Licensing, compliance and enforcement policy (the “Consultation”), including changes to:

how compliance assessments are conducted;
its regulatory toolkit, introducing special measures;
the licence review process;
the way in which financial penalties are calculated;
interim suspension appeals; and
regulatory settlements.

This is the second blog on the Consultation in which we consider the proposed changes to compliance and enforcement. The first blog can be accessed here. The enforcement proposals, if implemented (cue cynicism), will severely impact fairness to licensees and unveil an even more punitive and unpredictable regulator.

Compliance changes

a) Compliance Assessments

Under sections 27 and 305 of the Gambling Act 2005, the Gambling Commission, its enforcement officers and other authorised persons are empowered to monitor and assess the compliance of licensees. In recent years, the Gambling Commission moved to conducting these compliance assessments remotely.

The Consultation proposes to formalise the current position by adding the following new section:

Remote compliance assessments

The Commission may conduct remote compliance assessments for the purposes of determining whether activities are being carried on in accordance with the conditions of the operator’s licence or determining the suitability of the licensee to carry on the licensed activities. Such assessments may be conducted using video conferencing platforms such as Skype. During such assessments the Commission may request sight of documents and records held by the licensee, including customer records and the audit trail in relation to customer accounts.

Additionally, as part of the framework to judge levels of compliance, the Consultation proposes to add details of what non-compliant/just compliant and compliant looks like.

b) Special measures

As part of its regulatory toolkit, the Gambling Commission has been piloting the use of special measures, since September 2020, “to bring operators to compliance at pace” following the identification of failings during a compliance assessment. The recently published Raising Standards for consumers – compliance and enforcement report 2020 to 2021 reports that the pilot scheme has used in relation to eight licensees.

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

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

The Gambling Commission’s online guidance on compliance assessments states:

Special measures

To increase the tools available to us and to ensure swift interventions with failing licensees we have been piloting a ‘special measures’ scheme. The aim of this process is to raise standards immediately under strict supervision. Where licensees are being considered for regulatory action, we may consider special measures and notify you that it is an option. Special measures is an opportunity to achieve compliance before formal action. Failure to achieve compliance during the special measures process would lead to a regulatory investigation.

Special measures is only appropriate if:

there is an acceptance of failings
we have a high level of confidence that a licensee can become compliant quickly, and they have demonstrated this during the assessment
actions which mitigate the risks to the licensing objectives and consumer harm are put in place immediately
there isn’t a history of protracted non-compliance
there isn’t evidence of significant consumer harm
there is an offer to divest any profit made from non-compliance.

Furthermore, the Raising Standards for consumers – Compliance and Enforcement report 2020 to 2021 states:

Our requirements

The process of special measures is commenced by the Commission and requires a licensee to meet the following requirements:

the licensee must acknowledge and accept the failings
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
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

The Commission will consider the submitted action map 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. Following this, the licensee is required to adhere to the following requirements:

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

The Consultation proposes to add the following new paragraph to the Licensing, compliance and enforcement under the Gambling Act 2005: policy statement (the “Policy”):

Special measures

4.22 If serious failings are revealed during or as a result of a compliance assessment, then the Commission may decide that it is appropriate to place the licensee into Special Measures. The effect of Special Measures is that the licensee will be invited to submit and agree an urgent action plan to rectify the regulatory failings identified. This may include divestment of any financial benefits derived from the failings. If the licensee fails to agree an action plan, or fails to implement the agreed action plan, the Commission is likely to proceed to review the licence. Compliance with the action plan does not prevent the Commission from reviewing the licence in any event, but such compliance will be treated as a mitigating factor. Where the licensee has fully complied with the action plan, it may request release from Special Measures. The Commission will consider such a request following a further compliance assessment.

Enforcement changes

a) Commencing a licence review

If the Gambling Commission decides to commence a licence review, generally, the following – unreasonably lengthy – process is followed:

Stage 1	Section 116 letter sent providing notice to the licensee setting out the grounds of the review, the procedure and the licensee’s right to make representations and when (the “Section 116 Letter”).
Stage 2	Invariably lengthy Gambling Commission investigation.
Stage 3	Following its investigation, the Gambling Commission sends letter setting out its preliminary findings (the “Preliminary Findings”). This will usually set out details of the documents and any other evidence being relied upon. The letter will remind the licensee of their right to make representations on both: (i) the Preliminary Findings; and (ii) the preliminary assessment of seriousness, and timing requirements (normally 28 days).
Stage 4	Licensee responds to Preliminary Findings with representations (the “Representations”).
Stage 5	Gambling Commission considers the Representations or if none are received by the deadline, further notice setting out the settled findings (the “Settled Findings”) and the outcome of the review. If the Gambling Commission is minded to impose a financial penalty, the licensee will be given a further opportunity to make representations about the proposed financial penalty. The licensee may accept the outcome of the review or refer the matter – both the Settled Findings and the proposed sanction – to the regulatory panel for determination.

Any licensee that has lived through enforcement action will know well that the Gambling Commission will take (persistently in our extensive experience) many months, and sometimes more than a year, to reach Preliminary Findings (Stage 3 above), leaving a cloud of uncertainty and tension hanging over the business. It therefore seems unfair to say the least that licensees are granted a single month to respond with their case – with extensions generally refused these days – whilst continuing: (1) to run their business, without which a licence is obviously not required; and (2) on their improvement journey. In the months or years that have elapsed, key employees may have changed and those remaining may have a dwindling recollection of events that in many cases occurred years before the Section 116 Letter.

The Consultation explains:

During a section 116 review, the Gambling Commission is obliged to properly consider and take account of all information revealed during that review and to provide licensees with an opportunity to make representations. Whilst every attempt is made to do this in one act, there may be times when issuance of further preliminary findings is required particularly where, in responding to previously issued findings, new evidence is introduced. The Commission considers that until an outcome is reached, the investigation stage of a review remains live.

…

It is essential that within a review, all relevant matters, mitigation, remedial actions, and aggravating factors are assessed, considered and representations gained. This ensures fairness to the licensee in being able to present their response to our conclusions before an outcome is obtained.

The Consultation proposes to add the following new paragraphs to the Policy:

5.10 The process of review may itself reveal facts or matters requiring investigation. Accordingly, the Commission will take a flexible approach to the procedure to ensure that all relevant facts and matters are investigated, and that the licensee has a full opportunity to make representations in relation to the review

5.20 While in most cases, the Licensee’s representations will enable the Commission to proceed to a determination, in some cases the Licensee’s representations may raise further questions for the Commission. This may be because the licensee has not adequately replied to the preliminary findings letter or because its representations raise further questions requiring investigation. This may lead to further investigations by the Commission, as set out at paragraph 5.10 above, which may result in a further consolidated preliminary findings letter. In such a case, the Commission will afford the Licensee the opportunity to make further representations before moving to consider its determination.

The Gambling Commission proposes to take a “flexible approach to the procedure to ensure that all relevant facts and matters are investigated”, for example, with the opportunity to send “a further consolidated preliminary findings letter” following the Representations (after Stage 4 above). In contrast, existing policy requires the Gambling Commission to send Preliminary Findings (Stage 3) following an investigation (Stage 2). “Flexible” is not a word one would use to describe the Gambling Commission, and nor should it be, at least in the context of important policy and procedure. The Regulators’ Code, which the Gambling Commission and its officers are obliged to follow, stipulates that “regulators should ensure that their approach to their regulatory activities is transparent.” Adopting a flexible approach during enforcement action is anything but transparent, especially where it would be so one-sided! Inevitably, adopting such an approach and issuing further preliminary findings during the same licence review will delay an already unreasonably lengthy process.

As though we needed another reminder of the notable shift in the Gambling Commission’s approach to regulation, the Consultation adds that the additional stage “may be [required] because the licensee has not adequately replied to the preliminary findings letter or because its representations raise further questions requiring investigation.” The proposed “flexible” approach would be especially unfair and unjust to a licensee, and against the principles of natural justice, because the Gambling Commission would be able to reach new and additional findings of fact based on the original investigation. A cynic would say that it unfairly gives the Gambling Commission a second bite at the cherry if its initial investigation was incomplete, for example, through its own incompetence. However, it is much worse. In its Representations, a licensee will put forward its case, including acceptance of failings and, very often, a Regulatory Settlement offer. The Gambling Commission is proposing to give itself the option – upon receipt of the Representations and having considered the licensee’s case – to issue further Preliminary Findings, taking advantage of the Representations and pushing up an offer. This is procedurally unfair in the absence of new information, prolonging an already invariably lengthy investigation.

b) Financial penalties

Financial penalties, which are sanctions imposed by the Gambling Commission only if a licence condition has been breached (with or without a licence review), are governed by the Statement of principles for determining financial penalties. Paragraph 2.5 of that policy states:

2.5 Although the Act…does not set a limit for a financial penalty, a penalty will be set at a level which the Commission considers to be proportionate to the breach. It will take into account the financial situation of the licensee where this information is provided to the Commission. A financial penalty allows the Commission, amongst other things, to eliminate any financial gain or benefit from non-compliance.

The Consultation proposes to add the following new paragraph:

Whether a financial penalty is to be imposed following a review or without a review having taken place, the Commission may request financial information regarding the financial resources available to a licensee, including but not limited to its own resources and those of any parent or group company or ultimate beneficial owner. In the absence of sufficient information, the Commission will infer that the licensee has the resources to pay such financial penalty as is appropriate in the circumstances of the case.

In considering quantum, the Gambling Commission requires financial information regarding the licensee’s financial resources. In our extensive experience, this requires the disclosure of not only the licensee’s, but also parent companies’, financial accounts. The Consultation therefore proposes to go one step further by enabling the Gambling Commission “to consider the resources available to the licensee and any parent or group company as well as the ultimate beneficial owner” [emphasis added]. Boldly, the Gambling Commission describes this as providing “further clarity on [its] approach”, which is disingenuous because it is a marked departure from existing policy. The Consultation goes on to state that if the requested information is not provided, “the inference should be that [the licensee] is sufficiently resourced to meet the penalty.”

Paragraph 1.4 of the Statement of principles for determining financial penalties requires the Gambling Commission to make decisions “openly, impartially, with sound judgment, and with justifiable reasons” and “make a decision only after due consideration of all information reasonably required upon which to base such a decision”.

The Regulators’ Code requires it to “choose proportionate approaches” to those it regulates based on “business size and capacity”, “minimis[ing] negative economic impacts of their regulatory activities”. It seems to us that reference here is being made to the licensed gambling business in Great Britain rather than its parent or sister companies, let alone its ultimate beneficial owners.

Critically, the Gambling Commission appears to believe it is empowered to break the corporate veil (between the licensed company and its shareholders) by virtue of section 121(7)(c) of the Gambling Act 2005. This provision states that in considering the imposition of a financial penalty, the Gambling Commission is required to consider “the nature of the licensee (including, in particular, his financial resources).” This language is mirrored in the “key considerations” at paragraph 1.6 of the Statement of principles for determining financial penalties. Unhelpfully, the Explanatory Notes to the legislation do not provide any guidance to help us – or the Gambling Commission – establish the intent of parliamentary draftsmen. We would therefore expect the Consultation to explain the reasoning behind such a seismic change.

The key question is whether the Gambling Commission is empowered to consider the financial resources of all parent companies, group companies and shareholders? Plainly the Gambling Commission believes it is empowered to do so because it has determined that the “nature of the licensee” and its “financial resources” includes group companies, parent companies, shareholders and any other ultimate beneficial owners. The result being to push up quantum, in many cases by millions of pounds. In our view, “nature” is not carte blanche to consider any of the licensee’s corporate or individual relatives, save where the licensee’s corporate structure is not bona fide, as described below.

The Gambling Commission proposes to also have regard to the financial resources of ultimate beneficial owners. This is interesting because: (1) as discussed in my first blog, there is no definition of this term so it could include an indirect shareholder at 3%; and (2) it is in stark contrast to the Gambling Commission’s focus on an operating licence application, where financial documentation would only generally be required in respect of controllers (those at 10%) unless the ultimate beneficial owner was also funding the business.

We accept that a licensee could not structure itself such that it had no financial resources for paying a financial penalty but continued to generate revenues for group companies and shareholders. In such circumstances, there is established English case law that the separate legal personalities of group companies constitute a single unit for economic purposes and should therefore be seen as one legal unit. This, of course, would not be the case in the structure of most licensed groups acting in good faith.

Where should the line be drawn? The principle of single unit for economic purposes seems indisputably fair in the extreme example of a licensee acting in bad faith. However, life rarely operates in extremes (except for the pandemic). What about the following fact scenarios?

A licensee that has £1m in the bank, passed £10m up the chain of ownership, during the three financial years before, in a corporate group structured in good faith. It balks at a £5m financial penalty because it cannot pay without the support of its parent company and ultimate beneficial owners. Is it piercing the corporate veil to expect money to come back down? Does the single economic unit argument exceptionally work for the Gambling Commission because the statutory wording – “licensee’s resources” – includes monies paid to the parent in such circumstances?
A loss-making licensee who has received financial support in the form of intra-group loans, without which the British business would have gone bust. The British business has been loss-making since inception, but the business outside Great Britain, in Malta, has been highly profitable and subject to M&A activity. Does “licensee’s resources” overlook the losses and intra-group loans?
A licensee under new ownership. Does the Gambling Commission consider the group financial situation before or after the change in ownership? Is this something potential investors should consider carefully when investing?
A licensee and its ultimate parent company have suffered financially because of the pandemic which hit its retail business heavily. Both companies have limited financial resources and received Government support during the pandemic. The ultimate beneficial owners provided various shareholder loans to the business, which remain largely unpaid. Does “licensee’s resources” overlook the unpaid loans, despite the inappropriateness of doing so from an accounting perspective, and focus on the wealth of the ultimate beneficial owners? Can the Gambling Commission reasonably expect disclosure of the ultimate beneficial owners’ financial resources?

Regulators must be consistent and transparent in their approach. The Consultation should, therefore and at a minimum, have answers to these questions (and more!) to understand how the Gambling Commission intends to apply its wide-ranging proposals. This is not the first time the consultation process has seemed like a sham. Most notably, in earlier blogs, we noted our concerns regarding the regulatory panel reforms, where the overwhelming majority of respondents, including Harris Hagan, disagreed with the proposals.

To date, instead of poking the bear, clients have been eager to draw a line under licence reviews that inevitably take years to conclude, creating huge uncertainty and stress for the business. It seems to us that until a licensee is motivated (and brave enough) to challenge the Gambling Commission by taking a licence review to regulatory panel or judicial review, rogue and baseless decisions will continue to be reached. Worryingly though, the Consultation proposes to prop up the bear by empowering it to make even worse decisions on quantum.

c) Interim suspension

Where there is a serious risk to the licensing objectives the Gambling Commission may decide it is “proportionate and appropriate” to suspend the operating licence. A suspension may take place with immediate effect, and it may relate to only certain activities authorised by the operating licence.

In recognising the impact an interim licence suspension may have upon a gambling business, the Gambling Commission proposes to list any challenge before the Regulatory Panel “as soon as reasonably practicable”. Unlike many other regulators, a definitive time period is not provided; however, the Consultation refers to “expediting these hearings wherever possible”. It is not clear whether this means within seven days or four weeks, but getting before a Regulatory Panel quickly is a good thing.

Interestingly, the Raising Standards for consumers – compliance and enforcement report 2020 to 2021 now includes a designated section on licence suspensions, which may signal a stronger appetite for imposing them!

d) Regulatory settlements

The Chief Executive’s message to the Raising standards for consumers – compliance and enforcement report 2019 to 2020, published in November 2020, stated:

Regulatory settlements are a way of resolving enforcement cases which we have used to good effect. Frankly, however, there are too many occasions where settlement proposals are made at a late stage of our investigation process or approached as if a licence review is a commercial dispute to be negotiated. That is not acceptable.

Our Statement of Principles for Licensing and Regulation…makes it clear that settlements are only suitable where a licensee is open and transparent, makes timely disclosures of the material facts, demonstrates insight into apparent failings and is able to suggest actions that would prevent the need for formal action by the Commission. Only licensees who meet those criteria need make settlement offers; licensees who choose to contest the facts before conceding at a later stage need not make offers of settlement.

As part of the Consultation, the Gambling Commission wants “to provide greater clarity for licensees…[to] reset to [the] original purpose [of a Regulatory Settlement] i.e. to expedite the delivery of an appropriate regulatory outcome.”

The Consultation proposes to add the following new paragraph:

The process of regulatory settlement is intended to produce a rapid and fair disposal of a case. Accordingly, regulatory settlements should be offered at an early stage in the process. The Commission will not normally accept offers of regulatory settlements offered after the licensee has made representations on the Commission’s preliminary findings.

Unsurprisingly, in an archetypal Gambling Commission edict, licensees are blamed for submitting late offers, contesting “facts” and treating the process like a commercial negotiation. Conveniently, the Gambling Commission now wants offers to be made before the licensee makes its Representations, assuming the Gambling Commission is always right in its findings of fact. Any licensee with Gambling Commission enforcement war wounds will know first-hand that the Representations (Stage 4 above) is – without doubt – the most critical in putting forward the licensee’s case. Bypassing this stage suggests the Gambling Commission is right with all its findings and that the licensee should just accept the one-sided “facts” and lay its head on a platter, as required by the Gambling Commission. In our extensive experience, no proper view can be taken on the appropriateness of: (1) Regulatory Settlement; and (2) the proposed offer put forward by the licensee, until after receipt and consideration of the Representations, and perhaps even until the Gambling Commission produces its Settled Findings (Stage 5).

What both the enforcement report and the Consultation fail to point out is that, in accordance with the Commission’s own policies, offers can be made at any time. Further, paragraph 5.33 of the Policy states “the Commission will only engage in such discussions once it has a sufficient understanding of the nature and gravity of the suspected misconduct or issue to make a reasonable assessment of the appropriate outcome.” Surely, this can only be after the Representations have been submitted? How can the “nature and gravity” be assessed when only the “prosecutor” has been heard? Even in a dictatorship, a jury would not be asked to return a verdict without hearing the defence’s case. Fairness is not a word one associates with the Gambling Commission these days, unless of course the letters “u” and “n” are added at the beginning.

The Gambling Commission states its purpose is early settlement. Again, this is disingenuous, because accepting a regulatory settlement between the Representations and any regulatory panel is still early! Each stage of the licence review process takes at least several months and whilst there is a shared keenness to reduce the unreasonable length of time the Gambling Commission takes for a licence review, it cannot be at the sacrifice of fairness to the licensee. As the only party with the luxury of more than a few weeks to respond, the Gambling Commission’s efforts would be best served overhauling its compliance and enforcement departments to speed up its investigation process (Stage 2) and the time taken to reach Settled Findings or accept a licensee’s regulatory settlement (Stage 5).

Respond to the Consultation

We strongly encourage licensees and even their owners to respond to the Consultation to express their concern for the proposals.

The Consultation closes on 9 February 2022. Responses can be submitted here.

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

01Dec

Gambling Commission consultation on the Licensing, compliance and enforcement policy statement: Proposed changes to licensing

1st December 2021 Bahar Alaeddini 50

On 17 November 2021, the Gambling Commission launched a consultation proposing changes to its Licensing, compliance and enforcement policy (the “Consultation”), including changes to:

set out its position on products that appear to require dual regulation;
clarify certain operating and personal licence requirements;
its regulatory toolkit following its pilot use of Special Measures; and
its process on licence review, interim suspension, and Regulatory Settlement.

What is the Licensing, compliance and enforcement Policy?

The Licensing, compliance and enforcement under the Gambling Act 2005: policy statement (the “Policy”) builds on the Gambling Commission’s Statement of principles for licensing and regulation (the “Statement of Principles”). These important policy documents underpin every aspect of the licensing lifecycle of a licensee as they set out the principles that the Gambling Commission will apply in exercising its functions under the Gambling Act 2005 and how it will comply with its duty, under section 22, to promote the licensing objectives.

As the title of the document suggests, the Policy is split into sections that deal with licensing, compliance and enforcement separately. Given the number of wide-ranging and significant proposals jam-packed into the Consultation we will publish two blogs. This is the first blog, which covers proposed changes to licensing.

Dual regulation products

The Gambling Commission has been working with the Financial Conduct Authority (the “FCA”) to “finalise” its regulatory approach to products that contain financial elements and should, therefore, be regulated by the FCA. The Consultation makes clear the Gambling Commission’s “preferred outcome is that this is resolved through legislative change, but this is unlikely to happen before the current Gambling Act Review is concluded.”

In the absence of legislative change, the Gambling Commission proposes to set out its “clear policy position” that:

applications that it considers contain an element that should be regulated by the FCA “are likely to be refused”, although, this will not affect existing licensees already dual licensed; and
this includes “products whose name, branding, marketing or game rules contain language associated with financial products such as “stock”, “share”, “index” or “investment” risk harming the second and third licensing objectives, because they may give the impression that they are in the nature of a valuable investment rather than a gambling product.”

These proposals no doubt follow the collapse of Football Index earlier this year and the embarrassing role the Gambling Commission played in it. The independent report into the regulation of BetIndex, the providers of Football Index, dated 13 September 2021, found that:

the two regulators had been interacting since May 2019 on whether all or part of Football Index should be regulated by the FCA rather than by the Gambling Commission and those discussions remained unresolved in March 2021; and
the Memorandum of Understanding between the two regulators was “an appropriate and proactive step to address the issues that arose in relation to BetIndex”; however, needed to be strengthened to avoid the “stalemate” and “differing understandings of the same events” that occurred between the Gambling Commission and the FCA.

The independent review led to a strengthened Memorandum of Understanding to improve co-operation between the two regulators and found that:

In the first instance, BetIndex did not properly notify the Gambling Commission of the nature of the product in its licence application, nor did it inform the regulator of changes to the product after launch as it was required to.

The Gambling Commission could have better responded to the challenges that the novel product raised once launched, with earlier scrutiny, including of the language used by the product, quicker decision-making and action, and better escalation of issues.

Complete applications

The Gambling Commission expects all applications to be complete when submitted. Its well-established policy is to reject incomplete applications, and, from June 2021, refunds are no longer given for incomplete applications. It remains an applicant’s responsibility to ensure their application is “complete” and provides “all relevant information” at the time of submission. Despite this, the Gambling Commission continues to receive incomplete applications which “omit necessary information and supporting evidence required” and “request or expect a refund of their application fee”.

The Gambling Commission proposes to set out its “established policy position for clarity” as follows (new wording in bold):

If an application is incomplete or information to support the application is missing or not provided upon request then, depending on the individual circumstances the Commission may:

reject the application as incomplete;
seek further information;
determine the application based on theinformation the Commission has available to it. This may affect the decision on whether a licence can be granted.

The application fee is payable on submission of the application. The Commission will not refund the application fee where an application is rejected for any reason, including where the application is rejected as incomplete.

This emphasises the critical importance of submitting full and proper licence applications, and the need to work with specialist lawyers when preparing and submitting licence applications, including variation and change of corporate control applications submitted by existing licensees.

Please get in touch with us if you would like assistance with any licence applications.

Relevant persons

As part of the Gambling Commission’s assessment of an application, it will consider the suitability of “persons considered relevant to the application.” Section 3.10 of the Policy currently states:

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.

The Gambling Commission proposes to provide greater clarity about persons who may be considered relevant to an application by including further examples, by adding the following sentence to the end of paragraph 3.10:

It may also include shadow directors, persons or other entities who are controllers of the applicant and/or those who are its ultimate beneficial owners.

This proposed change highlights the importance of applicants and licensees ensuring their stakeholders – especially the owners of the business and those funding it – understand the relevant gambling legal, 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.

No definition is provided in the Consultation, or elsewhere by the Gambling Commission, for the meaning of “ultimate beneficial owner”. This is unhelpful (and in breach of the Regulators’ Code) because, to date, few jurisdictions have defined beneficial ownership, its scope or threshold. Furthermore, jurisdictional definitions tend to differ from the anti-money laundering definition which is based on FTAF principles.

Use of the licence within a reasonable period

The Statement of Principles provides:

3.9 The Commission will not issue licences to people who do not need them. If a licence is issued but an operator or individual does not provide facilities for gambling in reliance on that licence within a reasonable period, the Commission may commence a licence review with a view to revoking the licence if that appears necessary.

3.10 The Commission may grant licences (particularly remote gambling licences) subject to a condition that requires an operator to begin to offer facilities for gambling within a specified timescale.

The Gambling Commission proposes to reinforce this position by adding mirror wording in the Policy, which will read as follows:

In considering operating and personal licence applications, the Commission will include assessment of whether an operati[ng] licence applicant is likely to provide facilities for gambling within a reasonable period or a personal licence applicant is likely to be employed in a role that requires a personal licence within a reasonable period.

If a licence is not used within a “reasonable period” – another term that remains undefined – the Gambling Commission will seek to revoke it following a section 116 review, unless it is surrendered.

Perhaps unintentionally, likely due to clumsy drafting, the proposed wording suggests that a personal licence holder needs to be employed. Although, in our experience, this has been the Gambling Commission’s strong preference due to a person’s vested interest in, and ability to be disciplined by, their employer, it has accepted circumstances where a person is a third party to the gambling business.

Suitability

The principle of suitability underpins every aspect of the Gambling Commission’s work. It expects applicants to be open and to co-operate in supplying the information it needs to assess an application for a licence. The Gambling Commission proposes “to make it clearer to applicants how [it] consider[s] the suitability of the applicant and make it explicit that [it] will look beyond the applicant entity.” These changes are being made because some applicants do not fully understand how each element of suitability is considered and the requirement to look beyond the applicant when assessing suitability, and requests for further information are “sometimes met with resistance”, causing delays and application refusals.

Most of the proposed changes relating to suitability are being made at paragraph 3.11 of the Policy, which will read as follows:

3.11 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 to have an interest in, the licensed activities;
shadow directors;
persons or other entities who are controllers of the applicant;
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 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.

Paragraph 3.22 is being updated to clarify that where shares are held on a nominee basis, the “true owners” will need to be identified.

The proposed changes broadly match our experience submitting and managing applications on behalf of our clients, and therefore formalises the Gambling Commission’s existing approach. In recent years, applications have had a much sharper focus on source of funding in relation to both funding arrangements and ownership, although the Gambling Commission believes this is due to increasingly complex ownership structures. Often, detailed investigations are conducted by forensics accountants. Applicants and licensees should take heed of these proposals to ensure they, and in turn their key stakeholders (i.e. direct and indirect shareholders, other owners and lenders), understand the regulator’s focus to minimise the risk of refusal or revocation.

Financing arrangements

As mentioned above, the finances of the applicant/licensee, and “connected persons”, form a key aspect of the suitability assessment. This includes “being satisfied that the business will not be financed by the proceeds of crime, nor will its profits be used to finance criminal activity.” The Gambling Commission states that this position is implicit, which accords with our experience; however, it wants to make it explicit as it regularly receives applications that “do not include full and open information as to the source of funding for the operation, nor full and frank information about all those relevant persons connected to an applicant.” This resistance delays determination of an application and can result in refusal.

The Consultation proposes to add the following two new paragraphs:

The Commission will not grant an operating licence until it is fully satisfied that the operation will not be financed by the proceeds of crime and that profits from the operation will not be used to finance criminal activity. To that end, applicants will be asked to provide information and evidence as required both as to the source of finance of the proposed operation and as to the identity of those connected to the applicant as specified in paragraph 3.11 above.

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.

Updating the Gambling Commission

The Gambling Commission wants to add examples of the types of changes and matters that are important for a licensee to monitor and report because of the potential impact of non-compliance.

The Consultation proposes to update paragraph 3.46 as follows:

Once a licence has been granted and issued, it is important that licensees read through it to check that the details on the licence are correct and that they are familiar with the conditions attached to the licence. Licensees should also be aware of the changes and matters they must keep the Commission informed of whilst they are the holder of a licence. Failure to do so may result in regulatory action being taken. This includes, but is not restricted to:

Changes in ownership/control
Submission of timely and accurate regulatory returns
Submission of timely variation application if a licensee is likely to exceed the fee category limit of its licence

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.

Respond to the Consultation

The Consultation closes on 9 February 2022. Responses can be submitted here.

01Dec

Chambers Gaming Law 2021 Global Practice Guide

1st December 2021 Ting Fung 42

Partners, Julian Harris and Bahar Alaeddini, return to their roles as Contributing Editors to the Chambers Global Practice Guide and co-authors of the UK chapter, with the latest edition of the Gaming Law 2021 eGuide now online.

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; and tax.

Key trends are also 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.

In addition, to their role as Contributing Editors, Julian has published the Introduction to provide commentary on the latest developments regarding the gambling industry whilst Bahar provides the latest gambling regulatory position in Alderney.

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

25Nov

Harris Hagan retains Band 1 ranking in Chambers and Partners

25th November 2021 Ting Fung 47

We are delighted to announce that Harris Hagan has been ranked in Band 1 of Chambers and Partners UK for the 19th consecutive year for gaming in the UK, with Chambers describing us as:

“Absolutely the number one betting and gaming firm”.

The firm continues to have five lawyers individually ranked, with partners Julian Harris and John Hagan retaining their Band 1 rankings, and partner Bahar Alaeddini her Band 2.

In addition, Francesca Burnett-Hall, remains an Associate to Watch, whilst Hilary Stewart-Jones retains her ranking as a Senior Statesperson.

We received many positive testimonials, including:

“The firm would be my first point of call for any legal matters relating to gambling.”
“The firm is highly skilled, supremely well informed about the sector, always responsive, and has the consummate ability to translate regulation into effective advice, offering a comprehensive service to clients.”
Julian Harris “…is above anyone else in terms of knowledge” and “has enviable expertise…”
John Hagan is lauded as “one of the best: a tremendous lawyer with an impressive knowledge of regulation.”
Bahar Alaeddini “offers extensive experience and excellent client communication.” She “is very pragmatic, very straightforward and does not pull any punches.”
Francesca Burnett-Hall has “diverse range”, “…is diligent and has consummate attention to detail.”
Hilary Stewart-Jones “has been a force in the industry for a long time.” She is also praised as “a legal technician with a real business mind.”

We wish to thank our clients and friends of the firm for their continued input and recognition of our work.