01Sep

Gambling Commission sets its sights on late regulatory returns and incorrect fee categories

1st September 2023 Gemma Boore 176

In its latest E-Bulletin, the Gambling Commission has reminded operators that it is a licence condition (15.3.1 of the Licence Conditions and Codes of Practice) to submit regulatory returns on time.

The update goes on to note that the Gambling Commission is aware that some regulatory returns have been overdue since 1 April 2023, and advises operators to bring these up to date “immediately”.

“Operators who fail to submit returns on time will be escalated to our Enforcement team to consider regulatory action and may result in a financial penalty under section 121 of the Gambling Act 2005.”

This is an important reminder from the Gambling Commission, which should not be taken lightly, and it is clear a tougher approach is now being taken.

Background

Gambling licence holders in Great Britain are required to submit a regulatory return for each type of activity for which they hold a licence.

Depending on licence type, regulatory returns must be submitted on a quarterly or annual basis. Quarterly returns must be submitted within 28 days of the end of each quarterly reporting period. Annual returns must be submitted within 42 days of the end of each annual reporting period.

All returns must be submitted via the online regulatory returns system within the Gambling Commission’s eServices Hub.

The Gambling Commission uses the information to publish bi-annual industry statistics and to inform its understanding of its licensees and the wider gambling industry. The information also helps the Gambling Commission ensure licensees are within the correct fee category for their licensed activities.

An imperfect system

The Gambling Commission publishes information on when and how to submit regulatory returns in its Regulatory Returns Guidance, which is split by licence type.

However, the guidance is simple, and a repetition of what is asked within the regulatory return forms. There is no additional detail as to the type of information that should be captured in the form, and where. The lack of clarity, in our experience, has sometimes resulted in incorrect data being provided with the regulatory returns, or being provided under the wrong licensable activity.

In our experience, licensees often require assistance with the following:

Non-GB revenues – they should only be reported if taking place in reliance on the Gambling Commission operating licence;

B2B online casino revenues that are not revenue shares – the form only allows for GGY (revenue share) to be reported, and not fixed fee revenues, although the Gambling Commission is now aware of this issue from us.

It is important that information provided in regulatory returns is accurate. If a licensee misrepresents or fails to reveal information that it is asked to provide, unless it has a reasonable excuse it will commit an offence under section 342 of the Gambling Act 2005.

Beware exceeding your fee category

Regulatory returns go hand in hand with ensuring a licensee is in the correct fee category and, recently, we have noticed an increase in the Gambling Commission using regulatory returns to identify and contact licensees that it believes have exceeded the upper threshold of their fee categories.

Fee categories are a licence condition, included on the face of an operating licence. Therefore, an application to vary the fee category must be submitted before the upper threshold has been exceeded and it is a licensee’s responsibility to proactively monitor its fee category to ensure the upper threshold is not exceeded.

We urge licensees to routinely consider whether they are approaching the maximum limit of their fee category and whether a change of fee category is warranted. Licensees should be aware that the fee category licence condition follows the licence year, and will not necessarily align with the regulatory returns reporting period.

The process for submitting an application to vary is relatively simple. The applications can be completed through the eServices portal and carry a fee of £40. It is important to note that:

fee category increases by one level do not require any supporting documentation;
fee category increases by two levels or more must be supported by:
- new or updated financial projections;
- new or updated business plan;
- evidence of how the expansion of the business is funded;
decreases in fee categories must be supported by a full explanation.

Gambling Commission working group

In order to address some of the issues with the regulatory returns system, the Gambling Commission has established a working group and is seeking feedback from licensees on the questions currently posed in regulatory returns.

The last time the regulatory returns process was reviewed was in 2020 when, following a Consultation on changes to information requirements in the LCCP, regulatory returns, official statistics, and related matters, the Gambling Commission simplified the regulatory returns processes. In its consultation response, the Gambling Commission also committed: (1) to publish guidance for regulatory returns (which went live on 4 May 2021); and (2) to improve the usability, accessibility and availability of the regulatory returns system.

Three years on, the system is under review again – but it appears there will be no consultation and, consequently, fewer licensees will be aware there is an opportunity to help shape forthcoming improvements.

Next steps

We strongly recommend licensees use the online contact form to tell the Gambling Commission about their concerns with the regulatory returns process, forms and guidance as soon as possible, so they can be improved.

We hope that the working group will use this, as well as our recent feedback on the Gambling Commission’s guidance, to improve the current system.

In the meantime, licensees should also:

submit any outstanding regulatory returns as soon as possible;

endeavour to submit complete and accurate regulatory returns within the timeframes set by the Gambling Commission. The Gambling Commission is taking a much tougher approach and late and/or inaccurate regulatory returns will be referred to the Enforcement Team; and

routinely review whether they are in the correct fee category and, if necessary, submit an application to vary before exceeding the upper threshold of a fee category.

Please get in touch if you have any questions regarding the regulatory returns process and/or if you would like our assistance preparing a regulatory return or changing your fee category.

With credit and sincere thanks to Jessica Wilson for her invaluable co-authorship.

14Nov

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

14th November 2022 Gemma Boore 230

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

Compliance Changes

Proposal 9. Remote compliance assessments

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

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

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

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

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

Proposal 10. Changes to assessment framework

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

Respondents’ views: Some respondents noted that:

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

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

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

Proposal 11. Introduction of Special Measures

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

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

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

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

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

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

Enforcement changes

Proposal 12. Right to issue further preliminary findings letter

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

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

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

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

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

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

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

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

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

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

Proposal 14. Regulatory Panel to consider challenges to licence suspensions

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

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

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

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

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

Proposal 15. Regulatory settlements only considered at an early stage

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

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

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

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

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

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

14Nov

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

14th November 2022 Gemma Boore 240

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

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

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

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

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

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

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

The Consultation Questions

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

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

Proposal 1. No dual regulation of financial products

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

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

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

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

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

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

Proposal 2. Right to reject incomplete licence applications

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

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

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

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

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

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

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

Proposal 3. Persons relevant to a licence application

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

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

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

Amended paragraph 3.10 (changes to proposal highlighted):

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

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

Proposal 4. Timescale for using a new licence

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

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

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

Proposal 4. Timescale for using a new licence

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

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

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

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

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

Proposal 5. Clarification on suitability criteria

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

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

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

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

Amended paragraph 3.13 (changes to proposal highlighted):

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

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

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

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

Proposal 6. Requirement to provide evidence of source of funds

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

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

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

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

Amended paragraph 3.28 (changes to proposal highlighted):

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

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

Proposal 7. Clarification that licensees have ongoing reporting obligations

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

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

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

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

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

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

Proposal 8. Minor updates to reflect changes in internal policies

Proposal: Several minor updates to the Policy.

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

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

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

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

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

11Oct

Gambling Commission Special Measures: Trick? or Treat?

11th October 2022 Julian Harris 234

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

The background

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

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

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

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

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

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

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

The current position

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

The requirements

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

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

The process

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

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

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

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

Treat?

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

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

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

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

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

Trick

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

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

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

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

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

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

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

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

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

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

Final word

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

18Feb

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

18th February 2022 David Whyte 215

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 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 “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 248

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 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” . Boldly, the Gambling Commission describes this as providing “further clarity on 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 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 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… reset to original purpose 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.

09Aug

Update on the Commission’s Regulatory Panel Reform Consultation

9th August 2021 Jemma Newton 271

The Consultation

In May 2020, we wrote about the Gambling Commission’s (the “Commission”) consultation on a change in approach to Regulatory Panel Reform (the “Consultation”) and our concerns about the changes proposed. The Consultation included proposals to:

employ between four and six Adjudicators, who are legally qualified persons employed solely for the purposes of sitting on Panels;
set the quorum for conduct of any business by the Panel as one Commissioner and one Adjudicator for matters relating to an operating licence and one Adjudicator for matters relating to a personal licence;
enable a Panel to occasionally be asked by Commission staff to provide steers on regulatory settlement proposals / indication of an appropriate figure for a financial penalty; and
make changes to the procedures set out in the guidance for Regulatory Panel and Licensing hearings with reference to the timescales for the service of hearing bundles, requests to submit further evidence, the process for arranging hearing dates and the process for considering additional evidence at the hearing.

The Commission’s Response

On 21 July 2021 the Commission published its consultation response to the Consultation which summarised the 22 written responses received from gambling operators, trade associations and others, including Harris Hagan. The overwhelming majority of respondents disagreed with each of the Commission’s proposals, with a key concern being that “the independence and impartiality of the Panel would be adversely affected by the proposal to use adjudicators” as outlined in our May 2020 blog.

Worryingly, despite the concerns raised by the respondents and lack of support for its proposals, the Commission confirmed that it will forge ahead with its plans, albeit in some cases, with slight amendments to the original proposal. The consultation response confirms that:

the Commission will employ between four and six Adjudicators, who are legally qualified persons employed solely for the purposes of sitting on Panels, exactly as proposed in the consultation. The Commission addressed the concerns of impartiality in “Summary of responses – Regulatory Panel Reform: Consultation Response – Proposal 1: Use of adjudicators on regulatory panels”, saying that “it is the Commission’s view that the use of Adjudicators does not affect the impartiality of decision-making”.
the quorum for conduct of any business by the Panel will, as envisaged in the consultation, be set at a minimum of one Commissioner and one Adjudicator for matters relating to an operating licence, however there is now a proviso that the Panel will normally comprise two Commissioners and one Adjudicator. For matters relating to a personal licence, the quorum will be just one Adjudicator;
as set out in the consultation, the Panel may occasionally be asked by Commission staff to provide “steers” on regulatory settlement proposals and financial penalties;
the Commission will make changes to the procedures set out in the guidance for Regulatory Panel and Licensing hearings with reference to the timescales for the service of hearing bundles, requests to submit further evidence, the process for arranging hearing dates and the process for considering additional evidence at the hearing. Additionally, the Commission has amended proposals regarding the process of arranging hearing dates in response to consultation feedback, and has amended the guidance to show that Case Management Hearings will take place before the Adjudicator sitting alone; and
in due course, the Commission will publish an Adjudicator Governance Framework (“AGF”) as part of the Commission’s Corporate Governance Framework, to codify the role, training and operating framework of Adjudicators. This has been added following the Commission’s review of the responses. We expressed our concerns in our blog of May 2020 about the absence of an AGF, and that we considered it could go some way towards addressing independence concerns by ensuring that decisions are fair, with clear separation of the Regulatory Panel from the Gambling Commission’s Licensing, Enforcement and Legal departments, and therefore keenly await the publication of the AGF.

Timeframe for Implementation

The Commission confirmed that the changes to the affected documents (listed below) “will come into effect during 2021 to 2022 once adjudicators can be recruited. We will provide 4 weeks notice of the date of change via the Commission website, and will apply to all Regulatory and Licensing decisions/requests for escalation to Panel made after that date”.

The documents affected are:

We remain concerned that the Commission intends to make major changes which do not present a practical vision for adjudication that is consistent with good regulatory and legal practice. The Commission appears to be ignoring the concerns of respondents thereby bringing into question the entire basis of “consultation”. It is disappointing that the Commission has not actioned the legitimate issues raised by respondents of the independence and impartiality of the Regulatory Panels. These are cases where an operating licensee’s entire business is at risk, and a personal management licensee’s career is threatened. Issues of such severity and importance deserve greater respect from the regulator, if it is to be seen to act in accordance with the Regulators’ Code and for it to constitute a fair, balanced semi-judicial process, as it is intended to be.

18Nov

Gambling Commission Compliance and Enforcement Report 2019-2020

18th November 2020 Bahar Alaeddini 350

On 6 November 2020 the Gambling Commission published its annual Raising Standards for consumers – Compliance and Enforcement report 2019 to 2020 (the “Enforcement Report”). The Enforcement Report has been expanded this year and is laid out in the following eight sections:

Chief Executive’s message;
Triggers and customer affordability;
Customer interaction and social responsibility failings;
Anti-money laundering and counter terrorist financing;
Personal management licence (“PML”) reviews;
Illegal gambling;
White label partnerships; and
Betting exchanges.

Chief Executive’s message

In the very first sentence of his message, Gambling Commission Chief Executive, Neil McArthur, reminded readers that:

“Holding an operating licence or a personal licence is a privilege, not a right, and we expect our licensees to protect consumers from harm and treat them fairly.”

He goes on to summarise the Gambling Commission’s compliance and enforcement work in the last financial year (April 2019 to March 2020), in which:

49 section 116 licence reviews were commenced against PML holders;
5 operating licences were suspended;
11 operating licences were revoked;
12 financial penalty packages or regulatory settlements, totalling over £30 million, were imposed; and
350 compliance assessments (land-based and online) were conducted.

Neil McArthur also emphasised:

“Those in boardrooms and senior positions need to live up to their responsibilities and we will continue to hold people to account for failings they knew, or ought to have known, about…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…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…Everyone has a part to play to make gambling safer and learning the lessons from the failings identified in this report is one way of doing that.”

Summary of other key points from the Enforcement Report:

Triggers and customer affordability

“Customer protection has continued to be a priority for the Commission and consideration of affordability should be a significant driving factor in customer risk assessments.”

Affordability is a top priority and the Gambling Commission remains dissatisfied by industry progress. Open source information remains an important element of an affordability framework, because “it is a parameter to consider when setting benchmark triggers that will drive early engagement with customers”. Open source information shows:

median gross weekly earnings* for full-time employees in the UK of £585;
50% of full-time employees in the UK receive less than £30,500 gross earnings* per year;
50% of full-time managers, directors and senior officials (the highest weekly earners) in the UK receive less than £45,000 gross earnings* per year.

*These are gross earnings before expenses such as income tax, national insurance, mortgage/rent payments, travel, food etc. are deducted. The Gambling Commission expects expenses to be considered “so the starting point adequately reflects the true level of available disposable income for that individual.”

Further, the Gambling Commission is concerned that:

affordability frameworks “are not being implemented at pace despite guidance and advice”;
“complex and convoluted matrices and mappings” are being developed based on gross earnings before disposable income is factored in;
“trigger groups are set without any sort of customer interaction to influence their true affordability determination”; and
operators are not interacting early on to set “adequate, informed affordability triggers to protect customers from gambling related harm”, which it goes on to say “could render the operator non-compliant”.

Most notably, the Gambling Commission adds that:

“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.”

Operators should review lessons in the Enforcement Report and re-assess affordability triggers whilst preparing for any new requirements that may emerge from the Gambling Commission’s consultation on remote customer interaction. We will publish a blog on this consultation next week.

Customer interaction and social responsibility failings

“We have set out clear expectations for operators in relation to safer gambling. We expect operators to actively work and accelerate cooperation with each other to prevent, mitigate and minimise harm, collaborating to accelerate progress and evidence impact. We want a focus on ‘what works’ and we expect operators to empower and protect consumers.”

The scope of social responsibility is broad and includes identification and engagement with those who may be at risk of or experiencing harms.

The responsible teams for social responsibility should be adequately resourced.

Operators are encouraged to consider whether they can evidence the following:

effective safer gambling policies and procedures in place which are tested and periodically reviewed and updated to reflect impact assessments and new research;
policies and procedures that are truly implemented in the business and are being acted upon;
appropriate safer gambling triggers in place that lead to meaningful customer interactions, which are regularly reviewed by management to critically assess their impact on customers and overall effectiveness;
effective challenge and oversight by senior management with clear accountability throughout the organisation; and
teams responsible for conducting social responsibly interactions are adequately resourced so that at-risk customers are not missed or identified too late.

Licensees are strongly encouraged to review the Gambling Commission’s notable enforcement cases, helpful case studies and good practice guidelines.

Anti-money laundering and counter terrorist financing

“Work to ensure gambling stays free from crime and the proceeds of criminal finance continues to be a major area of concern for the Commission. Significant and substantial assessment continued for both land-based and online gambling businesses, including money service businesses activities offered by the casino sector.”

The Gambling Commission continues to see operators falling down on the following:

insufficient depth of knowledge demonstrated by PML holders, leading to competency and integrity concerns;
deficient Risk Assessments leading to ineffective policies, procedures and controls;
operators and PML holders failing to learn lessons from the Gambling Commission’s compliance and enforcement activity; and
failure to provide regular, quality training to staff.

Licensees are strongly encouraged to review the Gambling Commission’s notable enforcement cases, helpful case studies and good practice guidelines.

PML Reviews

“The Commission has been signalling for the past few years that we will increasingly focus on the role played by Personal Management Licence holders (PML) when undertaking Compliance and Enforcement investigations.”

Common failings have emerged from:

Failures to assess if decisions being made at Executive level are being implemented within businesses.
Overly complicated lines of decision making and accountability.
Lack of technical knowledge and oversight of areas that PML holders have specific responsibility for, especially in respect of AML.
Prioritising commercial outcomes over regulatory responsibility.

This section ends with a stark reminder, which we always provide to our clients and training subjects, “businesses do not make decisions – people do.” The Gambling Commission adds that “icensees can expect us to continue to take action against accountable individuals to ensure standards are raised to the levels required, whether in relation to the business or individual capability.”

Illegal gambling

“Part of our statutory remit and a key licensing objective is to keep crime out of gambling. We are particularly focused on identifying and disrupting those illegal websites which are targeted at the young and vulnerable gamblers and which often provide little, or no, customer protection. When consumers access illegal gambling sites, they expose themselves to many risks and are not afforded the protections in place in the regulated sector.”

The Gambling Commission’s focus has been on investigating unlicensed gambling facilities and unlicensed advertising, with 59 instances of remote unlicensed operators and 245 illegal lotteries referred by Facebook for closure. Its investigations have shown:

consumers identified as users of the websites have in the main been vulnerable with some having previously self-excluded via GamStop;
consumers often contact the Gambling Commission because they have been unable to withdraw funds;
when consumers have complaints with unlicensed operators these are often not dealt with, and consumers have no right to appeal;
the protection of consumers’ personal information cannot be relied upon; and
such websites may be linked to organised crime.

The Gambling Commission urges licensees to remain vigilant as to the risk of illegal sites using their software without authorisation and to report any such instances immediately

White label partnerships

“The white label operating model continues to be popular within the GB market with there being over 700 white label partners within the industry at present. One of the reasons this model is becoming increasingly popular is that this type of arrangement can bring global exposure to an operator’s products, via the arrangements their white label partners have in place with sports teams for example. However, there is a concern that unlicensed operators who would potentially not pass the Commissions’ initial licensing suitability checks, are looking to use the white label model to provide gambling services in Great Britain.”

White labels have been a key area of focus for the Gambling Commission in the last year. It showed that licensees were failing to appropriately mitigate the risks to the licensing objectives, including:

a failure to properly scrutinise the ownership of white label partners;
ineffective AML controls with individual white label partners or across the customers’ activity; and
poor oversight of activities performed by white label partners, particularly in relation to customer interactions.

Responsibility for compliance always sits with the licensee. In accordance with social responsibility code provision 1.1.20 (responsibilities for third parties) safeguards should always be implemented before committing to contractual obligations to ensure compliance with the LCCP. Failure to do so is likely to bring into question the suitability of the licensee.

Operators are encouraged to:

Conduct risk-based due diligence with a view to mitigating risk to the licensing objectives before entering a relationship with a white label partner;
continually manage and evaluate its white label partner relationships;
ensure service agreements between the licensee and white label partner explicitly articulate where overall responsibly for regulatory functions lie;
ensure white label partnership contracts contain a clause permitting the licensed operator to terminate the business relationship promptly where the partner is suspected of placing the licensing objectives at risk or fails to comply with the requirements contained in the LCCP;
provide training to their partners and conduct ongoing oversight of the activities which should be clearly documented and retained for the life of the business relationship;
ensure that any system the licence holder has in place to manage or detect multiple accounts for individual customers, works across all white label partners so they will have a holistic view of customer activity; and
ensure that source of funds, affordability or markers of harm triggers are based upon this holistic view and not solely on an individual domain basis.

Licensees are strongly encouraged to review the Gambling Commission’s notable enforcement cases, helpful case studies and guidance on white labels.

Betting exchanges

“This year has seen increased regulatory activity related to betting exchanges; an area of growing complexity as operators expand the breadth of markets available and the jurisdictions from which they draw their customers.”

The Gambling Commission reminds betting exchanges that they must apply “critical risk-based thinking” and must not assume that something good enough for one regulator will be acceptable to another. Due diligence should be undertaken for each individual customer. In particular, source of funds and source of wealth must be monitored by adequate checks and controls, particularly where these may be obscure, unconventional and/or especially large – for instance, in relation to account to account transfers or syndicates.

Licensees are strongly encouraged to review the Gambling Commission’s notable enforcement cases.

We strongly encourage all Gambling Commission licensees and applicants to read the Enforcement Report carefully.

28May

Changes to the Gambling Commission’s Regulatory Panel

28th May 2020 Bahar Alaeddini 355

On 18 May 2020, the Gambling Commission announced planned changes to its Regulatory Panels. In its introduction it explained:

“Due to changes in the gambling market and gambling regulation, the cases that are heard by Regulatory Panels are becoming increasingly complex and legalistic. consulting on a number of proposals to ensure that Regulatory Panels are best equipped to deal with…evolving casework.”

Proposed changes

The Gambling Commission proposes:

To employ four to six adjudicators, who are legally qualified, solely for the purposes of sitting on Regulatory Panels. The “presumption” is that they will provide legal advice to the Regulatory Panel, although the Gambling Commission will retain the option for a legal adviser to attend. This legal advice would be shared as part of the Regulatory Panel process, in the same way as at present.
Reconstitute the Regulatory Panel quorum as follows: (a) operating licences: one Commissioner and one Adjudicator; and (b) personal licences: one Adjudicator.
To use a Regulatory Panel “occasionally”, if asked by Gambling Commission staff to provide “steers” on regulatory settlement proposals (delegation of approval will remain with Executive Directors) and financial penalties.

These changes are believed to provide a “cost-effective” way of conducting hearings, with the Gambling Commission claiming the following advantages:

they provide “a broader range of combined experience and ensure such skills do not atrophy by being regularly utilised”;
Regulatory Panel members will have greater availability to hear cases;
shorter waiting times for hearings;
other regulators adopt similar models; and
cost savings “meaning that costs awarded against the losing party will be lower overall”.

The consultation provides basic details of costs (approximately £1,000 per day per Adjudicator) and potential savings. However, the likely calibre and experience of an Adjudicator is unclear.

“Increasingly complex and legalistic”

The consultation provides no evidence to demonstrate that “the cases that are heard by Regulatory Panels are becoming increasingly complex and legalistic”. Other than published decisions, and procedural rules, no information is publicly available on the work of the Regulatory Panel, including the number of cases heard or matters referred, the number of hearings and the waiting times.

In our experience and in general, it is a misconception to say cases have become “increasingly complex and legalistic”. Any case that reaches the Regulatory Panel will be substantial and complex, and often, legalistic. Revocation, suspension and a hefty fine are on the table, so what is wrong with that?

There is no denying that the firm’s work has become more complex, but this boils down to a noticeably changed approach to gambling regulation in Great Britain, influenced by various factors. Factors include a new Chief Executive, high turnover of Gambling Commission staff, not providing reasonable periods of time to licensees (but giving itself months on end) and – regrettably – procedural issues and failings by the Gambling Commission, which jeopardise the right to a fair and proper hearing.

Erosion of independence

Regulatory Panels provide an important opportunity for applicants and licensees to attend an oral hearing to challenge decisions made by Gambling Commission staff.

The independence of employed Adjudicators, recruited and appraised by the Gambling Commission, is questionable, encroaching on its supposed “values” (as set out in its Corporate Strategy 2018-2021) to be:

fair
accountable
professional; and
consistent.

The very purpose of the Regulatory Panel is to give the applicant/licensee the opportunity to challenge a “minded to” decision reached by Gambling Commission staff. This is a critical control and protection, which is being weakened – by the Gambling Commission – in this consultation. The Regulatory Panel is the only quasi-independent option available to an applicant/licensee. Although it is still the Gambling Commission making the decision it is invaluable and must be protected.

The consultation does not include an adjudication governance framework, which could go some way in addressing independence concerns by ensuring decisions are fair, with clear separation of the Regulatory Panel from the Gambling Commission’s Licensing, Enforcement and Legal departments. It also does not specify which regulatory models and regulators were examined. As I mentioned in my earlier blog on 1 May 2020, many other regulators use registrant or industry panel members – not employees – who bring with them a wealth of knowledge and independence, assuming potential conflicts are managed.

By way of example, approximately half of the Financial Conduct Authority’s Regulatory Decisions Committee’s 18 members come from finance or financial services backgrounds. The other half have esteemed legal, governance, policy or academic backgrounds. Independence is further emphasised by the FCA handbook stipulation that:

none of the members are employees; and
the committee has its own legal advisers and support staff.

Independence is likely to be further eroded by changes to quorum. Presently, a Regulatory Panel must be made up of at least two Commissioners, although normally it will comprise three Commissioners. Under the proposed arrangements there will, at most, be one Commissioner, with no Commissioners sitting on hearings relating to personal licences. The latter will be considered by a single Adjudicator, who will receive one day of training annually, presumably from the Gambling Commission. It is unimaginable that the Gambling Commission would consider one day of training annually to be sufficient education for anyone working in the gambling industry!

Taking a cynical view, Adjudicators may be guided by the Gambling Commission’s recommendations, further eroding independence of the Regulatory Panel.

Unfairness

The loss is not simply one of independence. The proposed reduction to a maximum of one or two panel members is unjust. A Regulatory Panel of one Commissioner, as opposed to the standard three, particularly for operating licence hearings, will undoubtedly impact on the fairness of the hearing and regulatory decision. Surely, particularly in complex matters, there is a strong argument for retaining that number, not reducing to one Commissioner? What happens if a Regulatory Panel of two is spilt on the decision? Who has the binding vote? Is it the Adjudicator because they will “ordinarily” provide the legal advice to the Regulatory Panel? Presently, one Commissioner presides over the proceedings, but all three have equal decision-making powers.

How will the Adjudicator manage the role of legal adviser to the Regulatory Panel whilst also being a member? By way of comparison, the Solicitors Regulation Authority uses an Adjudication Panel; however, it has a minimum of two members and will normally comprise three, excluding the independent legal adviser.

“Me, myself and I”

A Regulatory Panel of one member is not a panel. The Cambridge Dictionary defines a panel to mean “a small group of people chosen to give advice, make a decision or publicly discuss their opinions”. It is therefore misleading to suggest a single Adjudicator considering personal licence hearings would establish a Regulatory Panel.

In such hearings there may be an argument that a decision made by a new-style Regulatory Panel fails to be “independent and impartial”, in accordance with the Human Rights Act 1998.

The future

Disappointingly, the consultation, which closes on 26 June 2020, signals another marked change in regulation. If introduced, there will be an unescapable loss of diversity, given the Commissioners’ varied backgrounds, and the principles of fairness and natural justice will be compromised.

Ultimately, the Regulatory Panel should be about making good decisions in the public interest, following a fair process. A new or modernised process should not be pursued at the expense of the quality and fairness of the outcome. Poor quality decisions that are not robust or consistent will result in more cases being appealed.

It seems to us that the Regulatory Panel has been functioning well providing independence, fairness and much needed separation from the executive arm of the Gambling Commission, which is embroiled in the day to day business of the investigatory and review work and, quite understandably, can lack perspective. A legitimate failing is the length of time taken to constitute Regulatory Panels, but surely there are better ways to address this, for example, with more Commissioners? Instead, the cynic might be tempted to conclude that the Gambling Commission does not like the decisions the Regulatory Panel is reaching.

In conclusion, the proposed changes do not offer a practical vision for adjudication that is consistent with good regulatory and legal practice. There is nothing to suggest that fairness has been a consideration. The only consideration appears to be about saving cost, time for the Gambling Commission and Commissioners, and speeding up the process. In doing so, the duty to act fairly has been sacrificed.

08Apr

GAMSTOP, Prophet and Sportito – A Cautionary Tale

8th April 2020 Lucy Paterson 367

GAMSTOP is a multi-operator self-exclusion scheme which enables players to restrict their online gambling by self-excluding from online operators with a single request, rather than requesting exclusion from each operator individually. Through the scheme, which was launched in 2018, players in Great Britain can elect to self-exclude from online gambling websites and apps for a period of six months, one year, or five years. Once the minimum duration period has elapsed, the self-exclusion remains in force until the player requests that GAMSTOP remove them from the scheme.

Whilst initially, participation in the scheme was voluntary for operators, the Gambling Commission announced on 14 January 2020 that participation would become a licence condition on 31 March 2020, meaning that any of the more than 200 operators who had not integrated the scheme by that date would be in breach of a mandatory condition of their licence. The compulsory integration of the scheme, together with other initiatives such as gambling blocking software and payment card blocking, forms part of the Gambling Commission’s National Strategy for Reducing Gambling Harms, a three-year strategy which aims to drive and coordinate efforts to create a lasting impact on reducing gambling harms.

Indeed, the Gambling Commission did not delay in taking action against operators who had not complied by the 31 March 2020 deadline. On 3 April 2020, it announced that it had suspended the licences of two operators who had failed to integrate GAMSTOP – Dynamic Bets Inc, trading as Prophet, and Sportito.

Neil McArthur, CEO of the Gambling Commission, said:

“We have made it clear to operators that we are ready and willing to use our powers to protect consumers, as this action demonstrates. Self-exclusion is an important tool to protect vulnerable consumers, which is why we made it compulsory for all online operators to be signed up to GAMSTOP by 31 March. We took action because the operators had not complied by the deadline, which placed vulnerable consumers at risk.”

Though Prophet and Sportito have since integrated the scheme and had their licence suspensions lifted, the failure by both operators will now result in a review of their licences.

The swift action taken by the Gambling Commission highlights the absolute importance of licensees’ compliance in the current climate. The Gambling Commission has clearly shown that it will not be distracted by the global crisis and will continue to take whatever measures are necessary to protect consumers and protect the licensing objectives.

At a time when much of the gambling industry is in turmoil, licensees must ensure that they are not so distracted by protecting their commercial interests that they neglect their compliance obligations. Whilst ensuring the financial viability of the business will, understandably, be at the top of all gambling businesses’ agendas at this time, taking an eye off the ball when it comes to compliance may prove to be a very costly mistake further down the line.

Operators and suppliers should therefore ensure that they stay abreast of the Gambling Commission’s latest updates and are prepared to implement any required changes. Monday 14 April 2020, for example, will see the ban on the use of credit cards to gamble for all online and offline gambling products, with the exception of non-remote lotteries, come into effect, and operators must ensure that they are ready to implement this with immediate effect, or face similar action against their licence(s).

As mentioned in our blog post last week, operators should also be aware that the Gambling Commission will shortly launch consultations to amend the LCCP to:

introduce restrictions on customers under 25 years of age from being recruited to VIP incentive schemes;
require increased safer gambling, enhanced due diligence and spend checks before any customers are recruited to such schemes; and
require full audit trails detailing the decision-making process to require greater accountability when customers are recruited to such schemes.

Whilst no date has yet been set, these new requirements are expected to be in place no later than July 2020. It would therefore be wise for operators to consider how they will implement these changes now, in order to reduce workloads when gambling operations return to normal.