01Dec

Gambling Commission consultation on the Licensing, compliance and enforcement policy statement: Proposed changes to licensing

1st December 2021 Bahar Alaeddini 251

On 17 November 2021, the Gambling Commission launched a consultation proposing changes to its Licensing, compliance and enforcement policy (the “Consultation”), including changes to:

set out its position on products that appear to require dual regulation;
clarify certain operating and personal licence requirements;
its regulatory toolkit following its pilot use of Special Measures; and
its process on licence review, interim suspension, and Regulatory Settlement.

What is the Licensing, compliance and enforcement Policy?

The Licensing, compliance and enforcement under the Gambling Act 2005: policy statement (the “Policy”) builds on the Gambling Commission’s Statement of principles for licensing and regulation (the “Statement of Principles”). These important policy documents underpin every aspect of the licensing lifecycle of a licensee as they set out the principles that the Gambling Commission will apply in exercising its functions under the Gambling Act 2005 and how it will comply with its duty, under section 22, to promote the licensing objectives.

As the title of the document suggests, the Policy is split into sections that deal with licensing, compliance and enforcement separately. Given the number of wide-ranging and significant proposals jam-packed into the Consultation we will publish two blogs. This is the first blog, which covers proposed changes to licensing.

Dual regulation products

The Gambling Commission has been working with the Financial Conduct Authority (the “FCA”) to “finalise” its regulatory approach to products that contain financial elements and should, therefore, be regulated by the FCA. The Consultation makes clear the Gambling Commission’s “preferred outcome is that this is resolved through legislative change, but this is unlikely to happen before the current Gambling Act Review is concluded.”

In the absence of legislative change, the Gambling Commission proposes to set out its “clear policy position” that:

applications that it considers contain an element that should be regulated by the FCA “are likely to be refused”, although, this will not affect existing licensees already dual licensed; and
this includes “products whose name, branding, marketing or game rules contain language associated with financial products such as “stock”, “share”, “index” or “investment” risk harming the second and third licensing objectives, because they may give the impression that they are in the nature of a valuable investment rather than a gambling product.”

These proposals no doubt follow the collapse of Football Index earlier this year and the embarrassing role the Gambling Commission played in it. The independent report into the regulation of BetIndex, the providers of Football Index, dated 13 September 2021, found that:

the two regulators had been interacting since May 2019 on whether all or part of Football Index should be regulated by the FCA rather than by the Gambling Commission and those discussions remained unresolved in March 2021; and
the Memorandum of Understanding between the two regulators was “an appropriate and proactive step to address the issues that arose in relation to BetIndex”; however, needed to be strengthened to avoid the “stalemate” and “differing understandings of the same events” that occurred between the Gambling Commission and the FCA.

The independent review led to a strengthened Memorandum of Understanding to improve co-operation between the two regulators and found that:

In the first instance, BetIndex did not properly notify the Gambling Commission of the nature of the product in its licence application, nor did it inform the regulator of changes to the product after launch as it was required to.

The Gambling Commission could have better responded to the challenges that the novel product raised once launched, with earlier scrutiny, including of the language used by the product, quicker decision-making and action, and better escalation of issues.

Complete applications

The Gambling Commission expects all applications to be complete when submitted. Its well-established policy is to reject incomplete applications, and, from June 2021, refunds are no longer given for incomplete applications. It remains an applicant’s responsibility to ensure their application is “complete” and provides “all relevant information” at the time of submission. Despite this, the Gambling Commission continues to receive incomplete applications which “omit necessary information and supporting evidence required” and “request or expect a refund of their application fee”.

The Gambling Commission proposes to set out its “established policy position for clarity” as follows (new wording in bold):

If an application is incomplete or information to support the application is missing or not provided upon request then, depending on the individual circumstances the Commission may:

reject the application as incomplete;
seek further information;
determine the application based on theinformation the Commission has available to it. This may affect the decision on whether a licence can be granted.

The application fee is payable on submission of the application. The Commission will not refund the application fee where an application is rejected for any reason, including where the application is rejected as incomplete.

This emphasises the critical importance of submitting full and proper licence applications, and the need to work with specialist lawyers when preparing and submitting licence applications, including variation and change of corporate control applications submitted by existing licensees.

Please get in touch with us if you would like assistance with any licence applications.

Relevant persons

As part of the Gambling Commission’s assessment of an application, it will consider the suitability of “persons considered relevant to the application.” Section 3.10 of the Policy currently states:

3.10 In considering operating licence applications the Commission will include assessment of the suitability of those persons considered relevant to the application. The persons considered relevant may vary depending on the information provided in the operating licence application and on company structure, but are likely to exercise a function in connection with, or to have an interest in, the licensed activities.

The Gambling Commission proposes to provide greater clarity about persons who may be considered relevant to an application by including further examples, by adding the following sentence to the end of paragraph 3.10:

It may also include shadow directors, persons or other entities who are controllers of the applicant and/or those who are its ultimate beneficial owners.

This proposed change highlights the importance of applicants and licensees ensuring their stakeholders – especially the owners of the business and those funding it – understand the relevant gambling legal, regulatory and licensing requirements of being licensed in Great Britain, the Gambling Commission’s assessment process, and its wide discretion to request any information it considers relevant.

No definition is provided in the Consultation, or elsewhere by the Gambling Commission, for the meaning of “ultimate beneficial owner”. This is unhelpful (and in breach of the Regulators’ Code) because, to date, few jurisdictions have defined beneficial ownership, its scope or threshold. Furthermore, jurisdictional definitions tend to differ from the anti-money laundering definition which is based on FTAF principles.

Use of the licence within a reasonable period

The Statement of Principles provides:

3.9 The Commission will not issue licences to people who do not need them. If a licence is issued but an operator or individual does not provide facilities for gambling in reliance on that licence within a reasonable period, the Commission may commence a licence review with a view to revoking the licence if that appears necessary.

3.10 The Commission may grant licences (particularly remote gambling licences) subject to a condition that requires an operator to begin to offer facilities for gambling within a specified timescale.

The Gambling Commission proposes to reinforce this position by adding mirror wording in the Policy, which will read as follows:

In considering operating and personal licence applications, the Commission will include assessment of whether an operati licence applicant is likely to provide facilities for gambling within a reasonable period or a personal licence applicant is likely to be employed in a role that requires a personal licence within a reasonable period.

If a licence is not used within a “reasonable period” – another term that remains undefined – the Gambling Commission will seek to revoke it following a section 116 review, unless it is surrendered.

Perhaps unintentionally, likely due to clumsy drafting, the proposed wording suggests that a personal licence holder needs to be employed. Although, in our experience, this has been the Gambling Commission’s strong preference due to a person’s vested interest in, and ability to be disciplined by, their employer, it has accepted circumstances where a person is a third party to the gambling business.

Suitability

The principle of suitability underpins every aspect of the Gambling Commission’s work. It expects applicants to be open and to co-operate in supplying the information it needs to assess an application for a licence. The Gambling Commission proposes “to make it clearer to applicants how consider the suitability of the applicant and make it explicit that will look beyond the applicant entity.” These changes are being made because some applicants do not fully understand how each element of suitability is considered and the requirement to look beyond the applicant when assessing suitability, and requests for further information are “sometimes met with resistance”, causing delays and application refusals.

Most of the proposed changes relating to suitability are being made at paragraph 3.11 of the Policy, which will read as follows:

3.11 When considering the suitability of an applicant the Commission will look beyond the applicant itself and may for example consider those connected with the applicant, such as:

persons relevant to an application by reason of their being likely to exercise a function in connection with, or to have an interest in, the licensed activities;
shadow directors;
persons or other entities who are controllers of the applicant;
ultimate beneficial owners.

In respect of the applicant and others connected with the applicant the Commission has regard to the following elements and seeks evidence to support and enable an assessment to be made against each one:

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

Paragraph 3.22 is being updated to clarify that where shares are held on a nominee basis, the “true owners” will need to be identified.

The proposed changes broadly match our experience submitting and managing applications on behalf of our clients, and therefore formalises the Gambling Commission’s existing approach. In recent years, applications have had a much sharper focus on source of funding in relation to both funding arrangements and ownership, although the Gambling Commission believes this is due to increasingly complex ownership structures. Often, detailed investigations are conducted by forensics accountants. Applicants and licensees should take heed of these proposals to ensure they, and in turn their key stakeholders (i.e. direct and indirect shareholders, other owners and lenders), understand the regulator’s focus to minimise the risk of refusal or revocation.

Financing arrangements

As mentioned above, the finances of the applicant/licensee, and “connected persons”, form a key aspect of the suitability assessment. This includes “being satisfied that the business will not be financed by the proceeds of crime, nor will its profits be used to finance criminal activity.” The Gambling Commission states that this position is implicit, which accords with our experience; however, it wants to make it explicit as it regularly receives applications that “do not include full and open information as to the source of funding for the operation, nor full and frank information about all those relevant persons connected to an applicant.” This resistance delays determination of an application and can result in refusal.

The Consultation proposes to add the following two new paragraphs:

The Commission will not grant an operating licence until it is fully satisfied that the operation will not be financed by the proceeds of crime and that profits from the operation will not be used to finance criminal activity. To that end, applicants will be asked to provide information and evidence as required both as to the source of finance of the proposed operation and as to the identity of those connected to the applicant as specified in paragraph 3.11 above.

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

Updating the Gambling Commission

The Gambling Commission wants to add examples of the types of changes and matters that are important for a licensee to monitor and report because of the potential impact of non-compliance.

The Consultation proposes to update paragraph 3.46 as follows:

Once a licence has been granted and issued, it is important that licensees read through it to check that the details on the licence are correct and that they are familiar with the conditions attached to the licence. Licensees should also be aware of the changes and matters they must keep the Commission informed of whilst they are the holder of a licence. Failure to do so may result in regulatory action being taken. This includes, but is not restricted to:

Changes in ownership/control
Submission of timely and accurate regulatory returns
Submission of timely variation application if a licensee is likely to exceed the fee category limit of its licence

It is essential that licensees consult the LCCP to understand their reporting requirements, including what types of changes in ownership/control are reportable as key or other reportable events.

Respond to the Consultation

The Consultation closes on 9 February 2022. Responses can be submitted here.

09Aug

Update on the Commission’s Regulatory Panel Reform Consultation

9th August 2021 Jemma Newton 272

The Consultation

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

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

The Commission’s Response

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

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

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

Timeframe for Implementation

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

The documents affected are:

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

28May

Changes to the Gambling Commission’s Regulatory Panel

28th May 2020 Bahar Alaeddini 355

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

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

Proposed changes

The Gambling Commission proposes:

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

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

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

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

“Increasingly complex and legalistic”

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

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

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

Erosion of independence

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

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

fair
accountable
professional; and
consistent.

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

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

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

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

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

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

Unfairness

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

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

“Me, myself and I”

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

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

The future

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

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

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

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