Source of funding: A glimmer of hope on the horizon?
It is no secret that source of funding has been an area of uncertainty and, often intense, frustration in recent years. Whilst source of funding is a mandatory aspect of the licensing lifecycle, there continues to be a distinct lack of clarity from the Gambling Commission as to what is expected from applicants, licensees, and their investors. In our view, this breaches the Regulators’ Code which requires the Gambling Commission to have clear information, guidance and advice to help those they regulate meet their responsibilities to comply. Without such guidance, insurmountable regulatory and commercial risks are attached to the British market, potentially rendering it unviable and unattractive for new entrants and their investors, particularly where they are financial institutions. In view of the importance of this issue to our clients and the industry generally, we submitted a freedom of information request to the Gambling Commission in March 2023. Coincidentally or otherwise, there is now a glimmer of hope on the horizon as the Gambling Commission plans to publish source of funding guidance this Summer.
What is source of funding?
Source of funding involves establishing the legitimacy of funds used to make an equity or non-equity investment in a licensee or operating licence applicant, or parent company.
Disclosure is required to ensure (1) that the first licensing objective has not been compromised (preventing gambling from being a source of crime or disorder, being associated with crime or disorder, or being used to support crime), and (2) that the licensee or applicant is suitable to hold a licence (as detailed in the Gambling Commission’s Licensing compliance and enforcement policy statement), which includes “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.”
When is disclosure needed?
The common touchpoints for disclosure to the Gambling Commission are:
- operating licence applications – where “there is a positive obligation on applicants to show that they are able to satisfy the licensing objectives” and the Gambling Commission “will also wish to be satisfied as to the sources of the applicant’s finance to satisfy itself that such funds are not associated with crime or disorder.”
- key event notifications following the taking of new loans / funding, or the disclosure of new shareholders; and
- changes of corporate control.
Under section 122 of the Gambling Act 2005, the Gambling Commission may also request source of funding disclosure for the purpose of determining the suitability of a licensee to carry on the licensed activities.
The current requirements
Currently, there is no formal or detailed source of funding guidance setting out the Gambling Commission’s requirements and each case is considered on its merits.
From our extensive experience, we know that applicants and licensees are required, using a risk-based approach based on their knowledge of the investor and the size of the investment, to:
- Follow the “breadcrumb trail” of money and provide documents (i.e. bank statements) to evidence the flow of funds from the original source, to the ultimate investment in the licensee / applicant.
- Provide documentary evidence for the source of funding. This depends widely on the specific circumstances but, by way of example, if an investment was funded by:
a) a share sale, the SPA could be provided along with a bank statement showing receipt of the funds from the sale; or
b) personal savings, the Gambling Commission would wish to understand and see evidence as to how these savings had accrued and over what time period.
The onus is always on the gambling business, which can be challenging when the Gambling Commission rejects incomplete applications and the majority of the information can only be obtained from third parties; however, it is vital that they have used their reasonable endeavours to secure the necessary information.
Challenges and moving goalposts
Source of funding is a complex area, particularly if money has been raised through an investment fund with underlying limited partner (passive) investors, where often there are complex confidentiality agreements in place. It has also been known for gambling businesses to encounter investors who simply refuse to disclose their personal documents or are only willing to provide documents that are heavily redacted.
Ultimately, as set out in the Licensing compliance and enforcement policy statement, the Gambling Commission must “assess the likelihood of risk presented by [the applicant/licensee] and the potential impact that the risk if realised will have upon the licensing objectives.” In our view, this does not mean pursue a risk-free approach by testing every £.
Nowadays, the Gambling Commission’s expectations for source of funding are burdensome and follow a novel and unpublished approach (generally led by Forensics), often exceeding those of financial or other gambling regulators around the globe. In extreme circumstances, this creates tension between the gambling business and its investors, and the Gambling Commission and the gambling business (including us!). Published guidance is critical to ensure consistency and provide certainty to gambling businesses and their investors.
Glimmer of hope on the horizon
Turning to the positive, we understand that the Gambling Commission will be publishing guidance on its website regarding its source of funding requirements to “provide better information to applicants”. It is expected that the guidance will be published by the end of July 2023.
At this stage, we understand that the guidance will be non-exhaustive, but will include example scenarios, including those relating to investment funds.
We further understand that the guidance will explain how the Gambling Commission divides investors into two groups when determining its source of funding requirements:
a) Regulated – meaning entities that are regulated by any form of financial service regulator, including the Financial Conduct Authority and Securities Exchange Commission.
For each group, the Gambling Commission will take either a percentage of the total value of the investment / transaction, or an investment amount (e.g. £50,000) and consider source of funding for investors that cross that threshold. Where investors do not fall within either category, the Gambling Commission will look to take a dip sample, which reflects our recent client work. We further understand that the Gambling Commission will want investors identified so it can carry out open source and online checks before deciding if further source of funding information is required for particular investors.
Of course, the exact detail of the guidance will not be known until it is published. We are hopeful that it will provide some clarity on the Gambling Commission’s requirements and explain the basis for such requirements.
How we can help
Harris Hagan can navigate you through your engagement with the Gambling Commission on source of funding, minimising disclosure for you and your investors wherever possible, as well as offer source of funding training, tailored to the specific needs of your business. If you would like to discuss further, please do get in touch.