“Naughty or Nice?” – the Gambling Commission publishes its latest consultation on financial penalties and financial key event reporting
Between August 2021 and July 2023, Gambling Commission licensees paid around £38 million in financial penalties to HM Treasury’s consolidated fund and £44 million in lieu of a financial penalty via the regulatory settlement process.
After continued calls for clarification on the calculation of and challenges to its financial penalties, the Gambling Commission published its 2023 Consultation on proposed changes related to financial penalties and financial key event reporting (the “Consultation”) on 15 December 2023. The Consultation also addresses updates to the licence conditions and codes of practice (“LCCP”) in relation to financial key event reporting.
We set out below a summary of the key changes proposed in the Consultation.
Enforcement – financial penalties quantum
The Gambling Commission’s intention is to:
“ensure a consistent process for the determination and imposition of financial penalties… provide greater transparency and clarity over how financial penalties are calculated … allow a sufficient scope to exercise necessary judgment in the determination of the quantum based on individual case characteristics, and to mitigate the risk of legal challenges on our approach.”
The Gambling Commission hopes that greater transparency and clarity for licensees will streamline its enforcement process by reducing protracted correspondence between licensees and the Gambling Commission, which will also help take the pressure off the two-year limit it has for imposing a financial penalty.
How will penalties be calculated?
The Gambling Commission proposes to update its Statement of Principles for Determining Financial Penalties to introduce a more clearly defined six-step process (new wording in bold and italics):
- Calculate the disgorgement element of the penalty (if appropriate)
to reflect any financial detriment suffered by consumers and/or remove the financial gain to the Licensee, if possible. Consider the seriousness of the breach to determine the appropriateDetermine the starting point for the penal element of the fine, in most cases by reference to seriousness and a percentage of [gross gambling yield] GGY for the relevant breach period.
- Consider aggravating and mitigating factors which may increase or decrease the penal element.
- Consider the need for a deterrence uplift to the penal element
, having regard to the principle that non-compliance should be more costly than compliance and that enforcement should deliver strong deterrence against future non-compliance.
aany discount to the penal element where early resolution has been reachedfor early resolution.
whether anany adjustment should be made to ensure the sum of the figures at steps 1 (if calculated) and step 5 are reasonable and proportionate in respect offor affordability and proportionality.
Financial penalties calculations will primarily be based on a proportion of the licensee’s GGY and will be based on the “level of seriousness” of the breach, with an escalating five-level scale starting at 0% to 0.99% for a level 1 breach (for example, one-off breaches) up to 10-15% of GGY for a level 5 breach, representing “a very serious threat to the licensing objectives”. Higher penalties may be imposed in “exceptional circumstances”, including using a non-GGY approach where more appropriate.
In line with the proposed updated six-step process, these baseline calculations would be subject to the adjustments set out at 3-6 above.
Financial key event reporting – scrutiny of investor source of funds
The proposed changes to the LCCP are designed:
“to take account of the increase in complexity of mergers and acquisitions, and the increased globalisation of gambling.”
The current reporting threshold under licence condition 15.2.1(2) of the LCCP (reporting key events) regarding investors will be raised from 3% to 5% to align with requirements in other global jurisdictions.
The Gambling Commission is also proposing to expand reporting requirements regarding ‘relevant persons’ “significantly, but proportionately” to include “partnerships, trusts, charities and investment funds” which have “both direct and indirect interests in the gambling licensee of 5% or more”.
A new requirement will also necessitate disclosure of:
- individuals who acquire the equivalent of £50,000 or more worth of new shares in a rolling twelve-month period; and
- entities that acquire the equivalent of £1 million of new shares in a rolling 12-month period.
The Gambling Commission has indicated in the Consultation that:
“Given that this proposed new key event is focused on the raising of investment by the gambling licensee by issuing new shares, our expectation is that the source of funds evidence is gathered upfront as part of the share issuing process and should be reportable in the normal key event reporting timeframe.”
As such, this disclosure will include not only the identity of the investor and the value of the acquisition, it will also require the provision of evidence of the source of funds for the investment.
The Consultation is expected to close on 15 March 2024.
Subject to the actual changes to be made by the Gambling Commission, which it will outline when it publishes its response to the Consultation in due course, licensees can expect one or more versions of the following documents to be published in the next year:
- the LCCP;
- Licensing, Compliance and Enforcement Policy Statement; and
- Statement of Principles for Determining Financial Penalties.
We will be providing further insight on the proposals in the Consultation in upcoming blogs. In the meantime, please see David Whyte’s previous pre-emptive article, White Paper Series: The Gambling Commission’s powers – more to come?
We thoroughly encourage all licensees to respond to the Consultation.
Please get in touch if you have any questions or would like any assistance drafting your response.