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.

22Jun

Consultation response: Gambling Commission fees to increase from 1 October 2021

22nd June 2021 Jemma Newton 285

On 14 June 2021 the UK Government issued its response to a consultation by the Department for Digital, Culture, Media and Sport (“DCMS”) in relation to proposals to increase the fees which are payable by gambling operators in Great Britain to the Gambling Commission (the “Commission”).

The Government’s response set out that the consultation had proposed an increase in fees in order to enable the Commission to continue to “recover its costs and address regulatory challenges”.

The Government confirmed it intends to proceed with implementing the proposals outlined in the consultation, which were to:

increase annual fees for remote operating licences by 55% from 1 October 2021;
increase all application fees by 60% from 1 October 2021;
make other changes to simplify the fees system, including removing annual fee discounts for combined and multiple licences, from 1 October 2021; and
increase annual fees for non-remote operating licences by 15%, with implementation of these increases delayed until 1 April 2022.

The Government also confirmed that two minor amendments will be made to fees regulations:

to “ensure fees regulations are consistent with the provisions of UK GDPR and the Information Commissioner’s Office’s guidance”, no variation fee will be charged where individuals exercise their right to have inaccurate personal data rectified; and
the fee for an application for a Single Machine Permit will be increased, from £25 to £40, “to ensure that the Commission recovers its costs in processing these applications”.

The Government’s full response can be viewed here.

The Commission released a response to the Government’s confirmation of an increase in fees, stating that it “welcomes publication of consultation response on the funding of gambling regulation”, and clarifying that the much needed changes to its fees income “will enable to continue to regulate effectively”. The Commission’s response can be viewed here.

What does this mean for licensees?

As set out above, in addition to a significant increase to licence application fees, remote licensees will be required to pay considerably higher annual fees to the Commission from 1 October 2021. Notably, the increase in annual fees for non-remote licensees will be delayed until 1 April 2022, to account for the Government’s recognition of the impact COVID-19 restrictions have had on the non-remote sector. The Government’s response sets out that:

The majority of non-remote operators are required to pay their annual fees in August or September each year, meaning that the new annual fee levels for much of the non-remote industry will not be due until August 2022.

16Jun

Update on the Remote Customer Interaction Consultation

16th June 2021 Jemma Newton 305

Background

On 25 May 2021, the Gambling Commission of Great Britain (“the Commission”) provided an update regarding its Remote Customer Interaction Consultation.

The update referenced the Commission’s consultation, which took place earlier this year, which is concerned with identifying and protecting customers at risk of harm. The update also referred to the Commission’s current requirements, which place a duty on remote operators to monitor gambling, and to take action where there is a risk of harm, and the Commission’s finding that operators were not always acting swiftly enough. The Commission confirmed that it has been analysing the approximately 13,000 responses it received.

Confirming that it had considered what the respondents said, the Commission states that:

Many people think there should be protections in place for the most vulnerable and that appropriate checks should be in place to identify and prevent cases of clearly unaffordable gambling. Many respondents emphasised that measures should be proportionate and targeted at those at risk of harm. At the same time, customers were also concerned about privacy and freedom of choice. We take that seriously.

What are the Commission’s priorities and intentions?

The Commission confirms that it is aiming to achieve the correct balance, and that it has listened to concerns about what could be seen as an unnecessary assessment of time and money spent gambling. However, it goes on to state that it has seen serious failings by operators towards customers, and (somewhat surprisingly given the extensive responses it has to review) it has concluded that it needs to take action now to address the most significant risks, including excessive spending in short periods of time and harm to vulnerable customers.

The Commission states that it has concluded that stronger requirements are needed for operators to identify a range of indicators of harm, and to take action earlier and more often.

The Commission states that it has identified three key risks that it is prioritising for action:

Significant losses in a very short time

Cases where customers have been able to spend many thousands of pounds in short periods, including minutes, without any checks. These cases are relatively rare but have very significant impacts on the consumers affected. For example, in a recent case a customer lost four thousand pounds in six minutes following sign-up.

Significant losses over time

Where customers have significant losses over a period of time without sufficient assessment of whether they are being harmed. Significant losses over time are experienced by a relatively small proportion of customers and it is appropriate to require checks for these customers. An example of this in our casework was where a customer lost thirty-five thousand pounds over two months, without sufficient checks being carried out.

Financial vulnerability

Where information is available that shows when customers are particularly financially vulnerable and likely to be harmed by their level of gambling.

The Commission then sets out its next steps, which will be to:

- Publish its full response this summer, which will set out the detailed actions on the areas on which it has previously put forward proposals for consultation. Such areas include the requirement to take action where customers are known to be in a vulnerable situation, to take action in a timely manner, and, where appropriate, for that action to be automated. The Commission clarified that it will also proceed as planned with a consultation on thresholds for operators to take action and guidance as to what those actions should be.
- Continue to work closely with the Department for Digital, Culture, Media and Sport (“DCMS”) by providing advice and evidence for the Government’s Gambling Act Review (the “Review”) and recognising broader public policy questions about how to protect people from harm which will be considered as part of the Review.
- Continue to engage with consumers, the financial sector and the gambling industry about information on customers that should be available to gambling businesses.
- Continue its work to support the prevention of harm, including working to ensure that existing tools for setting deposit limits are used more widely and effectively.

Points of note for licensees and what should they do in the meantime?

1. The Commission’s update clarified that remote licensees should continue to meet the Commission’s current customer interaction requirements. The Commission’s requirements and current expectations are set out in the Licence Conditions and Codes of Practice, customer interaction guidance issued under SR Code 3.4.1 and in the Commission’s Compliance and Enforcement Report 2019-20. We discuss these requirements further in our blog.

1. Operators should note the three ‘key risks’ flagged by the Commission that are being prioritised for action. Monitoring “significant losses in a very short time” and “significant losses over time” should not be an overly burdensome task for licensees and they should consider taking steps now to introduce monitoring of these risks if they do not already do so. The third key risk, “financial vulnerability” is somewhat more nuanced; until such time as the Commission makes its position clear, licensees should note the increasing focus by the Commission on the risks presented by customers who are financially vulnerable.

1. Despite the apparent step backwards, which the Commission’s update indicates it has taken in relation to its future plans for affordability, licensees should note that in practice, the Commission continues to expect them to consider affordability in both their approach to safer gambling and in their approach to anti-money laundering and combating the financing of terrorism.

13May

The Personal Management Licence regime: An impossible tightrope?

13th May 2021 David Whyte 331

This article was co-authored by Tom Orpin-Massey from QEB Hollis Whiteman Chambers.

Introduction

Personal management licences (“PMLs”) issued by the Gambling Commission of Great Britain (“GBGC”) are held by those occupying specified management roles at licensed gambling operators. They are the key individuals at operators responsible for overall strategy, finance, marketing, information technology, oversight of day-to-day management of certain premises, regulatory compliance, and anti-money laundering.

The PML licensing regime for these senior managers creates a personal responsibility for regulatory compliance, both in the way that they conduct themselves in their role, and the way in which they have management responsibility for the behaviour of the operator for whom they work.

Their jobs are rarely easy. On top of the stresses and pressures of working for licensed gambling operators in a fiendishly competitive market, they must also navigate an ever-evolving regulatory landscape. In addition, the GBGC has been signalling for the past few years that it will increasingly focus on the role played by PML holders when undertaking compliance and enforcement investigations into operators.

The statistics reflect this; in the period April 2019 – March 2020, 49 separate licence reviews were undertaken into PMLs, primarily due to safer gambling or anti-money laundering (“AML”) failures identified at the operator at which they were employed. We expect that figure to increase by the time of the publication of the GBGC’s next annual Enforcement Report for 2020-21 later this year. Recently published GBGC action taken includes:

The CEO of an operator receiving a warning and an additional licence condition due to safer gambling and AML failures identified at the operator.
12 PML holders at an operator receiving warnings, advice to conduct letters, or surrendering their licence following notification that their licence was under review, due to safer gambling and AML failures identified at the operator.
A further 19 PML holders at that same operator surrendering their licence or receiving advice to conduct letters outside of the licence review process due to safer gambling and AML failures identified at the operator.

Prefacing the GBGC’s last Enforcement Report, then CEO Neil McArthur wrote that “holding an operating or a personal licence is a privilege, not a right”. He went on to say that the GBGC had indicated in the summer of 2017 that its focus was shifting towards PML holders and that “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”.

Is personal regulatory liability within a management framework straightforward?

The GBGC’s position seems, on the face of it, a reasonable one. Who else, other than their senior management and PML holders, are responsible for the behaviour of operators? It therefore follows that where PML holders have failed to meet the GBGC’s standards and/or to adhere to their responsibilities, they should be held to account.

However, as is frequently the case when seeking to apportion blame for a mistake, matters are often more complicated than they may seem. Factors of note include:

The GBGC’s regulatory framework evolves constantly.

The GBGC’s regulatory framework and guidance is often said to be difficult to follow and poorly communicated.

Employees who are not PMLs may be responsible for mistakes and oversights. Whilst these mistakes may expose the operator and its PMLs to criticism, it does not always follow that they are due to a PML’s ignorance or incompetence, and thus holding them responsible for shortcomings on a strict liability basis may not be fair or reasonable.

PML holders are subject to a licence condition that they take “all reasonable steps to ensure the way in which they carry out their responsibilities in relation to licensed activities does not place the holder of the operating licence … in breach of their licence conditions.” It does not always follow that, because an operator is in breach of licence conditions, a PML holder will also be in breach personally. In many cases, a PML holder may have taken “all reasonable steps”.

Inevitably, operators and PML holders’ views will not always be aligned. PML holders, who in our experience are generally trying to do the right thing, often find themselves facing complex challenges and caught between the GBGC’s requirements and the operator’s commercial interests, with their personal livelihood and reputation at risk. This should be borne in mind by the GBGC, particularly in the current economic climate.

PML licence reviews are not always carried out by the GBGC in a consistent manner. In some cases they are commenced at the same time as, or during, an operating licence review, but more often than not they are commenced once an operating licence review has concluded. Licence reviews can take years rather than months to reach a conclusion. PML holders are therefore left in the unenviable position of having to recall events that have taken place years ago when trying to defend themselves. This is if they are lucky enough to have access to the information required in order to aid their recall. If, for any reason, they have left the business, this may not be possible.

The GBGC does not set out clearly its approach to PML reviews when they are linked to operating licence reviews. PML holders are often expected by the GBGC to disclose information or answer questions about matters relating to an operating licence review that may have an impact on their PML, without having been clearly informed of the risks or consequences of doing so. The fact that in some cases a PML holder may be accused of breaching a licence condition, which is a criminal offence under the Gambling Act 2005, increases further the exposure to personal risk. This is despite the GBGC’s policy position that, as a general rule, it will not pursue a criminal investigation into a licensee, as in most cases the matter is likely to be capable of being dealt with by exercise of its regulatory powers.

In an age where mental health is at the forefront, all would benefit from giving thought to the impact regulatory action may have on the mental health of PMLs, the vast majority of whom are well-intentioned and want to do right by both their operator and their regulator. Competing interests, reputational harm, the unintentional consequences of their actions and future employability are all factors that will weigh heavily on the shoulders of a PML holder subjected to regulatory action. Expedited investigations should be prioritised, processes and procedures clearly outlined, and legal rights clearly communicated.

PML reviews that take years to resolve, often following prolonged operating licence reviews, are of no benefit to the GBGC, nor to the individual concerned. Swift reviews and clear processes will not only serve to limit the impact on the individual concerned but may also improve the efficacy of regulation.

A PML under review: some things to think about

GBGC investigations and licence reviews of operators often expose PML holders to the risk of similar action in a personal capacity. This puts PML holders in the invidious position of not only responding for and on behalf of the operator, but also having to consider their own professional interests and reputation.

We suggest five things a PML should consider in this situation.

First and foremost, when a PML holder learns that the GBGC is investigating a matter relating to either their own or their operator’s licence, they should seek appropriate legal advice and support immediately.

Before commencing a licence review the GBGC is obliged to put an operator or PML on notice, but a PML may become aware of GBGC interest from an early stage, for example through enforcement enquiries. If so, advice should be obtained at this point. This is important because often the interests of the PML do not necessarily align with those of the operator, even if they act very much as part of the “controlling mind” of the operator, and interests seem at the time to be indivisible.

Secondly, PML holders should be mindful of their own position when saying anything on the record to the GBGC. This is not to say that they should be anything other than honest, open and transparent: it is merely about ensuring that the process is fair to them too.

A typical step in the review of an operator’s licence will be a preliminary meeting with senior management. In some cases, this may be followed or replaced by a regulatory interview (sometimes under caution). These meetings and interviews are usually recorded and transcribed by the GBGC. Anything that is said in them may be used in both the investigation into the operator, and also in any subsequent review of the PML holder.

In practice, PMLs themselves should be warned, or in some cases cautioned, in an individual capacity if they themselves might be investigated. Appropriate advice can help PMLs navigate the difficult situation in which they have to respond on the record on behalf of an operator, whilst ensuring their own position is also protected.

Thirdly, if unsure of timescales and/or the review process, PMLs should ask the GBGC to clarify its position. Whilst the GBGC may not always be able to provide a definitive answer, the fact that the request has been made is an important point of record.

Fourthly, if, after an operating licence review has concluded, perhaps with a number of failings identified and regulatory action taken, the PML is unfortunate enough to be notified that their PML is being reviewed as a consequence of their role in the identified concerns, it is vitally important that they are given fair and proper disclosure. Without it they will find it very difficult to understand the case against them, and properly defend themselves. This can become more complicated if the PML no longer works at the operator concerned.

We recommend that the PML do all they can to seek disclosure from the GBGC and the operator in relation to the matter concerned. What material is the GBGC relying upon? What representations did the operator make? Should the GBGC or the operator be reluctant to hand over material relevant to them, there are options open to them to challenge this.

And finally, a PML should always be open and honest with the GBGC, and remember that they also have a personal duty to uphold the licensing objectives and act with integrity in the review process. Any obfuscation will do them no favours in the long term.

Conclusion

PML holders who make genuine mistakes when trying to do the right thing, particularly those in compliance roles, should in appropriate cases be supported by the GBGC and viewed as people who can assist in raising standards. Prioritising support and guidance over targeted regulatory action when such mistakes occur may be more productive and is less likely to deter highly competent individuals from holding PMLs because of the risks associated with doing so.

Whilst competing commercial and regulatory interests mean that being a PML is becoming tougher, there are things that PML holders can do to help themselves, and to protect their interests when the GBGC become involved. Legal advice should be sought at an early stage.

Tom Orpin-Massey is a barrister at QEB Hollis Whiteman specialising in crime and regulatory law. He was seconded to the GBGC in 2016 for seven months and continues to be instructed in a broad range of gambling work, both for the Commission and for operators and PMLs.

11May

The Affordability Debate (3): Regulating beyond its means?

11th May 2021 Julian Harris 270

This is the third in a series of articles considering different aspects of the affordability debate. We have already considered the right to protection, personal responsibility and freedom of choice (in article 1), and recently (in article 2), what the Gambling Commission (“the Commission”) has sought to require of operators at present, with an analysis of the manner in which it has done so. In this article, we turn to the wider powers of the Commission and consider whether they have been exceeded, or at least stretched, in relation to its approach to affordability.

The Customer Interaction Consultation

The Commission launched its ‘Remote customer interaction – Consultation and Call for Evidence’ (the “Consultation”) on 3 November 2020 and the Consultation closed on 9 February 2021. Further to our criticism in our 18 May 2020 article (‘New Gambling Commission Guidance for Online Operators: Changing the Basis of Regulation?’) of the Commission’s introduction of its ‘Customer interaction – Additional formal guidance for remote operators during COVID-19 outbreak’ (the “Covid-19 Guidance”) without consultation, and more generally its use of formal guidance as a means of expanding its Licence Conditions and Codes of Practice (“LCCP”), it was encouraging that on this occasion, the Commission did consult.

Whilst there is no impropriety in the Commission having a review on customer interaction, to include the consideration and gathering of evidence in relation to affordability, we remain concerned about the Commission’s increased use of guidance as a means of adding layers to existing formal requirements, and also about the nature and content of the Consultation. Firstly, whilst there may be cogent arguments in favour of guidance being used to explain and set out reasonable and proportionate expectations of requirements contained in the LCCP, it should not exceed this purpose to the extent that it is difficult to distinguish between requirements outlined in the LCCP and those contained within purported guidance. Secondly, when consulting, it is important that the Commission analyses all information available to it, rather than seemingly interpreting the information in its possession as a means to its ends.

The core proposal in the Consultation in relation to affordability is for the introduction of mandatory financial thresholds for affordability assessments. The evidence on which the need for such assessments is based is flimsy and unconvincing when properly analysed, which the Consultation does not attempt. In addition, the Commission relies on the 2018 Health Survey for England. This the Commission prays in aid of the proposition that “there is evidence to indicate that there is a large-scale issue with remote gamblers betting more than they can afford to lose and experiencing issues with their gambling”. The basis for this sweeping statement is a finding that 21% of respondents stated that they had bet more than they could afford “sometimes” when asked to choose between four options, the other three of which were “never”, “most of the time” and “almost always”. Without further questioning and analysis, this is hardly a basis for swingeing new regulations restricting the liberty of adults to make their own choices without having to prove their financial wellbeing; indeed, it could be that many of those who ticked that box occasionally bet more than they felt was wise, a position that most people would experience with many different kinds of spending: it is certainly not a guaranteed indicator of vulnerability or harm.

Of even greater concern is the scant regard which the Commission appears to have had for the 2018 Consultation Principles. These require, inter alia, that consultations by government authorities:-

1. Include “validated impact assessments of the costs and benefits of the options being considered….where proposals have an impact on business…”;
2. Consider whether “informal iterative consultation is appropriate using….open, collaborative approaches”;
3. “Publish responses with 12 weeks of the consultation or provide an explanation why this is not possible.”

It is disappointing that the Commission has in recent times shied away from informal engagement with the industry on matters of interest and importance to it and to its licensees. Whilst there has been some collaboration with the Betting and Gaming Council, this has on occasion been preceded by the threat of action and then followed by negative comments by the Commission. Moreover, collaboration underpinned by threat is not informal engagement. This, and the Commission’s apparent failure to consider the impact of its proposals on the industry and other stakeholders, such as the sports organisations, could once again lead an observer to question its motives, and ask if the consultation is really intended to open a debate and answer certain questions about safer gambling, social responsibility and affordability, or whether the Commission is simply going through the motions to tick the consultation box, with the intention, whatever the evidence produced, of imposing its own agenda. Perhaps it is for this reason that the Commission relies on questionable evidence from the 2018 Health Survey without mentioning that it also found that the incidence of problem gambling had fallen from 0.7% in the 2016 Survey to 0.5%.

As licensees are only too aware, and as we set out in our previous article on this subject, whilst the Commission has not formally imposed the proposals in the Consultation, it has sought to require operators to abide by them, or variants of them, outlined in its Enforcement Reports, by exerting pressure, threatening regulatory action and generally creating a climate of fear. That fear has been exacerbated by the uncertainty as to what the Commission actually requires.

This is the unfortunate consequence when a regulatory authority fails to have proper or sufficient regard for the statutory framework within which it is required to operate. We have already analysed the difficulties faced by the industry in trying to ascertain what is actually and properly required of it by law and regulation. The Commission has the power, and indeed the duty, to prepare codes of practice and impose appropriate licence conditions to regulate the way in which licensees operate. It is required to undertake consultation on such codes of practice. But in the case of affordability, the Commission expects licensees to abide by a series of “requirements” described, not in the LCCP, but in their Enforcement Reports and their existing Customer Interaction Guidance. Breach of a Code under section 24 of the Gambling Act, 2005 may properly be taken into account by the Commission in the exercise of its statutory function, but acting contrary to whatever opinions it expresses in its Enforcement Reports, or in speeches, may not. There can therefore be no basis for the Commission, when raising safer gambling concerns, to refer to those Enforcement Reports in its compliance assessment findings, licence review threats or regulatory actions, as it is increasingly doing.

It follows that similarly there can be no basis for the Commission to claim that affordability assessments are somehow already a requirement of the LCCP. Were that to be true, there would have been no need to write in different terms in the 2020 Enforcement Report from what was said in the 2019 Report, or in its current Customer Interaction Guidance (see article 2 for details), or indeed for the Consultation itself. Yet in reality, at present this is the only way the Commission could argue it properly makes these requirements of licensees.

Statement of Principles

The Commission publishes a ‘Statement of Principles for licensing and regulation’ (the “Statement of Principles”), as is required by section 23 of the Gambling Act 2005 (the “2005 Act”). This is expressed to have had regard to various documents, including the ‘Regulators’ Code (July, 2013: in force from 2014)’ (the “2013 Code”). Whilst the Commission makes reference to the principles included in the 2013 Code in the Statement of Principles, these are more clearly expressed in the 2013 Code, which requires, inter alia, that:-

“1.1 Regulators should avoid imposing unnecessary regulatory burdens through their regulatory activities and should assess whether similar social, environmental and economic outcomes could be achieved by less burdensome means. Regulators should choose proportionate approaches to those they regulate, based on relevant factors including, for example, business size and capacity.

1.2 When designing and reviewing policies, operational procedures and practices, regulators should consider how they might support or enable economic growth for compliant businesses and other regulated entities, for example, by considering how they can best:

- understand and minimise negative economic impacts of their regulatory activities;
- minimising the costs of compliance for those they regulate;
- improve confidence in compliance for those they regulate, by providing greater certainty; and
- encourage and promote compliance.

5.1 Regulators should provide advice and guidance that is focused on assisting those they regulate to understand and meet their responsibilities. When providing advice and guidance, legal requirements should be distinguished from suggested good practice and the impact of the advice or guidance should be considered so that it does not impose unnecessary burdens in itself”.

We do not know and cannot speculate as to whether the Commission has given careful thought to these obligations when preparing the Consultation. However, we cannot be satisfied that the level of burdensome proposals included in the Consultation and their probable economic impact, are demonstrably considered in the Consultation and this calls into question whether the Commission has had adequate regard to the requirements of the 2013 Code.

The vulnerable

When considering the Commission’s powers, the starting point is the licensing objectives, set out in section 1 of the Gambling Act, 2005 (“the 2005 Act”). These are:

“(a) preventing gambling from being a source of crime or disorder, being associated with crime or disorder, or being used to support crime;

(b) ensuring that gambling is conducted in a fair and open way; and

(c) protecting children and other vulnerable persons from being harmed or exploited by gambling.”

The Commission is required, by virtue of section 22 of the Act:

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

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

The licensing objectives were not entirely new inclusions in the 2005 Act, having been carried forward from the Gaming Act, 1968, albeit somewhat reworded. The third licensing objective – “protecting children and other vulnerable persons from being harmed or exploited by gambling” is relevant, as the basis for affordability checks. In the Statement of Principles, the Commission at 5.26 states that:

“With regard to ‘vulnerable persons’, whilst the following list is not exhaustive, the Commission considers that this group will include:

- people who spend more money and/or time gambling than they want to;
- people who gamble beyond their means;
- people who may not be able to make informed or balanced decisions about gambling, for example because of health problems, learning disability, or substance misuse relating to alcohol or drugs.”

The wording of the third licensing objective refers firstly to children, and then to other vulnerable persons. The use of that word “other”, and the position in which it appears in the wording of this licensing objective is significant: it is there for a reason. Children are, by law, incapable of making adult informed decisions. Gambling is an adult activity, again by law, as is the consumption of alcohol or the use of tobacco products. In our view the use of other is to indicate that this is the standard by which vulnerability is to be judged; i.e, that it means people who are unable to make a properly informed, or ‘adult’, decision. Plainly, that would include those referred to in the Commission’s third bullet point above. It might include some in the second, though this is too widely expressed. The same point applies to the first. But both of these would depend upon fact and degree: who amongst us has not at some time spent more than we set out to do, carried away by the moment, in a pub, restaurant, or shop? It does not necessarily follow that we are vulnerable people.

In recent years the Commission has interpreted “vulnerable persons” increasingly broadly in its publications and speeches, to include not just those who demonstrate a problem with gambling, or even those who are at risk of being problem gamblers, but to include those “who may be at risk of harms associated with gambling”. In reality, this could include everyone who indulges in gambling at any level. Despite the fall in the percentage of problem gamblers in recent years, or perhaps because of it, the Commission has expanded the class of people whom it considers to be vulnerable. This is not what the legislation intended. Moreover, it is the exercise of arbitrary power with no Parliamentary oversight. The absence of this oversight is all the more concerning when the progress of the 2005 Act through Parliament is considered.

Volume I of the Joint Committee Report on the Draft Gambling Bill (Session 2003-04) was produced by the Joint Committee on the Draft Gambling Bill, appointed by the House of Commons and the House of Lords to consider and report on any clauses of the draft Gambling Bill. It includes, at Annex 1, a schedule of detailed comments on the draft Bill. It is of note that, in response to a comment made by the Gordon House Association, that “the concept of protecting children and the vulnerable must be extended to include those whose lives are detrimentally affected by problem gambling”, the Department of Culture, Media and Sport (“DCMS”), indicated that it did not expect “vulnerable persons” to be interpreted so broadly when it stated:

“DCMS does not consider that the protection afforded by the Bill needs to extend to this wider group or persons who may be affected by the gambling of others.”

As a result of this ambiguity, the proposal in the Consultation on affordability to amend the Social Responsibility Code to require that licensees “must take account of the Commission’s definition of vulnerability”, amounts to an inappropriate suggestion that the Commission should make legislation, thereby assuming for itself that which is the prerogative of Parliament. The duty of the Commission is to uphold the licensing objectives, not to rewrite them, particularly when this rewriting appears to extend the ambit further than Parliament intended.

It follows that those who are not in fact vulnerable should be free to enjoy their gambling without interference, intrusive interrogation, or, worse still, demands for the provision of highly sensitive private financial information. For the Commission to seek to introduce measures to require such an invasion into the rights of individuals appears to be contrary to their duty to permit gambling where it is consistent with the licensing objectives.

The Gambling Review

Early in December the Government announced the Gambling Review. At the same time, DCMS published its Response to the House of Lords Committee recommendations (the “Response”). In relation to affordability, DCMS commented:

“However, we are not waiting for the Gambling Act Review to take action in this area. The Gambling Commission is, as recommended by the Committee, already consulting and calling for evidence on proposals to strengthen requirements on licensees to identify and interact with customers who may be at risk of harm. Alongside clear expectations on affordability checks, this consultation includes questions for discussion around markers of harm, how to identify and respond to vulnerability and how best to respond to risks for customers in particular situations.”

As we and other commentators, notably Regulus Partners have said, affordability affects every aspect of gambling structure and licensing objectives and potentially profoundly impacts them. In addition, it has massive implications for the cost of compliance and the economic health of the industry, as well as worrying implication for the liberty of consumers. There is therefore a very strong case for the type of affordability measures being proposed by the Commission to be considered as part of the Gambling Review. That affordability requirements were being introduced before the conclusion of the Consultation and before the Gambling Review, potentially renders much of the discussion and evidence irrelevant. By the time that Government and Parliament come to consider new legislation, the Commission will have pre-empted the process, with the consequence that the industry may already have been transformed beyond recognition, and not for the better.

In the Response, the Government – rightly in our view – said that addressing the risk of gamblers spending more than they can afford would involve a number of considerations, “including the need to strike an appropriate balance between player protection and the freedom of individuals to choose how they spend their money”. These are matters which embrace constitutional and human rights questions, which fall outside the statutory remit of the Commission. It is for the Review, and subsequently Parliament, to determine the future course of gambling legislation and regulation, not the Commission. Whilst the duty of the Commission is to regulate, it cannot be within its power to determine the level of regulation.

It seems to us that the Commission, by its commendable but unrealistic desire to abolish all gambling related harm, is at the root of the problem; it has lost sight of what the then Government recognised in developing the Bill which became the 2005 Act, when it stated in paragraph 7.3 of “A Safe Bet for Success”: “It is impossible to do away with problem gambling; and excessive controls could make matters worse by encouraging the growth of illegal gambling.” The Commission is dubious about the second part of that statement, but it certainly needs to accept the first part.

In the light of recent rumours, it is to be hoped that the process will now be halted, pending the Gambling Review. The issues raised are, in our opinion, too fundamental to fall within the purview or power of the Commission. This is not to say that the exercise was wasted; the evidence gathered can form part of the material for consideration as part of the Review.

The first stage on the road to recovery from any addiction, be it gambling, alcohol or drugs, is recognising and admitting the problem. This is a lesson which the Commission, which might be said to be at risk of developing a problem with regulation, would be wise to learn, or it may have to be taught by others: Government, Parliament or the courts.

With thanks to David Whyte for his invaluable co-authorship.

22Apr

The Affordability Debate (2): Ambiguous Regulatory Requirements

22nd April 2021 David Whyte 288

Following the closure of the Gambling Commission’s (the “Commission”) consultation Remote customer interaction – Consultation and Call for Evidence (the “Consultation”), on 9 February 2021, which yielded some 13,000 responses, we are now in the midst of an ‘affordability debate’. However, this debate is largely focused on the future, to the detriment of the present. At a time when licensees are proactively striving to improve their standards and prioritising their approach to safer gambling, it is apparent that licensees are unsure as to precisely what they need to do to remain compliant with present Commission affordability requirements, what those requirements are, and where they are specified.

Tim Miller, in his speech at the CMS Conference in March 2021, stated that “the process of giving detailed consideration to all the evidence is still ongoing with extensive further work and engagement likely to be needed.” Mr Miller went on to state that “clarifying existing rules will be our immediate priority in any next steps.” What Mr Miller does not say, however, is when that will be and what is going to happen in the interim.

A cynic may say that this lack of clarity operates to the benefit of the Commission in its pursuit of its affordability objectives as outlined in the Consultation. Two consequences are clear. Firstly, there are signs that the Commission is subjecting licensees to a series of requirements, none of which are clearly set out in licence conditions, codes of practice, or formal guidance issued by the Commission under its statutory remit.

Secondly, licensees concerned to ensure that they adhere to the Commission’s expectations are likely to interpret the limited formal guidance on affordability cautiously; many in our experience even taking into account the Consultation itself. This can only be to the advancement of the Commission’s affordability objectives. We will deal in a later article with the impact of this precipitate action by the Commission on the Consultation and the Gambling Review.

Current position

Despite what some licensees may have experienced when engaging with the Commission, the measures proposed in the Consultation are not in force. The Commission’s present requirements are instead spread across its last two annual enforcement reports and one formal guidance document, in addition to its published regulatory sanctions and/or settlements.

The Commission takes the view that its enforcement reports serve as indicators to licensees of its expectations, for which licensees can be held to account; these reports therefore arguably contain policy positions that, if enforced, are more akin to licence conditions or code provisions. We have discussed previously our concerns that the Commission may be making indirect changes to licence conditions and/or code provisions through its introduction of requirements to adhere to guidance and this is perhaps another, somewhat broader, example of the same.

We do not agree that the enforcement reports carry the weight of formal guidance. It is clear from the content of the licence conditions and codes of practice (“LCCP”) that in cases where the Commission expects licensees to adhere to formal guidance, it says so. Social Responsibility Code Provisions 2.1 (anti-money laundering – casino) and 3.4 (customer interaction) are examples of the Commission explicitly requiring licensees to adhere to, or take into account, specific formal guidance, the latter requiring that licensees take into account the Commission’s formal guidance on customer interaction. Nowhere in the LCCP is there any reference to the enforcement reports carrying such weight: the closest the Commission comes to this is in licence condition 12.1.1 (3) which, solely in relation to licensees’ obligation to ensure they have appropriate policies, procedures and controls to prevent money laundering and terrorist financing, requires that they:

“… take into account any applicable learning or guidelines published by the Gambling Commission from time to time.”

Putting aside the breadth by which this statement may be interpreted, it is clear that this obligation relates to anti-money laundering and not directly to safer gambling or affordability. This appears to be the cause for ambiguity in this area; an evolution of affordability from its apparent origins as a money laundering concern – historically some licensees’ customers having been identified as having gambled with criminal spend – to it now being central to the Commission’s expectations from a safer gambling perspective.

This is further evident from a consideration of the Commission’s introduction to its section on affordability in Raising Standards for Consumers – Enforcement report 2018-19 (the “Enforcement Report 2019”) where it states:

“Some of these individuals have funded their gambling activity through the misappropriation of monies from businesses, the taking out of unaffordable loans and misappropriating the funds from vulnerable people.”

The obligation, as outlined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, that licensees who hold casino operating licences obtain evidence of source of funds and source of wealth on a risk-based approach in order to mitigate money laundering risks will of course extend to their consideration of affordability. However, this should be as a risk factor that may, when subjectively assessed, increase the risk of money laundering and the financing of terrorism and trigger further enquiries. It is not at present a requirement at a certain level of spend.

When affordability is considered solely from a safer gambling perspective, a formal requirement to obtain evidence of affordability is impossible to identify and the Commission’s expectations are ambiguous at best, even more so given our contention that the enforcement reports may not operate as formal guidance on this matter. How then, is it reasonable for the Commission to hold licensees to account for failings in this area?

1. Enforcement Report 2019

The Enforcement Report 2019 outlines various open-source data sources that may help licensees to “assess affordability for its GB customer base and improve its risk assessment and customer interventions.” This data focusses largely on Office of National Statistics (ONS) and YouGov data highlighting average annual salary and monthly personal disposable income. The report goes on to state that:

“The above disposable income data identified clear benchmarks that should drive Social Responsibility (SR) triggers which will help to identify gambling-related harm by considering affordability.”
“Benchmark triggers should be a starting point for engaging with customers and are not intended to definitively demonstrate a customer is suffering from gambling related harm – but they can help identify instances when an operator needs to understand more about a customer, their play and affordability.”
“If an operator is going to set specific triggers for a customer base not representative of the general public, various documents sources should be relied upon, but they must contain sufficient information to substantiate the trigger level set.
In conclusion, we would recommend that operators revisit their framework on triggers and consider their customer base and their disposable income levels as a starting point for deciding benchmark triggers.”

It is of note that there is no recommendation in the Enforcement Report 2019 that licensees should obtain evidence of affordability from customers whose losses reach national average incomes. As we have discussed above, this requirement, it seems, comes from the Commission’s interpretation of money laundering legislation and certain licensees’ obligations to obtain, on a risk-based approach, evidence of source of funds and source of wealth. Rather, the Enforcement Report 2019 focusses on disposable income data being used to set “benchmark triggers” as a starting point for engagement.

2. Customer interaction – formal guidance for remote/premises based gambling operators – July 2019 (the “CI Guidance”)

When describing the Commission’s expectations as to how licensees must identify customers who may be at risk of experiencing harms associated with gambling, the CI Guidance refers to affordability and states:

“Operators should aim to identify those experiencing or at risk of harm and intervene to try to reduce harm at the earliest opportunity. Reliance on deposit or loss thresholds that are set too high will result in failing to detect some customers who may be experiencing significant harms associated with their gambling. It is therefore imperative that threshold levels are set appropriately.

Open source data exists which can help operators assess affordability for their GB customer base and improve their risk assessment for customer interactions. Thresholds should be realistic, based on average available income for your customers. This should include Office of National Statistics publications on levels of household income.”

Again, as with the Enforcement Report 2019, there is no suggestion in the CI Guidance that licensees should be obtaining evidence of affordability from customers whose losses reach national averages, rather it suggests that affordability is a factor that should be considered when developing customer interaction policies and aiming to identify customers who may be experiencing or at risk of experiencing harm. There is a significant difference between “ to try to reduce harm at the earliest opportunity” and requiring customers to produce extensive evidence to justify their level of spend when they reach a threshold.

3. Raising standards for consumers – Compliance and Enforcement report 2019-20 (the “Enforcement Report 2020”)

The Enforcement Report 2020 was published three days after the Consultation – a decision that will not have helped licensees to understand what is, and what is not, required. In referring to the recommendations it made in the Enforcement Report 2019, and considering customers who have “demonstrated gambling related harm indicators and been able to continue to gamble without effective engagement”, the Commission states:

“Furthermore, these individuals have funded their gambling without satisfactory affordability checks and appropriate evidence being obtained.”

The Enforcement Report 2020 goes on to outline various open source data sources that can help licensees to “assess affordability for GB customers and improve risk assessment and customer inventions”. Again, the data presented primarily focusses on average annual salary as outlined in the ONS survey of Hours and Earnings. The Commission goes on to state that:

“Open source information is 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.”
“We are concerned licensees are creating complex and convoluted matrices and mappings within their affordability framework to place customers into trigger groups well over the gross earnings stated above, before disposable income is factored in. Of more concern, these trigger groups are set without any sort of customer interaction to influence their true affordability determination.”
“Operators must interact with customers early on to set adequate, informed affordability triggers to protect customers from gambling related harm. Failure to do so could render the operator non-compliant.”
“Customers wishing to spend more than the national average should be asked to provide information to support a higher affordability trigger such as three months’ payslips, P60s, tax returns or bank statements which will both inform the affordability level the customer may believe appropriate with objective evidence whilst enabling the licensee to have better insight into the source of those funds and whether they are legitimate or not.”

Importantly, outside of the Consultation, this is the first occasion on which the Commission makes any reference to licensees requiring customers to provide information or evidence in relation to affordability. This time, suggesting evidence is required only when customers wish to “spend more than the national average”. The obvious question here, and a conundrum which we know licensees have been struggling with, is “to what national average does the Commission refer?”

There is a significant difference between the national average salary (stated as c£30,500) and average weekly gross earnings (stated as c£585.00). Should customers be evidencing affordability for losses exceeding £585 per week, or for losses exceeding £30,000 per year; or is there another average that is relevant?

What is expected now?

In his Speech at the CMS Conference in March 2021, Tim Miller suggested in that he did not expect the Commission to be announcing its plans on affordability imminently. Mr Miller also stated:

“…in our casework and compliance activity we continue to see example after example of operators who have allowed people to gamble amounts that are clearly unaffordable with very limited or no customer interaction until a very late stage. Just to be clear, we are not talking about grey areas here. We are talking about clearly unaffordable levels of gambling.”

Some of the handpicked examples in the enforcement reports demonstrate what almost all would agree are, without evidence of affordability, “clearly unacceptable levels of gambling”, for example a customer losing £187,000 in two days with no regular source of income. However, other examples of which we are aware are not so straightforward and are certainly not at, on any reasonable interpretation, “clearly unacceptable levels”. This is, in practice, most certainly a grey area. The consequence is that licensees who have prioritised safer gambling and, due to their misunderstanding of the Commission’s expectations, are at best criticised, or at worst subjected to regulatory action, because of a failure to meet those expectations in relation to affordability.

Since the publication of the Consultation, we have heard of licensees being criticised during compliance assessments for failing to obtain evidence of affordability from customers who have exhibited no clear signs of problem gambling, are at a low risk of harm, have never raised any concerns themselves, and who have informed licensees that they are comfortable with their gambling spend. This is not to say that licensees should not adhere to the CI Guidance and conduct customer interactions with these customers when and if they reach internally identified thresholds. It is also not to say that licensees should not take affordability into account and discuss the same with customers; but when are they required to evidence affordability?

Ambiguity inevitably leads to inconsistencies. Can “benchmark triggers” or “trigger groups” roll over and/or reset monthly/annually or are they expected to be final? Spend of say £60,000 presents very differently when it has taken place at a consistent rate over 10 years. The same applies to losses of £5,000 in a 3–6-month period when there are no other reasons for concern; yet examples such as these are being raised as concerns by the Commission. These customers are not spending “above the national average”, whatever average to which the Commission means to refer in the Enforcement Report 2020, and therefore it is at least reasonable for licensees, to decide at their discretion that there is no need to require evidence of affordability in these cases.

Licensees’ use of open-source data is also criticised for being inadequate, even in cases where this data more than adequately mitigates risk by demonstrating income at or above the national average, despite reference in the Enforcement Report 2020 to the same being “an important element of an affordability framework”.

The result of this ambiguity is that in our experience Commission activity demonstrates a much lower tolerated threshold than the CI Guidance and enforcement reports suggest; a threshold more aligned with the Consultation. In the current climate, this not only exposes licensees to unreasonable criticism from the Commission, but also places those licensees who are unlucky enough to undergo a compliance assessment at a time of such uncertainty, at a commercial disadvantage; a diligent response to criticism being to reduce thresholds and require evidence of affordability sooner, even if this is neither deemed necessary nor yet a formal requirement. One may question whether the Commission has overlooked its statutory obligation to “permit gambling, in so far as thinks it reasonably consistent with the pursuit of the licensing objectives”.

The impact

It is no secret that licensees are frustrated and confused, and understandably so. Discretion has given way to prudence; licensees are in the unenviable position of having to second guess what the Commission really expects and compliance assessments are becoming one-sided affairs where, in the main, Commission employees attend with an almost preconceived view as to what is and is not acceptable application of discretion. Nobody is perfect and, due to ambiguity, it is easy enough to call into question individual cases. This is not to say, however, that the vulnerable are not being protected. A very large proportion of the customers whose accounts are reviewed by the Commission never have and never will identify as problem gamblers; they are simply spending their money as they wish, even if at a level that Commission considers inappropriate.

Of course, the regulatory framework permits licensees to challenge the Commission’s findings. The reality, however, is that few choose to do so. Commercial realities, protracted Commission investigations, publicity considerations, cost and perhaps shareholder influence, result in most licensees entering into regulatory settlements with the Commission or accepting its findings. This is often their decision whatever the merits of their case. It would not be unreasonable to suggest that a general consensus amongst licensees is that the ultimate sanction will likely be the same anyway, particularly given the ambiguous guidance, so why incur further costs and prolong the inevitable?

Rather than regulate an industry that operates in fear: not the fear of deserved punishment, but fear of a being chosen and inevitably sanctioned for failing to do something it did not fully understand, the Commission would be better placed regulating an industry that is clear on what is expected of it. The present regulatory expectations in relation to affordability are grey and unclear. The Commission has acknowledged as much by consulting on prescriptive requirements. That Consultation now appears stymied, and it is incumbent upon the Commission to back up Tim Miller’s positive acknowledgement that “clarifying existing rules will be immediate priority” and act with urgency to clarify the existing requirements against which it is enforcing. The Commission had no reservation in moving quickly to issue additional formal guidance for remote operators during the Covid-19 outbreak last year, albeit without consultation, so it is capable of acting in haste.

Better understanding will raise standards and could easily be achieved through clarity in guidance. Informal engagement and discussion with the industry, and even possibly training (both internally and externally) controlled, prepared or delivered by the Commission would also be of benefit. How better to put effectively to use some of the £30 million paid in financial penalties and regulatory settlements in the past 12 months? In the meantime, what is absolutely not acceptable is for the Commission to wield its powers through compliance assessments to impose affordability requirements upon licensees which it has so far failed to implement through statutory consultation.

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

31Mar

Gambling Commission Consultation Response on Online Slots Game Design and Reverse Withdrawals

31st March 2021 Lucy Paterson 513

In July 2020, we blogged about the Gambling Commission’s consultation on online slots game design and reverse withdrawals, which proposed several changes aimed at reducing gambling-related harm caused by online slots games by reducing the intensity of slots play. The consultation proposed amending the Gambling Commission’s Remote gambling and software technical standards (“RTS”) to introduce new controls on online slots and to remove operators’ ability to reverse customer withdrawal requests.

The consultation closed on 3 September 2020, and on 2 February 2021 the Gambling Commission published its consultation response, announcing the new measures to be introduced in the updated RTS. The new provisions, which come into force on 31 October 2021, are clearly marked in red within the updated RTS, which are now available online.

Neil McArthur, now former Chief Executive of the Gambling Commission, said:

“This is another important step in making gambling safer and where the evidence shows that there are other opportunities to do that, we are determined to take them.”

The Gambling Commission, as expected, has proceeded with almost all of the proposed changes set out in the consultation document. We set out below the changes to the RTS and the Gambling Commission’s rationale for their introduction.

Display of elapsed time and net position

Expenditure and time spent gambling have been identified as the most relevant data points in minimising the risk of gambling related harm for consumers. From 31 October 2021, licensees providing slots will be required to permanently display consumers’ net position and time spent during slots gaming sessions on the screen. For the purposes of this new RTS, a “gaming session” begins when the game is opened or once play commences.

Display of elapsed time:

RTS requirement 13C

The elapsed time should be displayed for the duration of the gaming session.

RTS implementation guidance 13C

Time displayed should begin either when the game is opened or once play commences
Elapsed time should be displayed in seconds, minutes and hours

In relation to display of net position:

RTS requirement 2E:

All gaming sessions must clearly display the net position, in the currency of their account or product (e.g. pounds sterling, dollar, Euro) since the session started.

RTS implementation guidance 2E:

Net position is defined as the total of all winnings minus the sum of all losses since the start of the session.

Prohibiting auto-play functionality for online slots

The Gambling Commission’s proposal to prohibit auto-play functionality received low rates of support from all consultation respondent categories. Concerns raised ranged from the evidential basis for banning auto-play, to suggestions that auto-play could be used as a way to control gambling expenditure, and that removing it may negatively affect access to play for those with disabilities or other physical conditions. Given the views expressed, the Gambling Commission carried out further research (set out in Annex 2 of its consultation response), which, it states, supported its concerns regarding the potential intensity impact of auto-play. In our view, the Gambling Commission’s further research was very limited in scope. The sample size, which the Gambling Commission considered to be a “sizeable base”, was a mere 190 adults (from 358 online slots players) who had indicated they had used auto-play.

The Gambling Commission is therefore introducing a new RTS provision which will prohibit auto-play for slots from 31 October 2021.

RTS requirement 8C:

The gambling system must require a customer to commit to each game cycle individually. Providing auto-play for slots is not permitted.

Prohibiting reverse withdrawals

Reverse withdrawals allow customers to change their mind about withdrawing funds from their account by cancelling a withdrawal before the transfer to their bank or wallet is completed. In its guidance to remote operators issued on 12 May 2020 in the height of the Covid-19 pandemic, the Gambling Commission advised that remote operators should “prevent reverse withdrawal options for customers until further notice”. The changes to the RTS mean that this temporary ban on reverse withdrawals will be permanent from 31 October 2020. Importantly, the prohibition on reverse withdrawals will apply to all remote operators, and not just remote operators offering slots games.

RTS requirement 14B:

Consumers must not be given the option to cancel their withdrawal request.

RTS implementation guidance 14B:

a. Once a customer has made a request to withdraw funds, they should not be given the option to deposit using these funds. Operators should make the process to withdraw funds as frictionless as possible.

Prohibiting multiple slot games

The Gambling Commission consulted on this proposal due to concerns regarding the introduction of functionality deliberately designed to encourage play on multiple slots simultaneously via a split screen. The new RTS requirement will prohibit operator-led functionality specifically designed to facilitate such play, but will not go as far as proposed in the consultation in requiring licensees to ensure that customers can only play one slot game at a time across multiple tabs, browsers, applications or devices, on the basis that this would be very complex to implement (though the Gambling Commission is continuing to explore this as part of its Single Customer View project).

RTS requirement 14C:

The gambling system must prevent multiple slots games from being played by a single account at the same time.

RTS implementation guidance 14C:

a. Operators are not permitted to offer functionality designed to allow players to play multiple slots at the same time. This includes, but is not limited to, split screen or multi-screen functionality.

b. Combining multiple slots titles in a way which facilitates simultaneous play is not permitted.

Introducing speed of play limits

The Gambling Commission is introducing a minimum game cycle of 2.5 seconds for online slots. The new provision also applies to any game played with funds made available to a customer in lieu of a stake, such as bonus funds.

RTS requirement 14D:

It must be a minimum of 2.5 seconds from the time a game is started until a player can commence the next game cycle. It must always be necessary to release and then depress the ‘start button’ or take equivalent action to commence a game cycle.

RTS implementation guidance 14D:

a. A game cycle starts when a player depresses the ‘start button’ or takes equivalent action to initiate the game and ends when all money or money’s worth staked or won during the game has been either lost or delivered to, or made available for collection by the player and the start button or equivalent becomes available to initiate the next game.

b. A game cycle starts when a player depresses the ‘start button’ or takes equivalent action to initiate the game and ends when all money or money’s worth staked or won during the game has been either lost or delivered to, or made available for collection by the player and the start button or equivalent becomes available to initiate the next game.

Prohibiting player-led ‘spin stop’ features

The Gambling Commission is introducing the proposed requirement to prohibit features that speed up play or give the illusion of control such as turbo mode, quick spin and slam stop. Features that allow customers to skip the animation that plays after the result is communicated are still permissible, as are “genuine” choice elements of play such as picking which box to open, or the number of steps to progress in a feature and/or bonus round.

RTS requirement 14E:

The gambling system must not permit a customer to reduce the time until the result is presented.

RTS implementation guidance 14E:

a. Features such as turbo, quick spin, slam stop are not permitted. This is not intended to be an exhaustive list but to illustrate the types of features the requirement is referring to.

b. This applies to all remote slots, regardless of game cycle speed.

c. This requirement does not apply to bonus/feature games where an additional stake is not wagered.

Prohibiting effects that give the illusion of “false wins”

The Gambling Commission’s consultation set out its concerns about the fairness of celebratory effects and the psychological impact that this could have by inducing a “hot state” in a customer, and proposed prohibiting such effects where the return is less than or equal to the amount staked. Despite concerns from many licensees that this would require redesign, redevelopment, internal and independent testing, the new RTS provisions will prohibit such effects in the circumstances set out in the consultation.

RTS requirement 14F:

The gambling system must not celebrate a return which is less than or equal to the total amount staked.

RTS implementation guidance 14F:

a. By ‘celebrate’ we mean the use of auditory or visual effects that are associated with a win are not permitted for returns which are less than or equal to last total amount staked.

b. The following items provide guidelines for reasonable steps to inform the customer of the result of their game cycle:

Display of total amount awarded.

Winning lines displayed for a short period of time that will be considered sufficient to inform the customer of the result. This implementation should not override any of the display requirements (as set out in RTS 7E).

Brief sound to indicate the result of the game and transfer to player balance. The sound should be distinguishable to that utilised with a win above total stake.

The suite of measures set out above must be implemented by licensees by 31 October 2020, although members of the Betting and Gaming Council (“BGC”), or supplying BGC members, will find that implementing the BGC’s Code of Conduct, they are one step ahead and will already have introduced some of the Gambling Commission’s new measures, including slowing down spin speeds and banning certain gaming features such as turbo play and multi-slot play.

Importantly, those licensees required to implement the new measures should bear in mind that they must satisfy themselves that they are offering games that are compliant. Where they are not sure, any existing game will require independent retesting by a Gambling Commission-approved testing house. Given that demand on external testing houses is likely to be high as licensees surge to implement the new measures, we would urge that licensees review their games now with a view to ensuring that testing is complete and games are updated in time for 31 October 2021 deadline.

If you would like any advice on implementing the Gambling Commission’s new RTS, please get in touch with us.

15Mar

DCMS consults on significant increases to Gambling Commission fees

15th March 2021 Francesca Burnett-Hall 272

The Department for Digital, Culture, Media and Sport (“DCMS”) has launched a consultation which proposes significant increases to Gambling Commission fees, which will affect existing licensees and new applicants. The fee hikes are based on recommendations made by the Gambling Commission to Government, and are intended to fund its costs and increase its resources to respond to emerging risks and technologies. It follows considerable concerns about the funding of the Gambling Commission raised in February 2020, by the National Audit Office, in June 2020, by the House of Commons Public Accounts Committee, and in July 2020, by the House of Lords Select Committee on the Social and Economic Impact of the Gambling Industry.

It is worth noting that the Government Call for Evidence, published on 8 December 2020, includes review of the Gambling Commission’s power and resources. To heed off any criticism that the proposed fee increase is premature, the consultation states “the proposals are aimed at ensuring the Gambling Commission is able to meet ongoing challenges while the Review progresses.” It, therefore, does not close the door on further increases!

“Key challenges”

The Gambling Commission identified the following “key challenges” in regulation which are expected to grow in significance in coming years and are used as justification for the proposed increased fees:

Challenge 1: Increased technological developments, including product and payment innovation, requiring:

more specialist staff, including a Chief Product Officer, to understand and translate the impact of technological changes, and other staff with technical and investigative expertise;
investment in tools to improve the Gambling Commission’s approach to compliance; and
development of the Gambling Commission’s approach to making better use of the wealth of data available to it.

Challenge 2: Changes in the size and shape of the market, particularly consolidation by mergers and acquisitions, and globalisation, requiring:

more staff to drive the international regulatory agenda and work with international regulatory partners and agencies;
specialist staff to interrogate and understand complex corporate structures; and
increased legal capacity to defend positions.

Challenge 3: Increasing risks associated with unlicensed operators to protect consumers and the industry from “black market” encroachment, requiring:

more staff to identify, proactively and systematically, the scale of illegal gambling; and
more resources to tackle illegal gambling more robustly, including increased legal capacity for prosecutions.

The inclusion of Challenge 3 is perhaps most surprising given that the Gambling Commission has, for some time, maintained the view that the impact of the black market has been “exaggerated”.

The Gambling Commission acknowledges its proposed responses to these key challenges “are not fixed and will need to evolve over time”.

Annex One of the consultation includes the Gambling Commission’s detailed assessment of these key challenges.

Current funding

The Gambling Commission’s funding comes from its fee income (from application and annual fees), and in recent years, it has been drawing on its reserves which are now running low and will not be able to sustain its operations in the future.

In 2020-2021 the Gambling Commission’s budgeted income was £20.4 million and the latest figures suggest that its actual income will be approximately £700k less due to the impact of Covid-19. Its operating budget is £21.39 million, broken down as follows:

43%	Operational
24%	Policy
12%	Partnerships
11%	Licensing
10%	Gathering Information

Without increased fees, the Gambling Commission expects to see a difference between its income and expenditure of approximately £3 million per year by 2023-24. This is without any additional investment in new work to deal with the challenges set out above which it estimates will cost between £2m and £3m per annum.

Proposed changes

Proposed changes from October 2021:

60% increase to all application fees (both remote and non-remote licences) regardless of the licence type or fee category;
55% increase to annual fees for all remote operating licences (except for lottery and gaming machine technical licences) and all gambling software licences (both remote and non-remote);
the removal of existing 5% discounts on annual fees for combined or multiple licences (both remote and non-remote);
100% increase to the “flat” additional annual fee paid by licensees who hold operating licences authorising multiple RNG-based activities (including “host” licensees);
additional fee bands for society lotteries (remote and non-remote) and external lottery manager licences, increasing annual fees by at least 15%; and
15% increase to annual fees for all gaming machine technical licences

Non-remote annual fees will also be increased, but not until April 2022, as the Gambling Commission and Government appreciate the overwhelming impact Covid-19 has had on the land-based gambling industry, requiring non-remote operators to have been closed for almost all of the last year. When the annual fee increase comes into effect for non-remote licensees, it will be an increase of just 15%, as the Gambling Commission has identified that it is remote B2C operators, gambling software licensees and host licensees which are driving the increased regulatory burden and are responsible for the bulk of the Gambling Commission’s workload and costs.

Application to vary and change of corporate control fees remain unchanged; however, as these fees are usually calculated based on a percentage of a standard licence fee (with the exception of flat-rate fees in specific circumstances), the knock-on effect of the above-mentioned proposed changes will mean that these fees will also significantly increase.

Annex Two of the consultation sets out the proposed new fees for each licence type and fee category.

Consultation questions

There are only five questions that DCMS request feedback on:

1: Do you agree that annual fees should be increased in line with the proposals set out here, in order to enable the Commission to meet the challenges it has identified?

2: Do you agree with the proposals to increase the additional flat fees for licences that combine remote casino, bingo and/or virtual event betting (RNG licences), and the flat fees for those that combine host licences?

3: Do you agree with the proposals to remove the 5% annual fee (and first annual fee) discounts for other types of combined licence, and the 5% annual fee discount where both non-remote and remote licences are held?

4: Do you agree with the proposals to introduce additional fee categories for society lotteries and ELMs that generate (or manage) greater than £10m proceeds per annum?

5: Do you agree with the proposal to increase application fees to better reflect the costs involved in processing applications?

Next steps

We strongly recommend:

Any new operating licence application is submitted urgently (if you are ready!) for two reasons. Firstly, to pay lower application fees. Secondly, if your new licence is granted before October 2021 – which may be tight depending on where you are in the process – to pay lower annual fees.

Existing licensees review their fee categories to ensure they are in the correct fee category before their next annual fee is payable.

The fees consultation closes on 26 March 2021 and we urge you to respond, as one thing is certain: soon you will be paying a lot more for your licence.

You can respond to the consultation by emailing [email protected] copied to [email protected]

09Mar

Changes of Corporate Control: The Basics

9th March 2021 Bahar Alaeddini 298

In our experience, there is often confusion regarding change of corporate control (“CoCC”) requirements and, in particular, what events trigger a CoCC. CoCCs are easy to miss in complex corporate structures. Further, often “the left hand does not talk to the right hand” and the relevant individuals within the business, such as the PMLs or Compliance Department, who are fully aware of the licensing implications, are not notified of an event that triggers a CoCC until after the event or, worse, after the deadline has passed.

In this blog we summarise the basics of CoCCs. This will be supplemented by further blogs on the Gambling Commission’s areas of focus and common pitfalls we have identified in our work on numerous CoCC applications.

We strongly recommend you always seek legal advice, if in any doubt, given the risk to your licence(s), as highlighted below.

What is a CoCC?

Under section 102 of the Gambling Act 2005, a CoCC takes place when a new person or other legal entity becomes a new “controller” of the licensee. The definition of a controller stems from section 422 of the Financial Services and Markets Act 2000 (“FSMA”), which is financial services legislation. This is a complex provision, which even the Gambling Commission summarises incorrectly on its website and in its application forms.

Broadly speaking, section 422 of FSMA covers a person or entity that holds:

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

When considering whether a person or entity holds 10%, it is critical to consider:

whether the threshold has been reached as filtered by the corporate layers (i.e. directly or indirectly in the licensee);
cumulative interests; and
equity interests and voting rights separately if they are not aligned at any point in the corporate structure.

5-week deadline

Section 102(5) of the Gambling Act 2005 requires a licensee to submit a CoCC application to the Gambling Commission when there is a new controller within 5 weeks of the change occurring, for the licence(s) to continue to have effect. This is a statutory deadline.

Why is it important?

Pursuant to section 102(5), the Gambling Commission has the power to revoke the licence(s) – without a licence review – if a CoCC application, along with the application fee, has not been submitted within 5 weeks.

In our experience, the Gambling Commission has become increasingly stricter with CoCC application deadlines and we would strongly recommend you comply with the statutory deadline. The Gambling Commission is no longer generous in giving extensions, sometimes with extension requests being refused, so their goodwill cannot be relied upon. Further, in our recent experience, the Gambling Commission no longer overlooks failures to apply in time, often issuing “advice as to conduct” for the failure to comply with section 102.

Given the potential ramifications, it is essential that someone, with detailed knowledge of the Gambling Commission’s licensing requirements, is monitoring changes in corporate structure promptly and liaising with your stakeholders, as required. You need to develop effective internal procedures, relative to the size and complexity of your business, to ensure that equity and voting interests are regularly monitored.

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

02Feb

The Affordability Debate: Protection, Responsibility and the Right to Choose

2nd February 2021 Julian Harris 314

That affordability checks are a critical issue for the British gambling industry is undeniable; they place a yet further onerous burden on an already stretched gambling industry. However, without fear of exaggeration, they also raise a question about the rights of British adults to make their own free choices, both good and bad and to have responsibility for their own actions. Other industry commentators have written at length on this controversial issue, but its importance is such that it bears further examination, not least as to the way in which this line of regulation is developing.

Where’s the evidence?

In its Consultation and call for evidence – Remote customer interaction requirements (the “Consultation”), the Gambling Commission identify the problem leading to the consultation and proposed new measures as being that some operators have inadequate customer interaction processes and triggers which are set too high, as evidenced by research, casework and “lived experience” evidence. They conclude that the resolution of this will be defined affordability assessments at thresholds set by the Gambling Commission.

Ultimately, the Gambling Commission seeks to reform the way that operators are required to identify customers who may be at risk of gambling harms, by imposing mandatory triggers for activity that should flag such customers to the operator, what action must be taken by operators when such triggers are identified, and how operators must ensure that they evaluate the effectiveness of their approach to interacting with customers. A new customer interaction ‘manual’ is proposed as part of the customer interaction reforms, which will explain the new requirements of the Licence Conditions and Codes of Practice and how operators are expected to meet these requirements. This would replace the current guidance, Customer interaction – formal guidance for remote gambling operators (July 2019). The actual spending limits on which the Gambling Commission will settle, remain to be determined following the Consultation. However, the references in the Raising standards for consumers – Compliance and enforcement report 2019-20 (the “Enforcement Report”) and the Consultation suggest very low figures indeed before intervention is mandated and evidence required: the Gambling Commission have referred to “firm requirements”.

We are concerned that the Gambling Commission is not adopting a risk based and proportionate approach, combined with the fact that the evidential basis for this Consultation includes research in which customers admit to having sometimes lost more than they can afford, rather than their gambling being unaffordable. Have not we all sometimes had more to drink than is good for us, without being harmed by alcohol any more than we choose to be? Further, the Gambling Commission cite the Enforcement Report, as evidence in support of these measures, when in fact the Enforcement Report deals with “clearly unaffordable’ gambling, whilst the proposed affordability constraints go far beyond customers losing tens of thousands, extending to affordability checks after lifetime losses of as little as hundreds of pounds. The Gambling Commission seems intent on eliminating any harm at all from gambling, seemingly believing all gambling to be inherently bad.

It is unfortunately the case that, as the Gambling Commission’s casework demonstrates, some operators are having insufficient regard for the existing requirements as to intervention and triggers at appropriate levels, leading to licence reviews and sanctions. This, however, is manifestly a problem which the Gambling Commission is addressing as regulator. Operators may not all have adapted to the tsunami of changes and additional requirements as quickly as they should, but progress has been made, and the cases referred to in the Enforcement Report are not sufficient evidence for a de facto penalty against the industry as a whole. Better surely to educate, persuade and, where necessary, take action to ensure compliance with current measures.

A further cogent reason for adopting this approach is that by prescribing fixed thresholds, the Gambling Commission would be moving away from the risk based system of regulation which is the basis of the legislation and regulation.

One additional word of caution; currently the Consultation is expressed to apply only to the online gambling industry. Do not take from this. In our opinion it will inevitable be applied to the land based sector as well; indeed the signs are that it already is.

Does the end justify the means?

One of the stated objectives of the Government’s Response to the House of Lords Gambling Industry Committee Report (the “Report”) is to “ensure balance between consumer freedom and preventing harm to the vulnerable”. We share the concern of others, that these fine words, stating a noble aim, may not reflect genuine intent. As yet, there is no new legislation, the Gambling Review has only just commenced, but already draconian new measures requiring affordability checks are effectively in force. Support for this approach is to be found as early as paragraph 5 of the Report’s introduction, which states:

“The Committee is also right to say that further progress to make gambling safer does not need to wait for the outcome of the Act Review.”

We have written previously of the Gambling Commission’s worrying foray into creating what is in effect new law and regulation without due process or consultation, commenting then that the Gambling Commission was “taking a novel approach that facilitates prescriptive changes to its regulatory framework without consultation or notice” (our blog on 18 May 2020: “New Gambling Commission Guidance for Online Operators: Changing the Basis of Regulation?”). Now that approach is apparently beingsanctioned by Government. Not that the Gambling Commission even waited for that rather pale green light; in the Enforcement Report, the Gambling Commission stated that operators must interact with customers early on to set adequate affordability triggers to protect customers from gambling related harm, threatening that “failure to do so could render the operator non-compliant.” Customers wishing to spend more than the national average disposable income should, according to the Gambling Commission, be asked to provide evidence to support a higher trigger. The Enforcement Report was published on 6 November 2020, just three days after the Gambling Commission launched its consultation on further checks.

Without being unduly cynical, once again the Gambling Commission has jumped the gun. It appears, as has been previously established with such consultations, that they are little more than a box ticking exercise; at worst, with no real intention to entertain alternative opinions and suggestions, or even expertise.

In this case, the emperor truly has been shown to have no clothes; the Gambling Commission has not simply disregarded the results of the Consultation, it has pre-empted it, demonstrating that the exercise is a sham. In effect, the word of the Gambling Commission is now law. We do not need to question their motives, which may be all to the good, with a genuine desire to protect the vulnerable. However, the end cannot always justify the means. The idea that the Gambling Commission has the power, in effect, to regulate by decree, an instrument reminiscent of autocracy or totalitarianism, is abhorrent.

Where’s the balance?

Tim Miller of the Gambling Commission has expressed the intention of having “an open discussion with the gambling industry, consumers, people with lived experience and other stakeholders, to ensure we strike the right balance between allowing consumer freedom and ensuring that there are protections in place to prevent gambling harm.”

Operators will no doubt do their utmost to challenge as part of the Consultation, the levels at which these inevitable new requirements are to be set. However, the evidence on which the Gambling Commission is likely to rely, will almost certainly not include the views of the silent majority of consumers who safely enjoy gambling; they are not included in the group of “people with lived experience”, which is made up solely of those adversely affected by gambling. But the real issue of liberty here is the principle that adults should be free to make their own choices: even bad ones. Most people would regard as unacceptable, the suggestion that their spending should be questioned by any authority; for example when buying alcohol. Nor do most consider it right that anyone, and certainly not a commercial enterprise, should demand private financial information from them. The fact that this is coming to pass in this industry perhaps illustrates the strength of the anti-gambling lobby and its sympathisers, if not supporters, within the regulatory authority. This is a threat to us all.

What are the implications? It does not need a Sherlock Holmes, or even an Inspector Clouseau to understand that in the absence of operators adopting affordability checks now, their licences are at risk of review, and consequently, of suspension or revocation. Indeed, we have already seen the Gambling Commission requiring such checks of those numerous operators currently the subject of regulatory action. Inevitably this, temporarily at least, places them at a disadvantage to their competitors. The means to protect the vulnerable are already in place. We do not need to assume that all gamblers, or all drinkers or any other class of consumer, is inherently and automatically at risk of harm. We must preserve the principle of freedom of choice.