10Nov

Recap on the Fourth National Lottery Licence Competition

10th November 2022 Jessica Wilson 203

On 20 September 2022, the Gambling Commission formally awarded the Fourth National Lottery Licence (“Licence”) to Allwyn Entertainment UK (“Allwyn”), which will be the second National Lottery Licence holder since its launch in 1994.

As explained in our previous blog, the Fourth National Lottery Licence Competition (“4NLC”) process got off to a bumpy start when delays were announced as a result of the Covid-19 pandemic. In fact, the whole 4NLC process was not as smooth sailing as perhaps expected, with legal appeals being brought against the Gambling Commission criticising how it ran the 4NLC.

Now that Allwyn has been awarded the Licence formally, due to commence in February 2024, we take a look back on the ups and downs of 4NLC process.

4NLC is launched…finally

The 4NLC was announced in November 2018 and, after a three-month delay, was formally launched on 28 August 2020. In the interim period, the Gambling Commission set up an Expert Advisory Group to help inform and design the 4NLC and carried out global market engagement with all interested parties.

The 4NLC was divided into multiple stages:

Selection questionnaire
Invitation to apply
Announcement of preferred applicant
Transition period
Expiry of third National Lottery licence and commencement of the fourth National Lottery licence

Delays to stages 1 to 3 were incurred for several reasons; to “provide additional time for applicants to complete the applications and for the Gambling Commission to feedback”, to “contribute to a fair, open and robust competition by providing applicants with sufficient time”, “to provide opportunity for applicants to further refine their proposals”, and due to the impact of Covid-19 restrictions on the preparation of applications.

Such delays resulted in the third National Lottery Licence (held by Camelot UK Lotteries Ltd (“Camelot”)) to be extended by six months to February 2024.

Allwyn takes the Crown

The Gambling Commission received four final applications: Allwyn, Camelot, Sisal SpA, and The New Lottery Company Ltd.

After rumours of Camelot being the Preferred Applicant again, the Gambling Commission announced Allwyn (a Czech group previously known as Sazka Entertainment) as its preferred applicant on 15 March 2022, almost seven months after the intended announcement date of August 2021. Camelot was named as the Reserve Applicant.

The Gambling Commission stated that “the selection of Allwyn as the Preferred Applicant follows a fair, open and robust competition which received four applications at the final stage. This is the highest number of applications since the first National Lottery licence was awarded in 1994”.

A busy Summer for the Courts

Despite the Gambling Commission’s adamance that the 4NLC was fair, open and robust, in April 2022 the Gambling Commission received legal proceedings from Camelot and its technology provider, International Games Technology PLC (“IGT”), challenging the 4NLC process and appealing the Gambling Commission’s decision of appointing Allwyn as the new licensee.

Proceedings were issued in the High Court, with Camelot claiming that the Gambling Commission got the decision “badly wrong” and demanding a “proper explanation” as to why it was not chosen as the Preferred Applicant. Camelot stated that the Gambling Commission “failed to provide a satisfactory response” leaving Camelot “with no choice but to ask the court to establish what happened”.

The proceedings placed an automatic suspension on the Gambling Commission’s ability to formally aware the Licence to Allwyn. The Gambling Commission appealed the suspension on the basis that it would “present potentially severe consequences for the National Lottery and good causes”. Ruling in favour of the Commission, on 29 June 2022, the High Court lifted the automatic suspension, citing public interest as a strong factor in the Court’s decision:

“…maintaining the suspension until resolution of the dispute will cause delay to the Fourth Licence. In turn, this will cause delay to the benefits of the Fourth Licence, giving rise to reduced contributions to the good causes and delayed introduction of the enhanced game portfolio and new technologies. Balanced against the commercial losses that might be suffered by Camelot and IGT, for which damages would be an adequate remedy, in this case, allowing the Commission and Allwyn to proceed with the Fourth Licence is the course that will produce the least risk of injustice if ultimately it proves to be wrong”.

However, the Gambling Commission’s win was short-lived. On 14 July 2022, the Court of Appeal granted permission for Camelot and IGT to appeal the High Court’s decision, putting the automatic suspension on the Licence back in place…but only until September when both Camelot and IGT withdrew their appeals, deciding instead to pursue damages only.

Allwyn officially takes the crown

On 20 September 2022, the Gambling Commission, no longer bound by the suspension, formally awarded the Licence to Allwyn. The parties have now entered into an Enabling Agreement, confirming the official granting of the Licence to Allwyn, and are in a transitional period with Camelot until the Licence takes effect in February 2024.

What key changes can we expect with the fourth licence?

A fixed 10-year licence.
Incentive mechanism to ensure Allwyn’s incentives and delivery are better aligned with contributions to good causes.
Move to an outcomes-based approach, giving Allwyn greater responsibility to fulfil its obligations while retaining the Gambling Commission’s power to intervene if they do not.
Flexibility for Allwyn to adapt their offerings to reflect changing technology, consumer safety, regulation and consumer preferences.
A retail charter to ensure Allwyn engages proactively with retailers.

There is no doubt that the 4NLC process was a rollercoaster for all involved. The Gambling Commission may have learned some lessons along the way, and we hope that the next National Lottery Competition will be a more straightforward and less contentious process.

11Oct

Gambling Commission Special Measures: Trick? or Treat?

11th October 2022 Julian Harris 234

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

The background

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

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

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

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

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

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

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

The current position

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

The requirements

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

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

The process

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

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

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

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

Treat?

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

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

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

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

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

Trick

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

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

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

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

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

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

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

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

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

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

Final word

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

03Oct

Changes to the way Licensing works at the Commission

3rd October 2022 Chris Biggs 216

On 27 June 2022, the Gambling Commission announced that it was changing the way that licensing applications are processed and determined to “make the best use of resources”. In doing so, the Gambling Commission stated it hoped “to be able to solve queries more efficiently and effectively”, which we would welcome given the longstanding and frustrating delays on applications, particularly changes of corporate control.

What are the changes?

As many of our readers will be aware, previously operating licensees were appointed dedicated account managers who were the first point of call for any enquiries or applications. This model has been gradually phased out and, in its place, Licensing has restructured into four sub-groups:

The Operating Licence New Group

Responsible for processing applications for new operating licences.

The Change of Corporate Control Group

Responsible for processing applications relating to changes of ownership and control for existing licensees.

The Operating Licence Vary Group

Responsible for processing applications relating to changes to existing operating licences.

The Personal Licence Group

Responsible for processing all applications relating to personal licences.

Licensing process

Where an online service exists for applications, such as those listed on the Gambling Commission’s website, this process has not changed.

Where applications cannot be submitted online, they must be submitted via email to [email protected].

Shortly after submission, the allocated caseworker should email the application contact and provide an estimated timeline for the process.

If applicants wish to query their application, and do not have caseworker, they must contact [email protected].

General enquiries should be submitted via an online form and the Gambling Commission “aim to respond…within 20 days” – it is not clear whether that is calendar or working days.

Recent experience

Despite its encouraging intention, given the significant licensing backlog, the reality is that so far we have experienced no noticeable improvement, particularly on change of corporate control applications. Also, and more worryingly, we continue to identify inconsistencies in the approach across Licensing, which is something we are able to do because of the breadth of our experience preparing and submitting all types of licensing applications to the Gambling Commission.

We act for a wide variety of B2C and B2B businesses, including start-ups, throughout the world extensively preparing, submitting and managing non-remote and remote operating licence applications to the Gambling Commission. We have unmatched licensing experience and provide every client with a bespoke service tailored to their needs and business. We provide our clients with extensive resources, reference guides and templates to help navigate the application process, streamline and accelerate their preparation of the application and ensure clients understand, at an early stage, the Gambling Commission’s requirements.

Please get in touch with us if you require assistance with any licensing applications.

26Sep

The Gambling Commission’s Checklist for Licensees on Good Practice Complaints Handling

26th September 2022 Adam Russell 235

Following a review of licensee complaints policies which contained “a number of areas for improvement”, the Gambling Commission published advice and good practice tips for operators on 21 July 2022. This blog serves to summarily remind licensees of existing rules and guidance enclosed in the Gambling Commission’s update.

Player complaints: relevant themes

Research from the Gambling Commission found that 8% of players have made a complaint in the past, with an additional 4% reporting their wish to complain but failure to do so. These statistics are supplemented by qualitative data which suggests that some players refrain from pursuing complaints procedures because it is often considered a “tedious process”, with some licensees appearing “purposefully difficult to reach”.

However, it is important that players can locate policies and “raise their complaints without any barriers” to “improve outcomes” for both them and operators.

Although mentioned in the detailed leaks in July 2022, it remains to be seen whether a gambling ombudsman scheme will be introduced, as part of the Gambling Act Review, to adjudicate gambling complaints.

Checklist for good practice complaints handling

In light of this, the Gambling Commission issued the following checklist for good practice complaints handling:

ensure your complaints process is clear and short;
include clickable and appropriately functioning links, including a link to the complaints procedure on your homepage;
avoid jargon/legalese and use plain English instead;
inform players what information is required to investigate their complaint;
include details of the 8-week time limit for either resolving the complaint or issuing a final response;
clearly indicate whether a final decision or ‘deadlock’ has been reached;
utilise technology (such as webforms and decision trees) to help guide consumers through the complaints process, but always provide alternative contact methods;
ensure that your complaints procedure is accessible for all, including vulnerable people, with adjustments readily made where required;
maintain a virtual paper trail;
utilise consumer support tools, such as Resolver; and
provide clear signposting to ADR providers.

The overarching theme is that licensees should design their complaints procedures in a transparent, clear and accessible manner.

Next steps

We strongly encourage licensees to review their complaints procedures against the Gambling Commission’s checklist on good practice for complaints handling, making them as simple as possible, and ensuring policies are implemented.

Please get in touch with us if you require assistance in developing appropriate internal policies and/or updating your complaints procedure in line with the Gambling Commission’s checklist.

21Sep

New remote customer interaction requirements take effect…in part

21st September 2022 David Whyte 213

On 12 September 2022, the Gambling Commission’s new Social Responsibility Code Provision (“SRCP”) 3.4.3, partly came into effect. For now, however, the Customer interaction guidance – for remote gambling licensees (Formal guidance under SR Code 3.4.3 (the “Guidance”) will not take effect.

Background

In its update of 2 September 2022, the Gambling Commission states that the delay in the implementation of parts of SRCP 3.4.3, and the Guidance, takes into account a request from the industry for “an extension to the timeframe for implementing these new measures”. Further, it “considers it would be beneficial to use the time now available to conduct further consultation on matters to be addressed in the guidance associated with SR Code 3.4.3 by way of a consultation on the guidance document itself”: something which, as we pointed out in July, it should have done in the first place.

The Gambling Commission describes the Guidance as a “living document which is intended to be amended over time”: we have previously set out our concerns about the Gambling Commission’s introduction or amendment, without consultation, of guidance that has the effect of a licence condition. The Gambling Commission states it is “particularly interested to hear about good practice in implementing the requirements, based on the lessons learned by operators during the period between April and September and to hear about any implications arising out of recent research, evidence and casework”. A cynic may suggest that its focus on good practice implementation is indicative that, following the consultation, any revised guidance issued is likely to be very similar to the Guidance, irrespective of any consultation responses submitted: a cycle that has become commonplace in recent times.

The Gambling Commission states that the consultation is “set to be launched during late September and will last six weeks” (rather than the usual 12). Its provisional intention is to “publish the guidance on requirements in December 2022 with it taking effect approximately 2 months after publication”. Whether it meets that deadline remains to be seen.

We strongly encourage all licensees to respond to the Consultation when it is launched.

The Guidance – delay and confusion

The Gambling Commission’s decision, at this late stage, to delay implementation of parts of SRCP 3.4.3 and consult on the Guidance is surprising, as is the fact that pending its consultation it will not require that remote licensees take into account any guidance whatsoever. It seems to us that the latter of these issues has largely been influenced by two factors. Firstly, the fact that the previous Customer interaction: formal guidance for remote gambling operators (the “Previous Guidance”) was issued under the old SRCP 3.4.1, which is also now no longer in effect. Secondly, the Gambling Commission is unable to amend the new SRCP 3.4.3 and require that licensees adhere to the Previous Guidance without further consultation.

This last-minute change creates a lacuna that will last until at least February 2023, which will confuse some remote licensees and infuriate others. Remote licensees are left in the unenviable position of being without any customer interaction guidance whatsoever at a time when, by its recent admission, the Gambling Commission’s “focus on customer interaction has been there for some time now and will certainly be continuing over the coming months”. There must surely also be a risk that consumers could be negatively impacted due to this lack of clarity.

The Guidance – fairness and reasonableness

It has been a requirement that remote licensees “take into account the Commission’s guidance on customer interaction” since 31 October 2019. As any licensee who has been subject to a compliance assessment or regulatory action will attest, in practice the Gambling Commission interprets “take into account” as “strictly adhere to”. This is clear not only from the actions of the Gambling Commission, but also from the affirmative language, such as “must” and “required”, that is contained in guidance it has issued in relation to customer interaction. The Previous Guidance has therefore, at least to some extent, had the effect of a licence condition.

Various regulatory sanctions have been imposed, or regulatory settlements agreed that can be linked, at least in part, to remote licensees’ failure to take into account the Previous Guidance. Those licensees may, rightly, feel aggrieved that a combination of convenient timing and poor regulatory governance, means that they were exposed to such sanctions when, contrastingly, their peers, who may be subjected to compliance assessments or regulatory action now, are no longer obliged to adhere to similar standards. Whether those licensees choose to challenge this unfairness remains to be seen and may depend on the Gambling Commission’s action during this hiatus.

Non-remote licensees remain subject to the requirement, by virtue of SRCP 3.4.1, to “take into account the Commission’s guidance on customer interaction”. This guidance, Customer interaction: formal guidance for premises-based operators (the “Non-remote Guidance”), sets out very similar requirements to the Previous Guidance. This difference in required standards is likely to aggravate non-remote operators, particularly if the Gambling Commission continues to take action against them based on a failure to take into account the Non-remote Guidance. They will also likely be concerned that their already diminishing pool of customers will continue to migrate to the remote sector, which, at least in the short term, is held to a lower standard or can justify non-compliance more easily.

We question whether the Gambling Commission has given adequate thought to the possible impact of this last-minute U-turn and the consequential risk of challenge:

What will the position be for those licensees currently subject to regulatory action for failing to adhere to the Previous Guidance, or for those subjected to a compliance assessment in a period that straddles the change? What standards will they be held to?

Will the Gambling Commission now expect licensees to adhere only to the literal wording of SRCP 3.4.3, ignoring not only the delayed Guidance but also the Previous Guidance?

What are the current affordability requirements? Those requirements, in particular the requirement to consider ONS data and national average salaries when assessing affordability, were set out in the Previous Guidance and repeated in the Guidance. On what basis does the Gambling Commission propose to hold remote licensees who fail to meet those standards to account during this period?

The Gambling Commission has almost certainly opened a can of worms through this seemingly haphazard change. Licensees, consumers, stakeholders, and Government are all likely to have varying concerns. Whilst it is pleasing to see that the Gambling Commission has identified the risks linked to bringing all the requirements under SRCP 3.4.3 and the Guidance into effect without consultation, these issues could have been avoided if the Gambling Commission had given earlier credence to comments made by licensees, or industry stakeholders and advisors. The lateness of this change is embarrassing and the consequential complexities that now follow should be carefully navigated or the Gambling Commission may be exposed to challenge.

Next steps and SRCP 3.4.3

It is the Gambling Commission’s intention, subject to consultation, to introduce the remaining requirements of SR Code 3.4.3 and the associated guidance on 12 February 2023.

In the meantime, we encourage remote licensees to ensure that their policies, processes, and procedures comply with the existing requirements.

To assist licensees, we set out below SCRP 3.4.3 with deletions for those requirements not brought into effect on 12 September 2022.

Customer interaction 

All remote licences, except any remote lottery licence the holder of which does not provide facilities for participation in instant win or high frequency lotteries1, remote gaming machine technical, gambling software, host, ancillary remote bingo, ancillary remote casino, ancillary remote betting, remote betting intermediary (trading rooms only) and remote general betting limited licences.

Licensees must implement effective customer interaction systems and processes in a way which minimises the risk of customers experiencing harms associated with gambling. These systems and processes must embed the three elements of customer interaction – identify, act and evaluate – and which reflect that customer interaction is an ongoing process ~~as explained in the Commission’s guidance (see paragraph 2)~~.
~~Licensees must take into account the Commission’s guidance on customer interaction for remote operators as published and revised from time to time (‘the Guidance’).~~ 
Licensees must consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified. Licensees must take account of the Commission’s approach to vulnerability as set out in the Commission’s Guidance.
Licensees must have in place effective systems and processes to monitor customer activity to identify harm or potential harm associated with gambling, from the point when an account is opened. 
Licensees must use a range of indicators relevant to their customer and the nature of the gambling facilities provided in order to identify harm or potential harm associated with gambling. These must include: 
- customer spend
- patterns of spend
- time spent gambling
- gambling behaviour indicators 
- customer-led contact 
- use of gambling management tools
- account indicators.
In accordance with SR Code Provision 1.1.2, licensees are responsible for ensuring compliance with the requirements. In particular, if the licensee contracts with third party business-to-business providers to offer any aspect of the licensee’s business related to the licensed activities, the licensee is responsible for ensuring that systems and processes are in place to monitor the activity on the account for each of the indicators in paragraph 5 (a-g) and in a timely way as set out in paragraphs 7 and 8.
A licensee’s systems and processes for customer interaction must flag indicators of risk of harm in a timely manner for manual intervention, and feed into automated processes as required by paragraph 11. 
Licensees must take appropriate action in a timely manner when they have identified the risk of harm. 
Licensees must tailor the type of action they take based on the number and level of indicators of harm exhibited. This must include, but not be limited to, systems and processes which deliver:
- tailored action at lower levels of indicators of harm which seeks to minimise future harm
- increasing action where earlier stages have not had the impact required
- strong or stronger action as the immediate next step in cases where that is appropriate, rather than increasing action gradually
- reducing or preventing marketing or the take-up of new bonus offers where appropriate
- ending the business relationship where necessary. 
~~Licensees must prevent marketing and the take up of new bonus offers where strong indicators of harm, as defined within the licensee’s processes, have been identified.~~
Licensees must ensure that strong indicators of harm, as defined within the licensee’s processes, are acted on in a timely manner by implementing automated processes. Where such automated processes are applied, the licensee must manually review their operation in each individual customer’s case and the licensee must allow the customer the opportunity to contest any automated decision which affects them.
Licensees must implement processes to understand the impact of individual interactions and actions on a customer’s behaviour, the continued risk of harm and therefore whether and, if so, what further action is needed.  
Licensees must take all reasonable steps to evaluate the effectiveness of their overall approach, for example by trialling and measuring impact, and be able to demonstrate to the Commission the outcomes of their evaluation.
Licensees must take account of problem gambling rates for the relevant gambling activity as published by the Commission, in order to check whether the number of customer interactions is, at a minimum, in line with this level. For the avoidance of doubt, this provision is not intended to mandate the outcome of those customer interactions.

18Jul

Customer interaction guidance for remote gambling licensees (formal guidance under SR Code 3.4.3)

18th July 2022 David Whyte 226

Following its announcement, in April 2022, of the introduction of a new Social Responsibility Code Provision (“SRCP”) 3.4.3 that comes into effect on 12 September 2022, the Gambling Commission (the “Commission”) published its customer interaction guidance – for remote gambling businesses (formal guidance under SR Code 3.4.3) (the “2022 Guidance”) on 20 June 2022, which comes into effect at the same time as SRCP 3.4.3. To date the Commission has made no reference to the revision of its guidance for premises-based businesses and therefore those licensees remain in the dark about any changes that may be introduced in the future.

However, the Commission’s reference to “ew consumer protection guidance” in the press release for the 2022 Guidance demonstrates further its self-driven evolution into a consumer protection body and, given that the requirements set out in SRCP 3.4.3 require action across licensees’ entire customer base, the Commission’s reference to “new rules on action for at risk customers” in the release for the new SRCP is a further indication that the Commission considers all gamblers to be “at risk”. It is therefore likely that revisions to the requirements for premises-based licensees will follow. As we know from the affordability issue, whether formal inclusion of these licensees occurs or not, the Commission is not averse to applying guidance to the entire industry. As we have explained before, the Commission’s approach is difficult to reconcile with the licensing objectives set out in section 1 of the Gambling Act 2005 (the “2005 Act”) and in the Commission’s statutory obligations under 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 Commission is not charged with protecting all consumers, however admirable that may be; it could be the purpose of an ombudsman if appointed as part of the changes to gambling legislation. It was certainly not the intention of Parliament when passing the 2005 Act that the third licensing objective – “protecting children and other vulnerable persons from being harmed or exploited by gambling” apply to all customers who, at some point in time, may be “at risk”.

The 2022 Guidance, which we recommend licensees review in detail, reveals an apparent ignorance on the Commission’s part of various concerns that have been raised in the past about its approach, thereby exposing it to the risk of challenge. This article does not attempt a detailed critique of the entire 2022 Guidance; rather we have sought to identify the most salient points which we believe may have the greatest impact on licensees, or where we believe the Commission’s approach is misconceived.

Section A – General requirements

Paragraphs 1 and 2 – Formal guidance?

The Commission maintains its previous approach in paragraphs 1 and 2 of SRCP 3.4.3, requiring licensees to “embed the three elements of customer interaction – identify, act and evaluate”. Its replacement of the previous requirement to “interact” with a requirement to “act to minimise harm” illustrates its expectation that licensees do more than simply engage with customers and that tailored, proactive steps are taken to minimise the risk of harm.

The 2022 Guidance is more prescriptive than the existing guidance documents that the Commission has issued in relation to customer interaction, and it is certainly less outcome focussed. It requires licensees to undertake specific measures, for example that “licenses must understand that there are many reasons a person may be in a vulnerable situation” or that “licensees must identify customers that may be at risk of harm using all of the information available about the customer.” The use of words such as “must” and “required” have no place in guidance: they are the language of statute, conditions and codes of practice. We will leave for now the bigger issue that this prescription undermines the entire premise of the 2005 Act, which introduced a principles and risk-based system, as opposed to the prescriptive regime of the Gaming Act 1968 which it replaced.

It is of note that paragraph 2 requires that licensees “take into account the Commission’s guidance on customer interaction … as published and revised from time to time…” and that the Commission makes similar reference in the 2022 Guidance, stating that “for the purposes of raising standards, protecting customer interests, and preventing harm to customers, will update and re-issue guidance.” It is intriguing how the Commission considers that future updates to guidance “intended to support compliance with LCCP SR code 3.4.3” can raise standards or prevent harm. Unless, that is, the Commission intends to use the “formal” 2022 Guidance to implement “formal” requirements.

For a number of reasons, the Commission’s attempt to make a silk purse out of a sow’s ear is evident from the questionable foundations upon which the evolved 2022 Guidance is based. Firstly, and somewhat unsurprisingly, the Commission continues to ignore previous concerns raised, not least by us, about its use of guidance: guidance that enables the Commission to outline its expectations to licensees to assist their understanding of licence conditions or codes of practice is sensible. However, the Commission continues to introduce formal requirements through its use of guidance and without consultation, which is wrong. The Commission’s powers are controlled by statute and are therefore the preserve of Parliament. The 2005 Act requires that the Commission must consult before specifying a licence condition (section 76) and before issuing or revising a code of practice (section 24). Guidance must therefore be easily distinguished from a licence condition or code of practice (including those that carry the weight of a licence conditions such as SRCP 3.4.3) and should not prescribe additional requirements.

The distinction is not more apparent than real. Aside from the fact that it exceeds the Commission’s powers to introduce a licence condition or code of practice without consultation, by using guidance which should only be explanatory rather than mandatory, the distinction has very different consequences. Breach of a licence condition or code of practice carrying the weight of a licence condition is a criminal offence and allows the Commission to prosecute or resort to its full armoury of penalties through licence review. By contrast, licensees must “take into account” guidance and therefore not following it should not be an automatic breach. It is therefore wrong, and confusing, for the Commission to include specific requirements in the 2022 Guidance, particularly when it has very recently consulted on the introduction of SRCP 3.4.3 and has thus had the opportunity formally to introduce whatever further formal requirements it wished at that time. Reference to “formal” guidance in the title of the 2022 Guidance is indicative that it knew what it was doing.

Secondly, if the Commission is willing and able to circumvent statutory controls now, and not for the first time (it introduced its Covid-19 guidance very quickly and not alongside a change to the SRCP or consultation), it is likely to do so again. This leaves licensees and other stakeholders exposed to the risk of further change without fair notice or the ability to challenge.

Thirdly, whilst it may seem somewhat hypocritical to challenge now this prescription when licensees have been desperate for clarity for many years, a more thorough analysis of the 2022 Guidance reveals that, despite it being more prescriptive, it is unlikely to provide licensees with the clarity that they desire and will certainly lead to a continuance of the ‘flexible interpretation’ experienced by licensees during compliance assessments and subsequent regulatory investigations. One might argue that, like licensees, the Commission has also struggled to identify what specific controls and thresholds will adequately identify who might be at risk of harm and balance those controls against the freedom of choice.

It seems that in recent times, guidance, formal guidance and licence conditions have become one and the same thing in the belief of the Commission, the only difference being that the former two contain requirements that the Commission have found inconvenient.

Section B: Identify

Paragraph 3 – Transforming vulnerability

Paragraph 3 requires that “Licensees must consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified. Licensees must take account of the Commission’s approach to vulnerability as set out in the Commission’s Guidance.” Prior to the publication of the 2022 Guidance, the wording of paragraph 3 indicated that the Commission may have taken a step back from its intention, set out in its consultation, to require that licensees “take account of its definition of vulnerability”. However, it is clear in the 2022 Guidance that this is not the case: the requirement remains but it is drafted more subtly. The Commission sets out in “Aim 3” (which reads as more of an obligation than an aim – a theme that runs throughout the 2022 Guidance) that “ require operators to take action when they are aware that a customer is in a vulnerable situation”, and sets out its own definition of a vulnerable person as

“somebody who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”.

The Commission requires (amongst other things) that “licensees must understand that there are many reasons a person may be in a vulnerable situation…” explaining that a vulnerable situation “can be permanent, temporary or intermittent, and may be related to health, capability, resilience, or the impact of a life event such as a bereavement or loss of income”.

In recent years the transformation of what the Commission considers to be “vulnerability” is bewildering. Parliament clearly considered the interpretation of vulnerability a straightforward matter: it did not find it necessary to include a statutory definition in the 2005 Act. This is understandable: as we have discussed previously, the reference in the third licensing objective firstly to children, and then to other vulnerable persons, adequately set out Parliament’s intention that the licensing objective apply to those people who are not able to make properly informed or ‘adult’ decisions.

Most worrying, however, is that vulnerability as now defined, is to be determined by whether a “firm”, which we understand to mean a licensed operator, is “acting with appropriate levels of care”. Given that the decision about whether a licensee has acted with “appropriate levels of care” rests with the Commission, it seems that vulnerability will be determined subjectively by the Commission, in hindsight, most likely during compliance assessments, and based primarily on a licensee’s actions and controls in relation to each individual customer. In referring to those “appropriate levels of care” the Commission also suggests incorrectly that licensees have a duty of care at law to prevent customers from gambling if they are or might be vulnerable and risks improperly seeking to introduce such a duty in law, or at least exposing licensees to such a challenge based on its definition.

Matters are likely to become further complicated when the Commission launches its further consultation on the ways to tackle what it considers to be three key financial risks for consumers: binge gambling, significant unaffordable losses over time, and risks for those who are financially vulnerable (the “Financial Risks Consultation”). Licensees who are hoping that this consultation will provide clarity about affordability expectations may be disappointed and faced with a further definition to consider, this time of “financial vulnerability”. Based on its current approach, the Commission is likely to permit itself a similar level of hindsight, the focus of its decisions being on action taken and controls implemented.

The Commission apparently considers itself lawmaker on a par with Parliament: it will determine who is and who is not vulnerable, and will further amend its definition without consultation, whenever it sees fit.

Paragraphs 4 and 5 – Affordability?

Paragraphs 4 and 5 require licensees to “have in place effective systems and processes for monitoring customer activity” and set out a range of indicators which must be operated by licensees. The 2022 Guidance expands on these requirements, making it clear that the Commission expects a mix of automated and manual processes and that systems should “draw on all available sources of data”.

The 2022 Guidance does nothing to clarify the uncertainty about affordability, with the Commission’s position largely replicating the previous guidance. In setting out examples of indicators which should be used by licensees (some of which have now been made requirements) the Commission refers to “mounts spent compared with other customers, taking account of financial vulnerability”. It is of note that in its reference to the Financial Risks Consultation, the Commission indicates that further “guidance” will follow. Again, given that the Commission has considered it necessary to define “vulnerability”, this is an indication that a further definition for “financial vulnerability” seems likely.

Section C – Act

Paragraphs 8, 9, and 11 – An absence of prescription or guidance?

These paragraphs require that licensees take “appropriate action in a timely manner when they have identified a risk of harm” and that this action is tailored “based on the number and level of indicators of harm exhibited.” The 2022 Guidance obliges licensees to have a suite of actions in place ranging from “early generic action” to “very strong” action (this essentially amounting to ending the business relationship). The Commission does not, however, specify which indicators of harm it considers lower level and which it considers strong. Rather, strong indicators must be “defined within the licensees’ processes”. Prescription, when most likely to be helpful, is absent. The resulting inevitability of inconsistent standards and expectations being applied during compliance assessments will further frustrate licensees.

The requirement not only to “implement automated processes”, but also when those automated processes are applied to “manually review their operation in each individual customer’s case” is burdensome, impracticable, counterproductive and undermines the benefits of automation. The limited guidance – in its true sense – in relation to this requirement and the lack of clarity about when any manual review must take place, is indicative that the Commission has not considered fully how it is “consistent with data protection requirements”.

Section D – Evaluate

Paragraphs 12, 13 and 14 – Impact?

Evaluating the impact of each customer interaction is no easy task. As licensees have already experienced, it doubles the operational impact, with additional and equivalent resource required to follow up on the original interaction. The Commission fairly points out in the 2022 Guidance that “not every customer who receives an interaction will require a follow up” however it overlooks the fact that not every interaction will require evaluation. The Commission states that “by impact we mean a change in the customer’s gambling activity which could be attributed to the interaction”. The implication here is that if the customer’s gambling activity does not change for the better (i.e stop or reduce), they are suffering, or continue to be at risk of suffering harm. This cannot be correct. Some customers will, for various reasons, simply continue to gamble at previous levels, or may even increase their spend, particularly if they are winning (as is commonplace when most people gamble). This is certainly not always an indicator of harm. This lack of clarity will mean that licensees will continue to feel obligated to ensure that on every occasion they interact with a customer they see a change in behaviour, and where this is not the case will feel bound to take further action whether or not any such action is wanted by a customer or thought necessary to prevent harm.

The requirement that licensees evaluate the effectiveness of their overall approach maintains the current requirements, however the Commission sets out in more detail its expectations. The new obligation to “take account of problem gambling rates for the relevant activity published by the Commission in order to check whether the number of customer interactions is, at a minimum, in line with this level” is something of a step away from the tailored approach of other requirements in SRCP 3.4.3 and the 2022 Guidance. To avoid criticism, licensees will need to be acutely aware of any updated publication of problem gambling rates by the Commission, however questionable that data may be, and ensure that this is reflected in their approach.

Conclusion

Whatever the Commission’s intention, and however strongly it feels that licensees are not going far enough to protect consumers, it is vitally important that it acts within its statutory remit. Not for the first time, the 2022 Guidance reveals a willingness on the Commission’s part to act beyond its powers, this time under the guise of the new SRCP and its intention to introduce “stronger and more prescriptive” rules. The Commission’s willingness to continually use guidance as a means of introducing formal requirements through the back door is concerning and it may only be a matter of time before it faces challenge. In the meantime, licensees should ensure that they take steps to ensure that they are able to adhere to both the SRCP and the 2022 Guidance to mitigate the risk of regulatory action.

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

07Jul

The Affordability Debate (4): The Commission Unmasked

7th July 2022 Julian Harris 256

Readers may recall the three articles we have previously written analysing the Gambling Commission’s (the “Commission”) covert operation to introduce a requirement on operators to conduct evidenced affordability checks. Whilst we cannot claim that it is as a result of those publications, it is encouraging that the Commission has finally and “officially” been taken to task on this controversial issue by no less a body than the Digital, Culture, Media and Sport (the “DCMS”) Committee of the House of Commons (the “Committee”). On the penultimate day of the Committee’s Inquiry on What next for the National Lottery? (30 June 2022), the Committee heard evidence from Commission CEO, Andrew Rhodes and its Executive Director, John Tanner. Whilst much of the questioning by the Committee related to the subject matter suggested by the title of the Inquiry, the Committee then turned to the subject of affordability checks and then customer interaction.

We can all sympathise with being taken off guard by unanticipated questioning, but less so with Mr Rhodes’ apparent denial of responsibility for, or even knowledge of, matters that occurred before his appointment, especially in relation to such a critical issue for consumers and the industry.

Even less worthy of sympathy was his apparent inability to explain the relationship between the newly published Customer interaction guidance – for remote gambling licensees, the November 2020 Consultation and call for evidence – Remote customer interaction (the “Consultation”) on which the Committee interrogated Mr Rhodes, and the issue of affordability which was the basis for the questioning. This is particularly the case given that the core and most contentious of the Commission’s ever evolving proposals in relation to affordability, the introduction of mandatory financial thresholds for affordability checks, was introduced in the Consultation.

Secrecy v transparency

To quote Jeremy Bentham, “secrecy, being an instrument of conspiracy, ought never to be the system of a regular government.” summarises neatly the Committee’s displeasure – to put it mildly – at the Commission’s failure to publish the results of its Consultation. As the Chair, Julian Knight MP, put it:

“This is important work. Affordability and affordability checks are of great public interest. It seems to be very strange that this has not been made publicly available. I do not know what is so secret about it that it needs to be handed over covertly to DCMS and then inform the White Paper. We have a right to see it as well and so does the general public, because we pay for you.”

Mr Rhodes denied knowledge of the reasons, on the basis that it pre-dated his appointment. Now that he has been the CEO for a year, one would expect that he knew, or ought to have known, about the Commission’s handling of an important document relating to a key Commission policy that has been disclosed to DCMS, which has been the subject of numerous licence reviews conducted by the Commission, is of critical importance to those whom the Commission regulates and to consumers, and which has been the subject of very substantial commentary. As the Chair commented:

“It does seem to be very strange that you should announce a consultation in November 2020 on such an important area, which frankly does need scrutiny more widely than just DCMS and the Department, and that was not released publicly. I thought that would be of interest to parliamentarians, rather than for it just to be handed covertly to officials at DCMS. That seems a very strange approach and lacking in transparency, frankly.”

Strange indeed. A lack of transparency on the part of the Commission has unfortunately permeated this issue; coupled with the Commission’s sleight of hand in introducing affordability requirements outside due process, this has left operators confused by the relationship between their regulatory obligations in law and the Commission’s expectations, as explained in more depth in our second article (The Affordability Debate (2): Ambiguous Regulatory requirements). Mr Rhodes again pleaded ignorance:

“I was not at the Commission at the time, so I am very happy to look at what the reasoning was for it not being published. My understanding since I have joined the Commission is that we have fed into the White Paper that affordability checks will be considered as part of the White Paper’s recommendations, rather than have essentially two bites at that.”

More disappointing is that he did not explain what the Commission is doing now in relation to affordability. Given that the Committee referred to this as being “such an important issue”, we consider this to be somewhat disingenuous: it does not reflect the degree of transparency which the Committee felt entitled to expect, nor to the level which the Commission expects of its licensees.

Realpolitik

As operators are painfully aware, the Commission has for some three years done rather more than, in the word of Mr Rhodes, “…fed into the White Paper…”. The Consultation was followed just three days later by the Compliance and Enforcement Report 2019 to 2020 (6 November 2020) (the “2020 Enforcement Report”). In fact, even earlier – in its Compliance and Enforcement Report 2018 to 2019 (27 June 2019) (the “2019 Enforcement Report”) – the Commission outlined various open-source data that may help licensees to “assess affordability for its GB customer base and improve its risk assessment and customer interventions.” In referring to the recommendations it made in the 2019 Enforcement Report, and considering customers who have “demonstrated gambling related harm indicators and been able to continue to gamble without effective engagement”, the Commission opined that: “Furthermore, these individuals have funded their gambling without satisfactory affordability checks and appropriate evidence being obtained.” . The 2020 Enforcement Report proceeded to outline various open-source data that can help licensees to “assess affordability for GB customers and improve risk assessment and customer inventions”. Similar to the 2019 Enforcement Report, this data primarily focuses on average annual salary as outlined in the ONS survey of Hours and Earnings.

The core, critical “requirement” is that:

“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.”

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 that. Aside from the fact that the Commission is not adopting a risk based and proportionate approach, the evidential basis for the Consultation included research in which customers admit to having sometimes lost more than they can afford, rather than their gambling being unaffordable. The Commission cite the Enforcement Reports as evidence in support of their proposed measures, when in fact the Enforcement Reports deal 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; a point not missed by the Committee, when the Chair referred to “consumers potentially having to submit bank statements or tax returns to bet as little as £100 a month.”

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 (the “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 account of, specific formal guidance. Nowhere in the LCCP is there any reference to the Enforcement Reports carrying such weight, as we have previously explained (The Affordability Debate (2): Ambiguous Regulatory requirements).

So, in the case of affordability, the Commission expects licensees to abide by 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, but in their Enforcement Reports and the existing Customer Interaction Guidance and more broadly the Consultation. 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.

A Bridge Too Far

As licensees know from sometimes bitter experience, and as we explained in our second 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, referred to in its Enforcement Reports, by exerting pressure and threatening regulatory action for failing to implement affordability checks. This is clearly inconsistent, unfair and possibly exceeds its powers. Operators subjected to regulatory action have been pressured by the Commission to adopt affordability checks as if they were a legal requirement. The consequence, aside from placing them at a disadvantage to competitors, has been to create a climate of fear.

This has been exacerbated by confusion as to what the Commission actually requires. Moreover, despite the fact that the Consultation contains proposals for such checks to be applied solely to the online industry, the Commission is requiring such checks also from the land-based industry. The Commission has not merely pre-empted the Government’s decision, it has taken upon itself the role of Government and Parliament, i.e. that of lawmaker.

The whole truth

Mr Rhodes was unambiguous in saying that the issues relating to affordability checks “are something for the White Paper.”

Against the background explained above, it is reasonable to ask how he found himself able to make this statement. He was certainly correct in his pithy summary of how the Commission should have addressed affordability. However, he failed to explain that the Commission has been acting on many of the proposals on which it purported to consult for some three years, without reference to any higher authority. We find this strange indeed, not least given the Committee’s obvious interest and concern about the subject and the Chair’s statement that “affordability and affordability checks are of great public interest.” Given this “public interest” in the issue and the Committee’s concern as to lack of transparency on the part of the Commission, the Committee should have been informed of the Commission’s existing enforcement on the whole industry of affordability checks.

There is little point in speculating as to the reason for this absence, but it is reasonable to question whether (1) Mr Rhodes did not consider it relevant; (2) he was unaware of it and of the numerous licence reviews in which affordability has been an important feature; or (3) he chose not to mention it. If (1) obviously his view was misconceived; if (2) this would be a cause to question his grasp of the Commission’s work; and if (3) one wonders why not.

In the first article on affordability (The Affordability Debate: Protection, Responsibility and the Right to Choose), we commented that in disregarding the Consultation and pre-empting the results, the Commission had become the emperor that had no clothes. He has now been defrocked.

A question of trust

In conclusion, the Committee Chair asked Mr Rhodes if the Commission “have any measures or metrics in place to decide exactly how you are trusted by your licensees, for instance? Is there an overarching survey of that?” His answer was: “Not presently, no. There isn’t.” The answer from Mr Rhodes was correct: an answer that the Committee probably found disappointing.The fact of the question being asked hints at the possibility that the Committee considered there could be a negative response to such a survey.

There are stronger remarks that leave little doubt as to the Committee’s opinion; in questioning on metrics to determine whether the National Strategy to Reduce Gambling harms works, the Chair described the approach set out by Mr Rhodes as “very slipshod”. Having then heard Mr Rhodes admit there were no metrics to determine whether the £40 million spent does any good, the Chair concluded the hearing by saying:

“What do you do? There seems to be money going out the door and no accountability for that money, apart from when you make the award. This money just splashes out there and you have no idea in terms of what this impacts with the licensees. I am struggling to think precisely as an organisation how you are doing your job, because these seem to be key measures and indicators of whether you are successful.”

It is not for us to speculate on the views of licensees, who are quite able to make their views known themselves, but this withering criticism from the Committee reflects what was said by the All-Party Parliamentary Group on Betting and Gaming: there is reason to suppose it may well be shared by others.

As we know from experience, the degree of engagement between the Commission, those whom it regulates and even independent advisers, is negligible. The Commission seems interested in canvassing the views of those whom it knows to be anti-gambling or have reason to dislike the industry. This has been demonstrated by its formation of a group of people with “lived experience”, which meant only those who had suffered a problem with gambling. The Commission has never, to the best of our knowledge sought views from the vast majority who enjoy gambling as an adult leisure activity. For most licensees, the only real engagement with the regulator is through regulatory reviews or other confrontational issues.

In short, this issue demonstrates the need for the Commission to go on an “improvement journey”, be put into “special measures”, or even the equivalent of a “licence review” to establish whether it is fit, able and prepared to carry out the function with which it is charged under the Gambling Act, 2005 and not to make law according to its own whims.

06Apr

Change of Corporate Control Reminder

6th April 2022 Julian Harris 234

The Gambling Commission has issued a reminder in its fortnightly E-bulletin (4 April 2022) about the requirements on a Change of Corporate Control (“CoCC”), indicating a tougher approach where applications are late.

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 complex financial services legislation and, broadly speaking, it means 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.

The Gambling Commission is reminding licensees that a CoCC must be notified to them, via eServices, by means of a key event within five working days of the event happening. They must also submit a CoCC application within five weeks of the event occurring.

At present, where an application for a CoCC is late, licensees are able to explain the delay and obtain an extension of time for the application, in the words of the Gambling Commission, where an “adequate and reasonable” explanation is provided.

From July 2022, the Gambling Commission have warned that their approach to late submissions will become stricter, due, they claim, to an increase in the complexity and number of applications. Where the explanation is not considered to be “adequate or reasonable”, there will be a refusal to grant an extension and revocation of the licence where the new controller is unknown to the Gambling Commission (i.e not already a licensee) and is not:

Regulated by the Financial Conduct Authority; or
An immediate family member entering a small family business.

This is important because of the binary choice facing the Gambling Commission in determining a CoCC application; they may, in law, only grant the application, or refuse it. If the latter, the licence is revoked. The consequences for licensees are therefore potentially catastrophic. It is therefore to be regretted that the apparent reasoning for this change on the part of the Gambling Commission is the burden of their own workload. The consideration of a CoCC application is a statutory duty for them, and the subject of often huge application fees. Ironically, the complex applications which concern the Gambling Commission are generally those pertaining to larger, often international, licensees regulated in numerous well-respected jurisdictions. These licensees are very often owned by publicly traded companies, who submit numerous CoCC applications, in relation to their blue-chip institutional investors or acquisitions they have made in the sector. A stricter approach that could put the licences of such licensees at risk merits greater justification than the workload of the Gambling Commission.

The Gambling Commission have never provided an explanation of their view as to what constitutes an “adequate or reasonable” explanation, nor do they offer any guidance now as to its meaning, or as to what the change will mean in practice or who will make such a determination. The Gambling Commission’s Corporate Governance Framework (last revised in January 2022) states that an out of time extension request may be granted by a “Regulatory Manager or above”. However, it does not state who has the delegated authority to refuse such a request and issue a “minded to revoke” letter. The framework goes on to say “here, in response to such a letter, the licence holder requests a hearing, this will be before an Executive Director who will determine the case, otherwise a Senior Manager or above may take the decision.”

In our experience, the Gambling Commission have generally been understanding as to missed applications, particularly in complex, often international corporate groups, where restructuring somewhere in the chain of ownership may not necessarily be notified to those responsible for compliance in Britain, or where shares are publicly traded on a stock exchange with quarterly reporting periods.

In her blog last year, Changes of Corporate Control: The Basics, Bahar Alaeddini recorded our then experience that the Gambling Commission had become stricter in their approach to application deadlines, recommending that licensees take steps to ensure awareness of changes of control and ensure their ability to comply with application deadlines. Bahar recorded then that “the Gambling Commission is no longer generous in giving extensions, sometimes with extension requests being refused, so their goodwill cannot be relied upon.” This statement by the Gambling Commission confirms the reality of what we had experienced.

It may be that the Gambling Commission will continue to be sympathetic to inadvertent failures to meet the statutory deadline on a CoCC application, particularly where the delay is short, or due to share fluctuations, and in circumstances where, as frequently happens, the same institutional investors from time to time trigger a new CoCC. Where we suspect they will look less favourably on late applications, is when licensees discover several CoCCs missed over a considerable period of time or repeated failures; this the Gambling Commission might regard as evidence of more serious governance and compliance failure. In any event we strongly advise all licensees to check that they have appropriate means of identifying and addressing CoCCs. In the unfortunate event that any are or have been missed, immediate legal advice should be sought.

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.

18Feb

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

18th February 2022 David Whyte 215

The Gambling Commission released its most recent update on emerging money laundering and terrorist financing risks on 10 February.

The Gambling Commission reminds licensees on its website that they are required, by licence condition (“LC”) 12.1.1(3), to “keep up to date with any emerging risks that the Commission publishes”. This update covers three emerging risks that we set out in detail below.

1. Improvements needed to money laundering and terrorist financing risk assessments

The Gambling Commission points out that it expects to see licensees significantly improve their money laundering and terrorist financing controls, flagging that there are “too many instances being identified where licensees are failing to meet the requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and the LCCP”.

It reminds licensees of the mandatory requirement under LC 12.1.1 that they “conduct an assessment of the risks of their business being used for money laundering and terrorist financing and have appropriate policies, procedures and controls in place to mitigate the risk of money laundering and terrorist financing”.

In warning licensees that it will take regulatory action where it identifies significant failings (which, it also reminds licensees, can include suspension and revocation) the Gambling Commission directs them to its most recent compliance and enforcement report, Raising Standards for consumers – Compliance and Enforcement Report 2020-2021 (the “2021 Report”), within which it has identified and included examples of good practice to consider.

Having seen first-hand the Gambling Commission’s punctilious expectations of licensees’ money laundering and terrorist financing risk assessments, and noting some differences between the good practice examples set out in the 2021 Report and our own practical experience of its expectations, we recommend licensees consider the following:

Ensure that you review your risk assessment in the light of this emerging risk update. If the Gambling Commission has cause to raise concerns about your approach in the future, it will almost certainly point to this update as an opportunity for you to have improved your risk assessment sooner.
Ensure that you also review your risk assessment “as necessary in the light of any changes of circumstances”, including the examples set out in LC 12.1.1(1).
Methodically work through the Gambling Commission’s AML guidance for casinos (in particular paragraphs 2.12 to 2.39) or other gambling businesses (in particular section 18) (together the “AML Guidance”) when completing or updating your risk assessment. Gambling Commission officials seem to use the guidance as a checklist when reviewing risk assessments during compliance assessments.
Ensure that your risk assessment accords with the Gambling Commission’s own money laundering and terrorist financing risk assessments. As with the AML Guidance, Gambling Commission officials will likely cross check the content. Should your assessment of any individual risk differ from the Gambling Commission’s, it will likely expect you to be able to explain why. Please note that the Gambling Commission sets out in its 2020 risk assessment its expectation that you also refer to its 2018 and 2019 risk assessments “s part of your commitment to anti-money laundering and the prevention of terrorist financing”. We therefore recommend that, if you haven’t already, you cross check your risk assessment against all three documents, as together they form a catalogue, rather than superseding each other.
Include reference to all theoretical risks included in the AML Guidance and the Gambling Commission’s own risk assessments, irrespective of whether you consider those theoretical risks to present any actual risk to your business. We have seen Gambling Commission officials criticise licensees who have, justifiably, considered it sensible to omit theoretical risks from their risk assessment because they simply do not exist in their operation and therefore cannot be assessed. By means of an example, even when cryptocurrency it is not accepted, the Gambling Commission has stated it expects details to be included in a risk assessment, including about how this payment method is prevented. Whilst this may be something that can be explained and/or corrected at a later stage, the time and effort required in doing so is best avoided if possible.
Ensure that your policies, procedures and controls are prepared having regard to your risk assessment and cross refer to it where appropriate. By means of an example, a key area of concern often raised by Gambling Commission officials is that there is no explanation in the risk assessment about why triggers and thresholds were set at current levels. Putting aside any argument that policies, and not risk assessments, are the best place for this explanation to be recorded (as how else could those policies – and therefore the triggers and thresholds – have regard to the risk assessment?) the Gambling Commission will be looking for evidence of such consideration.
Ensure that you have a clear methodology for your risk assessment and that you can show that your approach has been applied logically to the risks. If you are unsure on an appropriate methodology to use, consider applying the same methodology that is used by the Gambling Commission in its own risk assessments.
Ensure that you are risk profiling customers from the outset of the business relationship.
Take into account when completing your risk assessment the risks presented by unaffordability, problem gambling or gambling addiction that leads to crime (for example increasing spend inconsistent with apparent source of income). Similarly, as part of a balancing exercise, be careful not to conflate those risks with those presented by money laundering and the financing of terrorism.
Include clear and detailed explanations of risks and mitigation rather than vague references.
Ensure that you do not reference any out-of-date Gambling Commission guidance and/or advice. The Gambling Commission sets out in the 2021 Report its expectation that licensees keep up to date with any guidance and/or advice it provides and then update their risk assessment and polices, procedures and controls based on that guidance and/or advice.

2. Due diligence checks on third party business relationships and business investors

The Gambling Commission sets out that it has become aware of instances of licensees failing to conduct sufficient due diligence in their business relationships, including where licensees have entered white label partnerships (which are noted as high risk in the Gambling Commission’s 2020 risk assessment, specifically for AML failures) or received third-party investment.

Again, the Gambling Commission reminds licensees to refer to the AML Guidance, within which it asserts that increased risks are posed by the jurisdictional location of the third-party, as well as by transactions and arrangements with business associates and third-party suppliers, such as payment providers, including their beneficial ownership and source of funds. Examples given are insufficient checks on the source of funds from an investment that had originated from cryptoassets that was converted to sterling when invested into the gambling business, and repeated failures to consider jurisdictional risk in relation to third-party business relationships.

The Gambling Commission advises licensees to remind themselves of the content of its April and July 2020 e-bulletins for more information on these risks.

This is not the first time the Gambling Commission has raised this issue and as such it is indicative that it may be preparing to widen its practical examination of licensees’ approaches to money laundering and terrorist financing risk, to concentrate further on their transactions in higher risk jurisdictions.

We recommend that licensees, in particular those in white label or B2B arrangements, review their approach to due diligence and risk in anticipation of additional scrutiny. As the Gambling Commission points out, failure to do so could amount to a breach of the MLR, the Proceeds of Crime Act 2002, the Terrorism Act 2000 or LC 12.1.1.

3. Scottish notes and pre-paid cards

Having set out in its 2020 risk assessment “the significant, potential money laundering risks associated with the use of Scottish notes and pre-paid cards” the Gambling Commission points out the increased risk of Scottish notes being used to top up pre-paid cards. It reminds licensees to “remain curious as to the source of customer funds and conduct ongoing monitoring to ensure that customer spending levels align with your knowledge of their affordability to gamble”.

It would be sensible for licensees to take this into account when reviewing their risk assessments, and to be mindful of the Gambling Commission’s concerns if they are accepting pre-paid cards.

Please get in touch with us if you would like any assistance on compliance or enforcement matters.

06Jan

Gambling Commission Compliance and Enforcement Report 2020-2021

6th January 2022 Ting Fung 250

The Gambling Commission’s latest Raising Standards for consumers – Compliance and Enforcement report 2020 to 2021 (the “Report”) was published on 9 December 2021, the first since Neil McArthur’s departure, and details “one of the busiest for Enforcement and Compliance teams…”. Unsurprisingly, the focus of the Report remains on social responsibility and anti-money laundering failings. It also includes designated sections on licensed operators and financial stability, special measures and licence suspensions, personal management licence (“PML”) reviews and illegal gambling. However, surprisingly, and unlike the Raising Standards for consumers – Compliance and Enforcement report 2019 to 2020, affordability is not featured as a key theme despite the continuing and increasing focus by the Gambling Commission across its compliance enforcement work.

Certainly, this is reflected in the Gambling Commission’s summary of its compliance and enforcement work:

15 financial penalty packages or regulatory settlements totalling £32.1 million;
262 security audits;
57 personal licence reviews were finalised; and
82 website reviews conducted; and
30 full assessments of online and non-remote operators.

Alongside an acknowledgment of the challenges of the pandemic upon consumers and businesses, the foreword concludes that:

“Looking back at enforcement in 2020 to 2021 we see the same two weaknesses in almost every case – operators failing to adhere to social responsibility and anti-money laundering rules…The reasons for these failings are almost as concerning as the failings themselves. Our casework reveals that operators are either not making suitable resources available or are simply putting commercial objectives ahead of regulatory ones…As the Great Britain’s regulator for the gambling industry, we still see far too many breaches of regulations where everyone in the industry agrees we should not see them. The industry has the resources, skills and knowledge to change this.”

We strongly encourage applicants and licensees to review, carefully, the Gambling Commission’s identified common poor practices, case studies, notable enforcement cases, guidance and lessons learned and health-check good practices.

Summary of other key areas from the Report:

Anti-money laundering and counter terrorist financing

“The Commission is finding increasing instances of gambling operators failing to consider how problem gambling can be linked to ML and TF despite both the Commission’s Guidance for remote and non-remote casinos: The prevention of money laundering and combating the financing of terrorism and Duties and responsibilities under the Proceeds of Crime Act 2002: Advice to operators (excluding casino operators) stating:
a pattern of increasing spend or spend inconsistent with apparent source of income could be indicative of money laundering, but also equally of problem gambling, or both.”

The common poor practices which led to “avoidable failings” were cited as:

inadequate due diligence measures;
failure to account for the Gambling Commission’s various guidance documents;
failure to consider the full range of circumstances in which enhanced due diligence (“EDD”) is to be applied;
over reliance on third party providers to conduct due diligence (“CDD”) checks;
delayed customer identification checks;
commercial considerations overriding the need to comply with anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) provisions;
operators having no clear methodology in place in their money laundering (“ML”) and terrorist financing (“TF”) risk assessments;
vague references made in ML and TF assessments;
not considering how problem gambling can be linked to ML and TF;
high financial thresholds in place before CDD or EDD measures take place;
high financial thresholds based on losses, deposits, or winnings only; and
the ML/TF risk assessment not being fully used to inform policies, procedures and controls.

The Gambling Commission highlighted the need for licensees to:

apply a risk-based approach;
conduct robust CDD and EDD checks;
ensure that their ML/TF risk assessment along with their policies, procedures and controls sufficiently mitigate the risk of ML and TF;
ensure that they are compliant with and stay up to date on customer interaction requirements, and that they take account of the current formal guidance for their sector; and
deliver robust and up to date employee training.

Licensed operators and financial stability

“It is not surprising given the significant challenges the pandemic has posed globally, that we have observed a significant increase in gambling operators, particularly land-based operators, experiencing extreme financial difficulty. In such situations it is imperative that operators, and their representatives are mindful of what is required of them in relation to the Licensing Objectives and customer protections. We urge licensees who are encountering financial stability issues to engage with the Commission at an early stage.”

Key takeaways from this section are:

responsibility for regulatory compliance remains – at all times – on the licensee, whether this is the gambling business or an appointed administrator;
in the case of administration, all regulatory responsibilities continue and vest in the administrator; and
operating licensees and PMLs were reminded the Gambling Commission will remain focused on ensuring licensees are treating consumers fairly. Fair treatment includes but is not limited to ensuring that segregated funds with medium and/or high-risk customer protection measures are ring fenced and not used to pay business expenditure.

The unsurprising consequence of either improper closedown or not adhering to continuing regulatory responsibilities are risks to any continuing operating licences PMLs. The Gambling Commission further emphasised that any adverse outcomes “may” affect future applications both in Great Britain and with other regulators abroad.

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.

During the special measures process a 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 Report highlights that the pilot scheme has used in relation to eight licensees. 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 (as noted below). 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 is currently consulting on special measures, to make them a permanent feature of their regulatory toolkit, as part of its consultation on the Licensing, compliance and enforcement under the Gambling Act 2005: policy statement. Read more about the consultation and special measures process in our blog on 13 December 2021.

PML reviews

“Businesses do not make decisions – people do. This is why the Commission continues to ensure that personal licence holders are held accountable, where appropriate, for the regulatory failings within the operators they manage.”

Key failings identified through casework included:

inadequate source of funding or source of wealth checks;
record keeping – lack of adequate documentation and audit trails to demonstrate properly informed decision making;
reporting criminal offences – delays or failures to report Schedule 7 offences as a key event;
nominated officer/ MLRO poor practice; and
senior management lacking oversight.

The associated casework has resulted in the following outcomes:

10 licence revocations – eight Personal Functional Licenses (“PFL”) and two PMLs;
11 PML warnings issued;
One PML warning with conditions;
21 PML advice as to conducts; and
10 PMLs surrendered.

Illegal gambling

“We are particularly focused on identifying and disrupting websites which are targeted at young or vulnerable people, those who experience significant harms from their gambling and self-excluded gamblers. The most widely reported complaints from members of the public related to the allowance of gambling. This accounted for 62% of all unlicensed remote reporting for the financial year 2020 to 2021 representing a 17% increase compared to the financial year 2019 to 2020.”

There were 99 reports of unlicensed remote operators in the financial year 2020 to 2021, some of which accounted for the same illegal website. In addition:

consumers’ inability to withdraw funds remained a prevalent issue;
there was a rise of illegal lotteries on social media;
the Gambling Commission continues to work with social media outlets and other regulators internationally to counteract the risks posed by illegal lotteries;
the Gambling Commission is also assessing its need for further legislative powers to counteract illegal gambling and will report any conclusions to the Department of Culture, Media and Sport as part of the Gambling Review.

What’s next?

The Gambling Commission’s foreword concludes that:

“The reasons for failings are almost as concerning as the failings themselves. Our casework reveals that operators are either not making suitable resources available or are simply putting commercial objectives ahead of regulatory ones.
This is simply unacceptable and will be seen as such by others in the industry who work hard to achieve compliance.
…
Our Enforcement and Compliance work will continue to focus on customer protection, as consumers have every reason to expect. This will vary from paying very close attention to novel products to checking that operators are looking after their customers by meeting the LCCP requirement and taking into account the current Commission guidance on anti-money laundering and customer interaction”.

Compliance and enforcement action will continue unabated.

Updated and consolidated guidance on AML and customer interaction is due to be issued “shortly” following the Gambling Commission’s consultation that ended nearly a year ago on 9 February 2021.

We strongly encourage applicants and licensees to review, carefully, the Report and the Gambling Commission’s identified common poor practices, case studies, notable enforcement cases, guidance and lessons learned and health-check good practices.