11Mar

The Gambling Commission’s emerging money laundering and terrorist financing risks: February 2024 update

11th March 2024 Chris Biggs 152

The Gambling Commission released its most recent update on emerging money laundering and terrorist financing risks on 9 February 2024. This update covers five emerging risks that we set out in detail below.

Multiple cards and innovative payment methods

The Gambling Commission indicates that there are an increasing number of instances of “multiple stolen debit cards” being used to fund online gambling activities. Alongside virtual debit card products that allow multiple virtual debit cards to be linked to one bank account, these instances pose a significant money laundering and terrorist financing (“ML/TF”) risk.

The Gambling Commission points out the following (non-exhaustive) red flag indicators of which licensees should be mindful:

- the operator is unable to match the customer’s personal details with the card details;
- the operator does not have the ability to verify the card holder’s identity information; and
- there are multiple bank accounts being used to fund a customer’s gambling activity.

The Gambling Commission reminds licensees that they are required to have “robust customer due diligence and onboarding checks” in place. It points out that in accordance with Licence Condition (“LC”) 12 of the Licence Conditions and Codes of Practice (“LCCP”), licensees must review their ML/TF risk assessments as necessary in the light of “any changes of circumstances, including the introduction of new products or technology or new methods of payment by customers.” It also reminds licensees that they must consider whether checks on customer ID documents are sufficient to identify false, stolen or “mule” (third party) ID documents, in accordance with the identification and verification requirements set out in LC 17.1.1(1) and (4).

Risks associated with access to third party funds

The Gambling Commission states that customers who are in functions, roles or responsibilities that give them access to third party funds should be considered to present a higher inherent ML/TF risk. Such roles may include access to:

- the funds of vulnerable people;
- customer funds, in the case of banking, accounting or finance (for example);
- company funds; and
- charitable funds.

It points out that licensees should consider these risks at the start of the customer relationship and before any deposits are made, noting that in order to sufficiently identify these risks customer monitoring should be an ongoing process.

Updated FATF ‘grey list’

In stating that the Democratic Republic of the Congo, Mozambique and Tanzania have been added to the list of jurisdictions that are under an increased level of monitoring by the Financial Action Task Force (“FATF”), the Gambling Commission points out that these jurisdictions are placed on the FATF’s ‘grey list’ due to “strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing.”

It reminds licensees to conduct robust customer due diligence checks in relation to any customer relationships associated with the jurisdictions on the FATF’s grey list in order to mitigate the risk of ML/TF, including proliferation financing.

The above-listed countries were added to the FATF’s grey list on 27 October 2023. However, it is important licensees note that following the Gambling Commission’s February 2024 update, the FATF announced on 23 February 2024 that Barbados and Gibraltar have been removed from the grey list. The FATF’s recent announcement and full grey list can be found here.

Funds originating from crypto-assets

The Gambling Commission states that it is aware of cases of licensees “not sufficiently” considering the risks associated with customer funds where the funds have originated from crypto-assets. It reminds licensees that it considers crypto-assets to be high risk and it expects licensees to “appropriately scrutinise transactions throughout the course of customer and business relationships.”

Common operator failings

The Gambling Commission states that there continues to be numerous instances of customers being able to deposit large amounts of money before the first anti-money laundering (“AML”) review can be undertaken by the licensee against a customer, due to insufficient and/or ineffective source of funds (“SOF”) checks and enhanced customer due diligence or KYC triggers.

It states that licensees have been identified as “failing to critically review SOF documentation” instead relying on electronic checks, which includes relying solely on open-source information, such as Companies House records, to verify SOF information. Other issues include licensees failing to provide sufficient guidance to staff on how to review and verify SOF information and to determine what supporting documents should be requested.

To mitigate these risks, the Gambling Commission recommends:

- setting realistic and effective monetary and non-monetary thresholds/triggers for determining when customer interactions should take place;
- carrying out such interactions earlier on in the customer relationship;
- ongoing customer monitoring (including monitoring all transactions or activity). The monitoring of customer activity should be carried out using a risk-based approach. Higher risk customers should be subjected to a frequency and depth of scrutiny greater than may be appropriate for lower risk customers; and
- considering geographical, customer, transactional and product risk in all customer relationships.

Next steps

As a reminder to licensees, LC 12.1.1(3) of the LCCP requires that all operating licence holders (with the exception of gaming machine technical and gambling software licences) ensure that their policies, procedures and controls for the prevention of money laundering and terrorist financing are “implemented effectively, kept under review, revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.

We recommend that all licensees review their ML/TF risk assessments as soon as possible in the light of the Gambling Commission’s update. In addition to any necessary updates to their risk assessments, licensees must update their policies, procedures and controls to take into account any changes made.

Please get in contact with us if you require assistance reviewing your ML/TF risk assessment and/or your AML policies, procedures and controls.

28Feb

White Paper Series: Parliamentary debate on affordability and financial risk checks

28th February 2024 Chris Biggs 163

On Monday 26 February 2024, the UK Parliament debated the petition Stop the implementation of betting affordability/financial risk checks (the “Petition”), formally addressing one of the Government’s (and the Gambling Commission’s) more controversial commitments from the White Paper.

Background

Launched on 1 November 2023 by The Jockey Club Chief Executive Officer, Nevin Truesdale, the Petition reached more than 100,000 online signatures within 27 days, prompting Parliament’s Petitions Committee to schedule yesterday’s debate by Members of Parliament (“MPs”) including the Gambling Minister, Stuart Andrew (the “Debate”).

The Petition states:

“We want the Government to abandon the planned implementation of affordability checks for some people who want to place a bet. We believe such checks – which could include assessing whether people are ‘at risk of harm’ based on their postcode or job title – are inappropriate and discriminatory.”

On 16 November 2023, the Government responded to the Petition, stating it is “committed to a proportionate, frictionless system of financial risk checks, to protect those at risk of harm without over regulating”, also indicating that the Gambling Commission would set out its plans “in due course”.

Last week (and in advance of the Debate), the Gambling Commission’s Executive Director of Research and Policy, Tim Miller, published a blog entitled “Financial risk next steps – February 2024”, which provided an update on the Gambling Commission’s intended implementation of financial risk checks. We discussed these proposals in our recent blog: White Paper Series: Gambling Commission update on its implementation of financial risk checks.

The Debate

The Debate was attended by a large number of MPs, 27 of whom shared views in favour of both sides of the argument. In opening the Debate, MP for Neath, Hon. Christina Rees, stated “affordability checks are not about attacking consumer rights or curbing individual liberties, but about upholding consumer protections and curbing operator excess.” Whilst Rees acknowledged the concerns of industry bodies, operators and the horseracing community, she argued that the idea of introducing financial risk checks is not new, and that industry and consumers alike support the need for regulation against harmful betting. In Rees’ view, the issue rather seemed to be that:

“such checks need to be frictionless, without negative impact on punters or operator revenue, and without pushing vulnerable gamblers into the black market.”

Similar concerns about the proposed financial risk checks were raised by other MPs. Broadly, the major concerns from the industry (particularly horseracing) and consumers, as put forward by various MPs, were:

it is unclear if the financial risk checks would truly be frictionless;
it is inappropriate for the Government and/or the Gambling Commission to determine what is affordable for an individual;
financial risk checks would push more consumers to the black market; and
horseracing should be distinguished from other forms of gambling, such games of chance, in the implementation of financial risk checks.

Several MPs called for the Government to reconsider the proposals and start again, arguing that a one-size-fits-all approach would not work, and that a wider group of industry stakeholders and experts must be consulted in order to find the appropriate balance.

MP for Shipley, Hon. Philip Davies, on the other hand, took a slightly more nuanced approach, stating that “however much I would like the Government and the Gambling Commission to abandon the affordability check policy, I have not been here so long without accepting that some battles are impossible to win”. Davies suggested that, if they are to be introduced, the proposed “enhanced” financial risk checks should be based on data from the Steering Committee on Reciprocity (“SCOR”), instead of current account turnover data. Davies argued that the use of SCOR data would, crucially, ensure that the checks are “entirely frictionless and do not discriminate against any group, such as the self-employed”.

Amongst the arguments in support of the introduction of financial risk checks, several MPs emphasised that the lower, “light-touch”, financial vulnerability checks will be frictionless and that the enhanced financial risk checks would only require 0.3% of online gambling account holders to provide gambling businesses with additional financial information – the 0.3% being a reference to Andrew Rhodes’ (Chief Executive Officer for the Gambling Commission) blog entitled “Your questions answered on the financial risk checks consultation”, which was published on the Gambling Commission’s website on 7 September 2023. In his blog, Rhodes argued that, on the basis that nearly all gambling customers have a credit reference file which can be checked frictionlessly, only a small percentage (estimated at 0.3% by the Gambling Commission – although it is unclear on the basis of what data/research) would be asked to directly provide additional financial information to an operator in connection with a financial risk assessment.

MP for Sheffield Central, Hon. Paul Blomfield, stated that gambling addiction is a health issue which needs to have a prevention strategy. Noting gambling-related harm can occur at relatively low levels of spend, Mr Blomfield also considered that the 0.3% of customers likely to be affected by the enhanced checks is a “tiny number” in relation to the benefit that could be achieved through introducing the checks. Blomfield went on to downplay the argument that financial risk checks would cause customers to move to the black market. Blomfield cited similar concerns that were raised by the tobacco and payday lending industries, which he noted did not come to fruition after these industries were more stringently regulated.

MP for Swansea East and Chair of the All-Party Parliamentary Group on gambling related harm, Hon. Carolyn Harris, suggested that the logical way forward in protecting those gripped by gambling addiction is to introduce the financial risk checks on anyone gambling larger sums:

“Those would not stop anyone who can afford it betting as much as they choose, but it would stop those who cannot.”

Harris cited research by Dr Philip Newall from the University of Bristol and Dr David Zendle from the University of York using open banking data, which found that “unharmed” gamblers have an average monthly spend of £16.41, compared with £208.91 for the highest risk group. Harris went on to conclude that this research suggested that “risk-free” gamblers would very rarely trigger any affordability checks at the thresholds proposed by the Gambling Commission, being £125 net loss within a month for the light-touch financial vulnerability checks.

Gambling Minister, Hon. Stuart Andrew was last to respond in the Debate and did not provide any significant new information or details about the financial risk checks. Andrew appeared to attribute responsibility to the industry for its “onerous, ad hoc and inconsistent“application of financial checks under the current regime and to cite this as a basis for the Gambling Commission introducing consistent and less intrusive checks. An alternative argument might be that it is the Gambling Commission’s overreaching in its compliance and enforcement activity, particularly in relation to its application of its guidance, that provides the foundation for the proposed financial risk checks.

Andrew briefly addressed the issues raised regarding the black market and the horseracing industry, but largely focused on reiterating the Government’s position that it is not its “job to tell people how to spend their money”. Rather, and as outlined in the White Paper, the Government wants to balance individual freedom with the “necessary action to tackle the devastating consequences that harmful gambling can have on individuals and communities”. Andrew also stated:

“I believe that the proposals for financial risk checks will represent a significant improvement for both businesses and customers, compared with the current situation.”

In addressing the implementation of the financial risk checks, Andrew largely restated the Gambling Commission’s position from its blog of 22 February 2024 (referred to above). However, he emphasised that the Gambling Commission is “carefully listening” to concerns, demonstrated by its confirmation that gambling businesses will not be required to consider an individual’s personal details, such as their postcode or job title, as part of the financial risk checks. We question whether it is the Gambling Commission “carefully listening”, or the public and political traction created by the Petition that led to the Gambling Commission issuing a premature update on its intentions immediately before the Debate, and in doing so backtracking on its original proposal to obtain personal information, such as occupation, from customers. Had the Gambling Commission not so issued its update, Andrew would have had little new information to put forward.

Andrew also emphasised that the Government is supportive of the Gambling Commission’s intention to pilot the implementation of the financial risk checks, and that he hopes it is clear that:

“both the Government and the Commission want this to be a genuine pilot of how data sharing would work”.

Summary

In summary, the Debate uncovered many more questions than answers, and it is still unclear how the Government and Gambling Commission intend to ensure that the financial vulnerability and financial risk checks will truly be frictionless. What is clear, however, is that the Government and the Gambling Commission are working closely together to roll out these checks.

In terms of next steps, Andrew confirmed that the Gambling Commission will publish its full consultation response “very soon”, which reflects the Gambling Commission’s promise in its February 2024 blog that the consultation response would be published in March 2024. We, along with many other industry stakeholders, will eagerly be awaiting the publication of this response, in the hope that it will: (1) clearly set out full details of its proposals with regard to financial vulnerability and financial risk checks (including in relation to the proposed pilot phase); and (2) propose novel and well considered solutions to address some of the (we consider, genuine) concerns raised by MPs in the Debate, and by the wider industry.

Frustratingly, and despite the high number of signatories to the Petition, it is unlikely that the Government and the Gambling Commission will depart from their path as articulated in the White Paper. The Gambling Commission, it seems, is determined to establish the requirement for financial risk checks, ensure that technological developments are implemented, and only then consider and determine what the “vast majority” of customers having a “frictionless” experience actually means. To continue the theme of horse-based analogies enjoyed by several MPs during the Debate, by then, the horse will have bolted.

Watch the full Debate in Parliament here:

Please get in touch with us if you have any questions about financial risk checks or if you would like assistance with any compliance or enforcement matters.

With thanks to David Whyte and Gemma Boore for their co-authorship.

23Feb

White Paper Series: DCMS announces online slots stake limits

23rd February 2024 Chris Biggs 160

The Department for Culture, Media and Sport (“DCMS”) has today announced that the government will introduce statutory maximum stake limits for online slots games later this year, as follows:

£5 maximum stake limit per spin for adults aged 25 and above; and

£2 maximum stake limit per spin for young adults aged 18 to 24.

In reaching this decision, DCMS states:

“We believe these limits will achieve the government’s stated objectives of reducing the risk of gambling-related harm, with a lower risk of unintended consequences and less disruption to the majority of gamblers who do not suffer harm.”

DCMS’ announcement is accompanied by the publication of its response (the “Consultation Response”) to its consultation A maximum stake limit for online slots games in Great Britain, which we have previously discussed.

Implementation

DCMS’ announcement sets out that the online stake limits will come into force in September this year, subject to the passing of secondary legislation through Parliament. It is of note, however, that there is no reference to an implementation date in the Consultation Response itself. If the stake limits are approved by Parliament, the secondary legislation will impose new licence conditions on remote gambling operators, which the Gambling Commission will be responsible for enforcing.

Notably, there will be a phased approach to the implementation of these new requirements:

DCMS expects there to be a minimum six-week transition period for Gambling Commission licensees to introduce the £5 stake limit for all customers.

Following this, the government will allow a further six weeks for licensees to develop any necessary technical solutions before it expects the lower £2 stake limit for young adults aged 18 to 24 to be in place.

The phased approach acknowledges that development of technical solutions by licensees may be required for age-based limits. However, following the transition period, if licensees are unable to develop solutions adequately to distinguish between customers who are 25 and over and those who are under 25, DCMS expects licensees will not be able to offer any customers online slots stakes exceeding £2 per spin. Licensees would therefore be wise to start taking steps now to develop the technical solutions required.

Key points of note in the Consultation Response

DCMS received and considered 98 stakeholder responses and identified the following clear themes from those responses:

Online slots are a high-risk gambling product and statutory stake limits are necessary to reduce the risk of gambling-related harm.
Many respondents indicated that online slots stake limits should align with stake limits on gaming machines in land-based operators.
It is important to retain consumer choice in light of the risk of consumers moving to the illegal online market if they are no longer able to stake at their preferred levels.

£5 stake limit

Notably, 44% of respondents indicated they were in favour of the lower £2 stake limit for all adults. DCMS explains that 26% of respondents (some of whom selected the £2 limit option) indicated in the free text box of the consultation question that the stake limit should be lower than £2. Many respondents in favour of these lower stake limits indicated that this option was “most likely to reduce average losses or help minimise the risk of runaway losses”, therefore significantly reducing gambling-related harm.

DCMS states around 20% of customers currently choose to stake over £5 per spin on online slots at least once a year and will therefore be impacted by the stake limit, however only 0.6% of all spins are over £5. DCMS believes that a £5 stake limit will: (a) achieve the government’s stated objectives in a proportionate way, with a lower risk of unintended consequences such as displacement to the illegal online market; (b) help to reduce harm because of the constraint on a player’s ability to place very large stakes quickly; and (c) align with the stake limit for category B1 machines in casinos.

£2 stake limit

DCMS states that the majority (60%) of respondents favoured a stake limit of £2 or under for young adults aged 18 to 24, many of whom cited evidence showing that young adults may be particularly vulnerable to gambling-related harm and “felt that this justified greater protections either in the form of a separate stake limit or otherwise.”

DCMS agrees that the evidence justifies increased protections for this cohort of consumer:

“Young adults have the highest average problem gambling score of any age group, generally lower disposable income, ongoing neurological development impacting risk perception, and common life stage factors like managing money for the first time or moving away from support networks.”

“A separate limit for young adults aligns with the wider government approach to gambling of targeted and evidence-based interventions for those at risk, while not unduly restricting others.”

Scope of limits

The government received general support for the descriptions of ‘online slots’, ‘maximum stake’ and ‘game cycle’ proposed in its consultation. The definition of online slots appears to have drawn the most scrutiny: 65% of respondents agreed with the government’s description and 22% did not agree, with some respondents considering the description to be too vague and therefore susceptible to loopholes. DCMS states that some respondents expressed concerns that gambling operators could be incentivised to develop products which are functionally similar to online slots, but might be argued to be technically exempt to circumvent stake limits.

DCMS confirms that the government does not intend to introduce a maximum stake limit for online games other than online slots. However, its intention is for boundary-pushing products (such as those which combine fundamentally slots-type gameplay elements with other games like bingo – for instance the popular ‘slingo’ game) to be captured under the definition of slots and subject to the stake limits.

Summary

Whilst not unexpected, the introduction of the stake limits at these levels is a significant shift in the UK’s remote gambling sector and one which will come at a cost to licensees. DCMS acknowledges the likely reduction in annual gross gambling yield across the industry, as well as the costs associated with implementing the stake limits. However, DCMS is clear on the government’s position: the £5 and £2 stake limits “will limit the potential for harmful losses from those gambling at elevated levels of risk or experiencing problem gambling compared to the status quo of theoretically unlimited stakes.”

Whilst it is unclear when the government will table its secondary legislation for Parliament to consider, we encourage licensees to begin considering how they will implement the stake limits well in advance of the September commencement date (whenever that may be).

Please get in touch with us if you have any questions about the stake limits or if you would like assistance with any compliance or enforcement matters.

16Feb

Andrew Rhodes’ speech at ICE 2024

16th February 2024 Jessica Wilson 145

On 6 February 2024, Andrew Rhodes, Chief Executive of the Gambling Commission delivered a speech at the Consumer Protection Zone at ICE 2024. In his speech, Rhodes revisited the progress made over the last 12 months, discussed the balancing act that we strive to achieve in the industry, and assured industry stakeholders that the Gambling Commission will be listening to all consultation responses.

Rhodes began by taking the time to acknowledge the significance of the past 12 months for the gambling industry, with publication of the White Paper being “a key moment”, and implementation of the Fourth National Lottery Licence, the first change of operator in the history of the National Lottery; a unique achievement.

The overarching theme of Rhodes’ speech was balance; the balance between consumer choice and operator innovation on the one hand, and ensuring gambling is safe, fair and crime free with the right level of consumer protection on the other.

“Perhaps the hardest task we have in front of us is about that balance. The balance between protecting those who need it and not interfering with those who do not”.

Rhodes took a pragmatic view by acknowledging that everyone has a different idea as to how to achieve such balance, particularly between different jurisdictions and markets, but that ultimately the vast majority in the industry want a version of the same thing. Perhaps as a nod to Brazil’s recently regulated market, Rhodes noted that “each jurisdiction is likely to be on a different journey and…if your market has only recently opened up…there may be some quite choppy waters ahead.”

Rhodes highlighted the importance of collaboration in the industry, both with other jurisdictions and with stakeholders here in Great Britain. He noted that Great Britain has a mature gambling market and that the Gambling Commission has continued to work with other international regulators, in both current and developing markets, in order to share insight and experience. This was a common theme across ICE 2024, with Tim Miller, Executive Director of the Gambling Commission, acknowledging the benefits of “international cooperation” and “knowledge sharing” of regulators at the World Regulatory Briefing on Monday 5 February 2024.

Closer to home, Rhodes encouraged stakeholder engagement with the Gambling Commission’s consultations. He was transparent in acknowledging there “can be a lot of cynicism around consultations” but reassured his audience that the Gambling Commission “welcome all views” and “consider all responses carefully”. Rhodes recognised the benefits of bringing different stakeholders together and how a difference of opinions can assist in finding solutions to knotty industry debates and issues.

“Consultation responses do make a difference and they do help us make sure regulation is as good as it can be.”

Rhodes reiterated that the Gambling Commission will be publishing its response to its Summer Consultation in the “coming weeks” along with its proposed phased approach for implementing the much-debated financial risk checks and the use of pilot schemes.

The final aspect of Rhodes’ speech was the importance of evidence and how “a key part of implementation is improving the evidence and data around gambling”. Rhodes raised the Gambling Survey of Great Britain, an independent review which is expected to be published later in February, and explained how the Gambling Commission is holding events to discuss its use of data and evidence, and how to improve data collection.

Rhodes concluded by stating that:

“Getting the balance right is important. And keeping that balance is a job that is never done”.

We welcome Rhodes’ pragmatic and reasonable approach in his speech and agree with the important themes he highlighted. We look forward to the Gambling Commission’s consultation responses.

If you would like to discuss Rhodes’ speech or any of the themes therein, please get in touch with your usual contact at Harris Hagan.

02Feb

Gambling Commission source of funding guidance: Two steps forward and one step back?

2nd February 2024 Jessica Wilson 157

In July 2023, we discussed the trials and tribulations of source of funding disclosure and the lack of clarity provided by the Gambling Commission as to what is expected from applicants, licensees and their investors. At that time, our understanding was that the Gambling Commission would publish guidance on its website by the end of July 2023, although no guidance was published until the end of November 2023. Now that we have the Gambling Commission’s guidance, do we have a clearer understanding of what the Gambling Commission requires?

What we were expecting

By way of recap, source of funding involves establishing the legitimacy of the source of the capital and revenue finance used in the licensee’s operation. It is a complex area and the lack of formal or detailed guidance from the Gambling Commission has resulted in applicants and licensees playing a guessing game as to what they should be disclosing to the Gambling Commission and when. Over the years, the Gambling Commission’s expectations have grown to be burdensome and novel, following an unpublished approach.

We were hopeful that the Gambling Commission’s guidance, once published, would provide that much needed clarity for the industry, along with an explanation of the basis for the Gambling Commission’s requirements.

Our understanding was that the guidance would be non-exhaustive and include example source of funding scenarios. We also expected the guidance to explain how the Gambling Commission divides investors into two groups when determining its source of funding requirements – unregulated and regulated – and that set thresholds would be put in place to trigger source of funding requirements.

What we were given

The Gambling Commission’s source of funding guidance has been included as sections within its Change of corporate control web page and What you need to send us when you apply for an operating licence web page.

The guidance is defined as a “general overview of when and what source of funds evidence is required”, caveated with confirmation that the Gambling Commission will “assess each application on a case-by-case basis according to risk”. Whilst the guidance is clear on when source of funding evidence is required, there are still murky waters on what source of funding evidence is required.

The Gambling Commission has indeed divided investor types into buckets, but instead of two, there are three different buckets; (1) unregulated, (2) regulated banks or investment companies investing their own money, and (3) regulated banks or investment companies acting as intermediary for an investor or pool of investors i.e. investment funds / financial institutions.

Each bucket has multiple sub-categories, resulting in 12 different categories of investor.

Two steps forward and one step back

We are pleased the Gambling Commission has recognised (and listened!) that clarity was needed and decided to publish its source of funding guidance, giving the industry a basis for its source of funding requests. It is also positive that the Gambling Commission appears to be applying a risk-based approach as evidenced by the thresholds that trigger detailed source of funding requirements.

However, whilst helpful in some ways, the Gambling Commission’s source of funding guidance now raises new question marks:

We had hoped the guidance would be separate formal guidance specific to source of funding. However, the guidance is buried within the Gambling Commission’s existing web pages that relate to change of corporate control and operating licence applications. Does the guidance and its investor categories apply in other source of funding situations such as capital raises and share issues that do not trigger a change of corporate control? We would expect the Gambling Commission to follow the same approach, but the position is unclear.

We now have clarity on when the Gambling Commission expects detailed source of funding evidence, but what the Gambling Commission expects to be disclosed is still vague. For example, for unregulated entities the guidance states: “Typically for established entities the latest set of filed financial statements can be sufficient evidence…For recently established entities, evidence of how the entity has been funded is required”. In respect of unregulated individuals, the guidance states: “Evidence of the individual’s source of funds will depend on what the source of funds is but examples include bank statements, investment portfolio statements and P60s”. Importantly, the guidance lacks example source of funding scenarios, which we had expected. Unfortunately, the position of what must be disclosed is no clearer than it was before, and we can only rely upon our previous experience with the Gambling Commission.

The Gambling Commission has used a combination of fixed figure and percentage thresholds to trigger source of funding disclosure. We understand the Gambling Commission’s intention is to take a risk-based approach, but it is questionable how this can be achieved if fixed figure thresholds are used, as there is the possibility that it could capture all investors, or none. For example, if a licensee received a £40,000 investment from 25 investors, totalling £1m, those individuals would not trip the £50,000 threshold and no detailed source of funding information would need to be disclosed. Conversely, if a licensee received a £1m investment from 20 individuals amounting to £50,000 each, detailed source of funding evidence is required for 100% of the investment. Testing every £ would be a risk-free approach, and not a risk-based approach.

It is a step in the right direction that investment funds are considered by the Gambling Commission separately from other investors, with investment funds being placed in their own investor group. This is an acknowledgement from the Gambling Commission of the complexities of investments made through an intermediary. However, the Gambling Commission requires a “schedule of underlying investors” from the intermediaries but gives no detail as to what such schedule should include. In our view, it would be unnecessary to provide full details of underlying investors that do not meet the source of funding thresholds set out by the Gambling Commission, and that an anonymised schedule would be sufficient (and this has been sufficient in the past based on our experience). However, if the Gambling Commission does require personal details of all underlying investors, this will continue to be problematic for investment funds who often have complex confidentiality agreements in place with their underlying investors.

FCA regulated entities that are underlying investors behind an investment fund are not treated the same as regulated entities that have made a direct investment. FCA regulated entities that have made a direct investment only need to disclose source of funding evidence if their investment is 10% or more of the total investment amount. However, if the FCA regulated entity is investing through an investment fund, that threshold percentage is reduced to 5%. It is not clear to us why there is a difference, particularly as FCA regulated entities should carry a lower risk, and our view is that there should be consistency.

On 15 December 2023 the Commission launched a consultation in respect of proposed changes related to financial penalties and financial key event reporting. One of the proposals is to introduce a new requirement for gambling licensees to submit a key event to report details of (a) individuals who acquire the equivalent of £50,000 or more worth of new shares in a rolling 12-month period, or (b) entities that acquire the equivalent of £1m or more worth of new shares in a rolling 12-month period. This proposal intersects with the source of funding guidance as it follows the thresholds for unregulated individuals and entities. The consultation states that if the financial key event creates a new controller, no key event notification is required as long as all of the information that would be included in the key event is included in the CoCC application. However, should a CoCC take place whereby the licensee issued £11m of new shares, with £1m of which being acquired by an FCA-regulated entity (equating to 9% of the investment, so they are not a controller), that entity would not be required to disclose its funds under the guidance (as it is less than 10% of the investment), but would be required to disclose under the proposed key event, as it is £1m or more. The proposal is subject to consultation, but we believe it is important that the Commission takes a consistent approach to the thresholds at which source of funding evidence must be disclosed.

We are pleased that the Gambling Commission has finally published some source of funding guidance and it is certainly a step in the right direction. However, there are still areas of uncertainty and new questions that have been raised. We wait to see how the Gambling Commission puts the guidance into practice.

How we can help

Harris Hagan can navigate you through your engagement with the Gambling Commission on source of funding, minimising disclosure for you and your investors wherever possible, as well as offer source of funding training, tailored to the specific needs of your business. If you would like to discuss further, please do get in touch.

02Feb

White Paper Series: Gambling Commission consults on timing of regulatory returns

2nd February 2024 Chris Biggs 147

On 30 November 2023, the Gambling Commission released its Autumn 2023 consultation on proposed changes to Licence Conditions and Codes of Practice (LCCP) and Remote Gambling and Software Technical Standards (RTS) (the “Autumn Consultation”). In this blog, we focus on the proposed changes to the Gambling Commission’s regulatory returns requirements, which for our regular readers, will not have come as a surprise.

Background

As we have previously reported, regulatory returns have been under the Gambling Commission’s microscope in recent months:

First, in an E-Bulletin on 29 August 2023, the Gambling Commission reminded licensees to submit regulatory returns on time in accordance with licence condition 15.3.1 of the Licence Conditions and Codes of Practice (“LCCP”). We discussed this reminder in our previous blog: Gambling Commission sets its sights on late regulatory returns and incorrect fee categories.

Subsequently (and as highlighted in our article: Regulatory returns are under the microscope – but will the key issue be missed?), the Gambling Commission’s Director of Research and Statistics, Ben Haden, posted a blog on 6 October 2023, entitled Making better use of operator data, confirming the regulator’s intention to make changes to its regulatory returns, including to “sharpen” the dataset currently received from licensees. Haden also indicated that there would be a consultation on the frequency of regulatory returns in November 2023.

It therefore comes as no surprise that the Autumn Consultation includes proposals to amend the frequency of submission of regulatory returns. In addition, the Gambling Commission indicates in the Autumn Consultation that it intends to make other changes outside of the consultation process. For example, by removing data fields from regulatory returns which are:

“both burdensome for gambling licensees and data quality issues for ”.

In this blog, we outline the Gambling Commission’s proposals in relation to regulatory returns and reflect on the likely impact of these changes.

Proposed changes to frequency – subject to consultation

Currently, the frequency of a licensee’s regulatory return submissions depends on the type of operating licence it holds. The Gambling Commission is consulting on requiring regulatory returns quarterly from all licensees, irrespective of gambling licence type.

It is expected that this proposal will affect the following categories / number of licensees:

Licence/Return	No. of licensees submitting annual regulatory returns
Adult gaming centre	400
Betting	549
Bingo	157
Casino (1968)	0
Casino (2005)	0
External lottery manager	28
Family entertainment centre	112
Gaming machine technical	402
Lottery	484
Remote casino, betting and bingo	10
Software	291

The Gambling Commission proposes to introduce this change by amending licence condition 15.3.1 as follows:

15.3.1 – General and regulatory returns

Applies to: All operating licences

On request, licensees must provide the Commission with such information as the Commission may require, in such a form or manner as the Commission may from time-to-time specify, about the use made of facilities provided in accordance with this licence and the manner in which gambling authorised by this licence and the licensee’s business in relation to that gambling are carried on.
In particular within 28 days of the end of each quarterly period ~~or, for those only submitting annual returns, within 42 days of the end of each annual period,~~ licensees must submit an accurate Regulatory Return to the Commission containing such information as the Commission may from time to time specify.

Further changes – not subject to consultation

The Gambling Commission also confirms in the Autumn Consultation that it plans to implement changes in relation to:

“the range of data required, the harmonisation of reporting periods across the industry, and improving the functionality for submitting and quality assuring the data.”

This is not the first time these changes have been mentioned. They actually flow from the Gambling Commission’s Changes to information requirements in the LCCP, regulatory returns, official statistics, and related matters consultation response, published in July 2020 (the “2020 Consultation Response”). According to the Autumn Consultation, the changes proposed in the 2020 Consultation Response were not implemented at the time due to the “reprioritisation” of the Gambling Commission’s work and the COVID-19 pandemic.

Changes to harmonise reporting dates

The first change that the Gambling Commission proposes to make is in terms of the “harmonisation” of regulatory return reporting dates. According to the Autumn Consultation, this change will take effect at the same time as its proposal to move to quarterly submissions – and means that the return due dates for all licensees will become:

Return	Reporting period	Return due date
Q2 return	1 April to 30 June	28 July
Q3 return	1 July to 30 September	28 October
Q4 return	1 October to 31 December	28 January
Q1 return	1 January to 31 March	28 April

Changes to data fields

In addition, the Autumn Consultation confirms that the Gambling Commission intends to remove a significant number of data fields from the current regulatory returns process, which it states will ensure:

data completion is less time-consuming for gambling licensees;
an opportunity to clarify questions and improve data quality;
obsolete and non-business critical fields/ questions are removed; and
improved understanding of current and emerging issues.

It is currently unclear which fields will be removed. Again, the Gambling Commission has chosen not to formally consult with the industry in respect of the removal of these data fields. However, it has confirmed that it will engage – outside of the consultation process – with the industry on the final reporting fields, with the intention to reduce the current number.

In line with Proposal 1 (of Part 2) of the 2020 Consultation Response, we expect the following data fields to be impacted as part of this process:

Non-GB data

The Gambling Commission will only ask for non-GB data at an aggregated activity level, as opposed to requiring data for each sport and game category level. (It is important to note here that the Gambling Commission is concerned with non-GB revenues received in reliance on the GB licence, rather than all non-GB revenues – as this is often misunderstood by licensees.)

B2C revenue share

Reporting of revenue share Gross Gambling Yield (“GGY”) for B2C licensees will be combined with proprietary GGY across remote casino, betting and bingo sport and game categories. The Gambling Commission stated that this would not affect licensees’ fee categorisation.

Gaming Machine Technical

The Gambling Commission will no longer ask for the number of units sold, software sales or gross value of software sales and instead simply require the total value of sales. It will also remove a number of questions relating to the purchase, lease or sale of machines, profit shares and reporting of data by venue type.

Bingo (non-remote)

Turnover reporting will no longer need to be split between participation fees and sales.

Workforce

The Gambling Commission will no longer ask licensees for their workforce numbers.

For operators interested in participating in the Gambling Commission’s pilot program (or providing feedback), queries can be directed to [email protected].

The elephants in the room

It is undeniable that aligning reporting dates for licensees will bring a degree of harmony to the regulatory returns process. However, neither the proposals in the Autumn Consultation nor the Gambling Commission’s intended changes to reporting dates / data fields address one of the main issues with regulatory returns, i.e. that fee categories are calculated by reference to a licensee’s licence year, not their financial or calendar year.

Currently, the Gambling Commission is generally amenable to amending a licensee’s reporting dates if requested by a licensee – giving licensees the flexibility to align their regulatory returns reporting dates with other internal financial reporting dates, which typically increases their ability to spot when they are about to exceed a fee category. However, once the new reporting periods are introduced, it seems that licensees will be unable to harmonise Gambling Commission reporting requirements with internal deadlines. The Gambling Commission appears to have paid little heed to this – despite some respondents to the 2020 Consultation highlighting that having the flexibility to determine their own reporting periods better enabled them to manage their resources to comply with their various other financial, regulatory and business reporting obligations.

Instead, it appears that the decision to align reporting dates has been made because it will be beneficial for the Gambling Commission, leading to:

an improved ability for the Gambling Commission to budget based on more timely reporting of financial information, which will assist forecasting and ensure licensees are in the correct fee category;
a more timely and accurate picture of the gambling sector, as the Gambling Commission will not need to estimate quarterly comparisons based on annual returns; and
improved data quality for the Gambling Commission’s official statistics.

As we have indicated in our previous blog, we are certainly hopeful that the Gambling Commission’s collection of ‘better’ evidence will lead to its better regulation. However, it is also critical that these changes do not create a significant additional regulatory burden on licensees.

Finally, we also hope that the Gambling Commission will, as part of its review of the regulatory returns data fields, review and update its regulatory returns guidance. As we have previously highlighted, the Gambling Commission’s guidance on regulatory returns is in many places, unclear and lacking in detail – an issue which continues to lead to confusion for licensees and, in turn, the inadvertent submission of inaccurate information. For now, it is unclear whether the Gambling Commission will update its guidance following the Autumn Consultation; and we strongly encourage licensees and other industry stakeholders to raise this with the Gambling Commission when they respond to the Autumn Consultation.

Next steps

The Autumn Consultation will close on 21 February 2024. Responses can be submitted through the Gambling Commission’s online survey or sent by post to the Policy Team at the following address: Gambling Commission, 4th Floor, Victoria Square House, Birmingham, B2 4BP.

In the short time before the Autumn Consultation closes, we strongly encourage licensees to consider how the proposals will impact their businesses and if they wish to influence change, respond to the Autumn Consultation and/or apply to be part of the Gambling Commission’s pilot data programme.

Please get in touch with us if you have any questions about your regulatory returns or if you would like assistance with preparing a response to the Autumn Consultation.

With thanks to G emma Boore and Jessica Wilson for their invaluable co-authorship.

21Dec

DCMS Committee on gambling regulation publishes its report

21st December 2023 Francesca Burnett-Hall 160

The Department for Culture, Media and Sport (“DCMS”) Committee on gambling regulation, appointed by the House of Commons, has today published its report with its conclusions and recommendations to Government.

The inquiry launched in December 2022, at a time when there was considerable uncertainty about the status of the Gambling White Paper. The original terms of reference were as follows:

What is the scale of gambling-related harm in the UK?
What should the key priorities be in the gambling White Paper?
How broadly should the term ‘gambling’ be drawn?
Is it possible for a regulator to stay abreast of innovation in the online sphere?
What additional problems arise when online gambling companies are based outside UK jurisdiction?

After the publication of the White Paper, on 27 April 2023, the terms of reference were broadened to include:

What are the most welcome proposals in the Gambling White Paper?
Are there any significant gaps in the Government’s reforms?
What are the potential barriers to the Government and Gambling Commission delivering the White Paper’s main measure by summer 2024, the Government’s stated aim?

Culture Media and Sport, Chair, Dame Caroline Dinenage MP, said:

“While gambling regulation should not overly impinge on the freedom to enjoy what is a problem-free pastime for the majority, more should be done to shield both children and people who have experienced problem gambling from what often seems like a bombardment of advertising branding at football and other sporting events. The Government needs to go further than the proposals in the White Paper and work with sports governing bodies on cutting the sheer volume of betting adverts people are being exposed to.”

The Committee received more than 160 submissions and held four oral evidence sessions.

Main conclusions and recommendations:

Implementation of the Gambling White Paper

The Government must set out a detailed timetable for the delivery of the White Paper’s proposals, with the Committee concerned that there was no mention of gambling legislation in the King’s Speech.
The Government and Gambling Commission should set out how they will address the growing trend of unlicensed gambling sites targeting the self-excluded. The Gambling Commission must also continue to work to improve its knowledge of the black market and its ability to monitor the number of British consumers gambling with illegal operators.

Online gambling protections

The Committee supports the principle of financial risk checks, but they must be minimally intrusive with customers’ financial data properly protected. There should be a pilot of the new system before the checks are fully implemented.
Stake limits for online slots should match those for electronic gaming machines in land-based venues and not exceed £5. Online deposit limits should be set by default and require customers to opt out rather than opt in.

Children and young adults

The Government should review the case for banning children’s access to social casino games, which are often playable on smartphones and simulate gambling activities and products.
The Committee supports the proposed enhanced online gambling protections for young adults aged 18-24, namely triggering a financial risk check at a lower monetary loss threshold and limiting the stake for online slots to £2. The Government, Gambling Commission, and gambling operators must ensure these measures do not unintentionally lead to more adults in this age group giving a higher age at account-creation.

Gambling advertising

There is an urgent need to better understand the effects of gambling advertising on the risk of harm. The evidence for a link between advertising and gambling harm currently appears much stronger than evidence indicating there is a risk of displacement to the black market if gambling advertising were restricted. The Government must commission research on the link between gambling advertising and the risk of gambling harm, including specifically for women and children.
The Government should have taken a more precautionary approach to gambling advertising in general – particularly to minimise children’s exposure. While a complete ban on gambling advertising would not be appropriate, there is still scope for further regulation beyond that proposed by the Government.
The Government should work with the Premier League and the governing bodies of other sports to ensure that the gambling sponsorship code of conduct contains provision to reduce the volume of gambling adverts in stadia. A higher proportion of gambling advertising in stadia should be dedicated to safer gambling messaging. The Government must require sports governing bodies to publish the code without further undue delay.

Land-based gambling

Customers who prefer to pay on electronic gaming machines using cash should continue to be able to do so on all machines following any introduction of cashless payments.
The Government must ensure that the new settlement arising from the review of the Horserace Betting Levy mitigates the impact of the White Paper’s reforms on the racing industry and ensuring British racing’s future.

Gambling research, prevention and treatment

The Committee supports the proposed structure and governance of the new statutory levy to be imposed on operators in the industry to fund gambling research, prevention and treatment. The Government must ensure that service providers currently operating via the voluntary funding system are adequately supported in the transition to a statutory levy. There should be a new national strategy for reducing gambling harms.

A Gambling Ombudsman

The scope of the new gambling ombudsman should include all disputes between gambling operators and their customers, not only those relating to social responsibility failings.

Government has two months to respond.

Please get in touch if you would like discuss any of the proposals in the White Paper or would like any assistance preparing a response to the Gambling Commission’s current open consultations: the Autumn consultation, which includes proposals relating to incentives, customer-led tools, customer funds protection and regulatory returns reporting (closing 21 February 2024) and the December consultation on proposals relating to financial penalties and financial key event reporting (currently closing 15 March 2024).

20Dec

DCMS publishes Gambling Commission Framework Document

20th December 2023 Ting Fung 159

Further to its consideration of the Gambling Commission’s powers and resources in the White Paper, the Department for Culture, Media & Sport (“DCMS”) published the Gambling Commission Framework Document (the “Policy Paper”) on 11 December 2023.

The Policy Paper, which has been agreed between DCMS and the Gambling Commission and approved by HM Treasury, sets out the broad governance framework within which DCMS will work with the Gambling Commission to provide:

“an effective environment for the Commission to achieve its statutory objectives through the promotion of partnership and trust.”

The Policy Paper updates the previous version of the corporate governance framework, which was published on 29 October 2021.

What are the Gambling Commission’s statutory objectives?

As a reminder, the Gambling Commission’s key statutory duty, as set out in the Gambling Act 2005, is to permit gambling insofar as it thinks is reasonably consistent with the licensing objectives of:

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 people from being harmed or exploited by gambling.

In addition, the Gambling Commission is responsible for regulating the National Lottery by virtue of the National Lottery etc Act 1993. In this regard, the Gambling Commission’s objectives are to manage the National Lottery in a manner most likely to secure:

a) that the interests of all participants are protected;

b) that the Lottery is run with all due propriety; and

c) that, subject to the objectives above, returns to good causes are maximised.

What does the Policy Paper do?

The Policy Paper sets out the manner in which DCMS and the Gambling Commission will work together to provide an effective environment for the Gambling Commission to achieve its statutory objectives.

The Policy Paper “does not convey any legal powers or responsibilities”. Instead, it provides a framework of good corporate governance practice and applicable regulatory requirements and expectations that accords with principles set out in the Treasury’s handbook, Managing Public Money (“MPM”), and within which both parties have agreed to operate.

Broadly, this means that the Policy Paper sets out the Gambling Commission’s core responsibilities, describes the governance and accountability framework that applies between the roles of DCMS and the Gambling Commission, and sets out how the day-to-day relationship works in practice, including in relation to governance and financial matters.

What does the Policy Paper say?

Some of the more notable aspects of the Policy Paper include:

In accordance with MPM Annex 3.1 a requirement for the Gambling Commission to provide “an account of corporate governance in its annual governance statement” including an assessment of its compliance with the Corporate Governance in Central Government Departments Code of Good Practice, with explanations of any material departures.
A requirement for Gambling Commission officials to liaise regularly with officials in DCMS’ Gambling Commission sponsorship team, DCMS’ primary contact with the Gambling Commission, to review performance against plans, achievement against targets and expenditure. This relationship, in turn, is overseen by the Deputy Director for Gambling and Lotteries.
Annual submission by the Gambling Commission of a draft corporate plan considering the following key matters in the year ahead:
- key objectives and associated key performance targets for the forward years, and the strategy for achieving those objectives;
- key non-financial performance targets;
- a review of performance in the preceding financial year, together with comparable outturns for the previous 2-5 years, and an estimate of performance in the current year;
- alternative scenarios and an assessment of the risk factors that may significantly affect the execution of the plan but that cannot be accurately forecast; and
- other matters as agreed between the department and the Gambling Commission.
The first year of the corporate plan will form the basis of the Gambling Commission’s business plan, which shall then be updated annually regarding key targets and milestones for the year immediately ahead. DCMS will also use the draft corporate plan to allocate the Gambling Commission’s annual budget and send this to the Gambling Commission by May/June each year.
A requirement for the Gambling Commission to publish an annual report of its activities, with the draft submitted to DCMS at least two weeks before the proposed publication date. The annual report must:
- cover any corporate, subsidiary or joint ventures under the Gambling Commission’s control;
- comply with the Treasury’s Financial Reporting Manual; and
- outline the Gambling Commission’s main activities and performance during the previous financial year and summary form forward plans.
In addition, the annual report must include the Gambling Commission’s finalised (audited) accounts. However, these will need to be provided to DCMS by May/early June each year so that they may be consolidated within DCMS, laid in Parliament and made available on the Gambling Commission’s website.
Formal performance review by DCMS four times a year.
Annual meeting between the Responsible Gambling Minister and Gambling Commission Chair as well as annual review of the Chair’s performance by DCMS.
Annual meeting between the Principal Accounting Officer (the Permanent Secretary of the department) and Gambling Commission Chief Executive (who is also the Accounting Officer responsible for safeguarding public funds and ensuring that the Gambling Commission is being run according to the MPM standards regarding governance, decision making and financial management).
A requirement for the Gambling Commission to provide information to DCMS monthly (at a minimum) to enable DCMS to satisfactorily monitor the Gambling Commission, including but not limited to its cash management.
Internal audits to be conducted (according to the Public Sector Internal Audit Standards, as adopted by HM Treasury) and reviewed by DCMS’ sponsorship department.

In addition, the Gambling Commission’s agrees to comply with the guidance set out at Annex A of the Policy Paper in areas of corporate governance, financial management and reporting, management of risk, commercial management, public appointments, staff and remuneration, and other general guidance.

Gambling Commission Fees

Notably, in relation to Gambling Commission fees (a topic upon which DCMS is expected to consult next year), the Policy Paper confirms that review of Gambling Commission fees remains at the discretion of the Secretary of State, to be exercised in accordance with MPM principles. Nevertheless, the Policy Paper confirms that the:

“Gambling Commission and DCMS will carry out an annual health check to determine whether fee levels remain appropriate or whether a further comprehensive review is required”.

The annual health check will consider:

any significant changes to legislation or the number/complexity of regulated operators;
levels of inflation;
efficiency savings made by the Gambling Commission; and
whether changes to industry structures or patterns of risk have significantly altered the focus of the Gambling Commission’s regulatory effort.

DCMS can bring the annual health check forward or initiate a comprehensive review of fees if it is clear this is required. Otherwise, the outcome of the annual health check will be recorded and signed off by the Director of Finance or the Head of Gambling and Lotteries in DCMS and by the Chief Executive or Chief Operating Officer of the Gambling Commission.

Next steps

The Policy Paper confirms that it should be reviewed and updated at least triennially unless there are exceptional reasons. However it goes on to state that the latest date for the next review and update is 1 September 2025, just under two years from now.

Given the amount of work on both DCMS and the Gambling Commission’s respective “plates” at the moment – with many of the reforms in the White Paper yet to be implemented – DCMS and the Gambling Commission will likely be pleased that the Policy Paper has now been agreed and that they can both take positive steps to progress other matters.

Please let us know if you have any questions or wish to discuss.

For further details on the Policy Paper, see the DCMS’ website.

18Dec

“Naughty or Nice?” – the Gambling Commission publishes its latest consultation on financial penalties and financial key event reporting

18th December 2023 Ting Fung 154

Between August 2021 and July 2023, Gambling Commission licensees paid around £38 million in financial penalties to HM Treasury’s consolidated fund and £44 million in lieu of a financial penalty via the regulatory settlement process.

After continued calls for clarification on the calculation of and challenges to its financial penalties, the Gambling Commission published its 2023 Consultation on proposed changes related to financial penalties and financial key event reporting (the “Consultation”) on 15 December 2023. The Consultation also addresses updates to the licence conditions and codes of practice (“LCCP”) in relation to financial key event reporting.

We set out below a summary of the key changes proposed in the Consultation.

Enforcement – financial penalties quantum

Aim?

The Gambling Commission’s intention is to:

“ensure a consistent process for the determination and imposition of financial penalties… provide greater transparency and clarity over how financial penalties are calculated … allow a sufficient scope to exercise necessary judgment in the determination of the quantum based on individual case characteristics, and to mitigate the risk of legal challenges on our approach.”

The Gambling Commission hopes that greater transparency and clarity for licensees will streamline its enforcement process by reducing protracted correspondence between licensees and the Gambling Commission, which will also help take the pressure off the two-year limit it has for imposing a financial penalty.

How will penalties be calculated?

The Gambling Commission proposes to update its Statement of Principles for Determining Financial Penalties to introduce a more clearly defined six-step process (new wording in bold and italics):

Calculate the disgorgement element of the penalty (if appropriate) ~~to reflect any financial detriment suffered by consumers and/or remove the financial gain to the Licensee, if possible~~.
~~Consider the seriousness of the breach to determine the appropriate~~ Determine the starting point for the penal element of the fine, in most cases by reference to seriousness and a percentage of GGY for the relevant breach period.
Consider aggravating and mitigating factors which may increase or decrease the penal element.
Consider the need for a deterrence uplift to the penal element~~, having regard to the principle that non-compliance should be more costly than compliance and that enforcement should deliver strong deterrence against future non-compliance~~.
Consider a any discount ~~to the penal element where early resolution has been reached~~ for early resolution.
Consider ~~whether an~~ any adjustment ~~should be made to ensure the sum of the figures at steps 1 (if calculated) and step 5 are reasonable and proportionate in respect of~~ for affordability and proportionality.

Financial penalties calculations will primarily be based on a proportion of the licensee’s GGY and will be based on the “level of seriousness” of the breach, with an escalating five-level scale starting at 0% to 0.99% for a level 1 breach (for example, one-off breaches) up to 10-15% of GGY for a level 5 breach, representing “a very serious threat to the licensing objectives”. Higher penalties may be imposed in “exceptional circumstances”, including using a non-GGY approach where more appropriate.

In line with the proposed updated six-step process, these baseline calculations would be subject to the adjustments set out at 3-6 above.

Financial key event reporting – scrutiny of investor source of funds

Aim?

The proposed changes to the LCCP are designed:

“to take account of the increase in complexity of mergers and acquisitions, and the increased globalisation of gambling.”

Key updates?

The current reporting threshold under licence condition 15.2.1(2) of the LCCP (reporting key events) regarding investors will be raised from 3% to 5% to align with requirements in other global jurisdictions.

The Gambling Commission is also proposing to expand reporting requirements regarding ‘relevant persons’ “significantly, but proportionately” to include “partnerships, trusts, charities and investment funds” which have “both direct and indirect interests in the gambling licensee of 5% or more”.

A new requirement will also necessitate disclosure of:

individuals who acquire the equivalent of £50,000 or more worth of new shares in a rolling twelve-month period; and
entities that acquire the equivalent of £1 million of new shares in a rolling 12-month period.

The Gambling Commission has indicated in the Consultation that:

“Given that this proposed new key event is focused on the raising of investment by the gambling licensee by issuing new shares, our expectation is that the source of funds evidence is gathered upfront as part of the share issuing process and should be reportable in the normal key event reporting timeframe.”

As such, this disclosure will include not only the identity of the investor and the value of the acquisition, it will also require the provision of evidence of the source of funds for the investment.

What’s next?

The Consultation is expected to close on 15 March 2024.

Subject to the actual changes to be made by the Gambling Commission, which it will outline when it publishes its response to the Consultation in due course, licensees can expect one or more versions of the following documents to be published in the next year:

We will be providing further insight on the proposals in the Consultation in upcoming blogs. In the meantime, please see David Whyte’s previous pre-emptive article, White Paper Series: The Gambling Commission’s powers – more to come?

We thoroughly encourage all licensees to respond to the Consultation.

Please get in touch if you have any questions or would like any assistance drafting your response.

12Dec

Gambling Commission releases its updated risk assessment of money laundering and terrorist financing in the British gambling market

12th December 2023 Chris Biggs 168

On 30 November 2023, the Gambling Commission published its updated money laundering and terrorist financing risk assessment for the British gambling industry in 2023 (the “ML/TF Risk Assessment”). The release of the updated ML/TF Risk Assessment has been a long time coming: the Gambling Commission had not updated its ML/TF Risk Assessment since December 2020.

The Gambling Commission sets out that the purpose of the ML/TF Risk Assessment:

“…is to:

provide a resource for the industry in informing their own ML and TF risk assessments
provide the Commission’s support to HM Treasury’s National Risk Assessment
inform and prioritise licensing, compliance, and enforcement activity to raise standards in the industry and meet duties under …”

Key points of note are:

The Gambling Commission reminds casino licensees to consider their obligations in the light of the update to the Regulations in September 2022 which requires those businesses to identify, assess, understand and mitigate the risk of proliferation financing.

The overall risk rating for each gambling sector has not changed since the Gambling Commission’s previous risk assessment from 2020 (the “2020 ML/TF Risk Assessment”).

The methodology applied by the Gambling Commission to assess the risks in the British gambling industry has been developed from its 2020 ML/TF Risk Assessment and it therefore recommends that the ML/TF Risk Assessment is read in conjunction with the 2020 ML/TF Risk Assessment.

Licensee requirements

Licence Condition (“LC”) 12.1.1 of the Licence Conditions and Codes of Practice requires that all operating licence holders (with the exception of gaming machine technical and gambling software licences):

conduct a risk assessment addressing “the risks of their business being used for money laundering and terrorist financing”;

following the completion of that risk assessment, ensure they have “appropriate policies, procedures and controls to prevent money laundering and terrorist financing”; and

ensure that their policies, procedures and controls for the prevention of money laundering and terrorist financing are “implemented effectively, kept under review, revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.

Licensees must therefore ensure that they review the ML/TF Risk Assessment in detail, with a view to:

reviewing and refining (as applicable) their own money laundering and terrorist financing risk assessment in the light of the ML/TF Risk Assessment; and

updating their policies, procedures and controls to take into account any changes made to their risk assessment.

Please get in contact with us if you require assistance with reviewing your money laundering and terrorist financing risk assessment and/or your AML policies, procedures and controls.