17Aug

Consultation Response on Changes to Information Requirements – AML/CTF

17th August 2020 David Whyte 313

In our blog of 7 April 2020 we summarised the Gambling Commission’s consultation, launched on 26 February 2020, in two parts, on planned changes to regulatory information and data reporting requirements. On 30 July 2020, the Gambling Commission published its consultation response document (the “Consultation Response”). The Gambling Commission received 70 written responses to its consultation, including 50 from licensees.

Some of the stated proposals of the consultation were “to make data requirements more efficient for licensees, and for ”, to “streamline existing requirements” and to “reduce regulatory burden”. The stated aim of the consultation being “to ensure the information requirements placed on licence holders are proportionate and effective to inform regulation of the industry”. Whilst many of the changes serve to support the Gambling Commission’s aims and proposals, some of the proposed changes relating to anti-money laundering (“AML”) and counter terrorist financing (“CTF”) may serve to confuse licensees’ understanding and increase the regulatory burden.

We recommend that all licensees read the Consultation Response and new/amended provisions in the Licence Conditions and Codes of Practice (“LCCP”). We highlight some of the Gambling Commission’s significant changes relating to AML/CTF:

New licence condition 15.1.3 – Reporting of systematic or organised money lending

All non-remote casino, non-remote bingo, general betting, adult gaming centre, family entertainment centre and remote betting intermediary (trading rooms only) licences

Licensees must as soon as reasonably practicable, in such form or manner as the Commission may from time to time specify, provide the Commission with any information relating to cases where they encounter systematic, organised or substantial money lending between customers on their premises, in accordance with the ordinary code provisions on money lending between customers.

Presently, ordinary code provisions 3.8.1 and 3.8.2, which apply only to non-remote casinos, provide that licensees take steps to prevent systematic or organised money lending between customers on their premises, and provide that the Gambling Commission should be notified where licensees encounter the same. This new licence condition is self-explanatory: it elevates the reporting requirement to a licence condition.

New licence condition 15.2.2(1)(d) – Other reportable events

All operating licences:

1. Licensees must also notify the Commission in such form or manner as the Commission may from time to time specify, as soon as reasonably practicable of the occurrence of any of the following events:

…

d. any actual or potential breaches by the licensee of the requirements imposed by or under Parts 7 or 8 of the Proceeds of Crime Act 2002, or Part III of the Terrorism Act 2000, or any UK law by which those statutes are amended or superseded.

The Gambling Commission re-emphasises in the Consultation Response that the primary purpose of the introduction of this reportable event is to encourage self-reporting by licensees of breaches of the relevant provisions of the Proceeds of Crime Act 2002 (“POCA”) or Part III of the Terrorism Act 2000 (the “Terrorism Act”).

A number of concerns were raised about the Gambling Commission’s proposal, with respondents considering it to be too broad. This was likely founded on a concern that licensees would be obliged to notify the Gambling Commission each time they submit a suspicious activity report (“SAR”) to the National Crime Agency (“NCA”), because such submission may constitute “a potential breach”. However, the Gambling Commission has made it clear in its Consultation Response that it does not consider the introduction of this licence condition to be too broad, as it covers actual or potential breaches by the licensee and does not extend to breaches by customers of the licensee. It stated:

The only relevant provisions therefore are the reporting requirements in relation to known or suspected money laundering or terrorist financing activity, breaches of the tipping off or prejudicing an investigation requirements, or committing one or more of the principle money laundering or terrorist financing offences...We agree that it is for the courts to decide whether a breach has occurred, and we do not intend to adjudicate in place of this. We do expect a licensee to be capable of identifying whether a breach has or potentially has occurred, and this should be reported to us as it may have an impact on the continued suitability of an operator to hold a licence. The reportable event is a simple process of notifying the Commission of either proven or potential breaches. We encourage self-reporting by licensees which allows us to better manage potential money laundering and terrorist financing risks, and thus keep crime out of gambling.

We therefore suggest that licensees who are concerned about the impact of this new licence condition consider the following when determining whether or not they (and not their customers) have actually or potentially committed any offence under the relevant parts of POCA or the Terrorism Act:

Did knowledge or suspicion exist when the licensee entered into or became concerned in an arrangement? The continuance or termination of a business relationship may be a relevant consideration here.

Under certain provisions of the legislation, the submission of a SAR or the receipt of consent from the NCA serves to ensure that there is no offence committed by the licensee.

Any failure to submit a SAR where knowledge or suspicion of money laundering or terrorist financing exists, or there are reasonable grounds for knowing or suspecting the same, may be caught as a potential breach (failure to disclose) and therefore may be notifiable. To mitigate the risk of licensees committing (or potentially committing) disclosure offences, care should be taken to ensure that policies, procedures and training are clear and up to date in relation to licensees’ SAR procedures.

Have any tipping off, or prejudicing an investigation, offences been committed? The Gambling Commission also made it clear in its Consultation Response that it does not consider that licensees will be at risk of committing the offences of tipping off or prejudicing an investigation when notifying the Gambling Commission under licence condition 15.2.2(1)(d). This seems logical; the notification is not required unless these offences have been committed by the licensee, if they have been, the licensee’s disclosure to the Gambling Commission would likely amount to a confession rather than tipping off or prejudicing an investigation.

New licence condition 15.2.3 – Other reportable events – money laundering, terrorist financing, etc

All non-remote and remote casino operating licences

1. Licensees must notify the Commission in such form or manner as the Commission may from time to time specify, as soon as reasonably practicable of any actual or potential breaches by the licensee of the provisions of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on Payer) Regulations 2017 , or any UK Statutory Instrument by which those regulations are amended or superseded.

2. Licensees must, within 14 days of the appointment, notify the Commission of the identity of the individual appointed as:

a. the officer responsible for the licensee’s compliance with the (regulation 21(1)(a)),

b. the nominated officer (regulation 21(3))

c. and any subsequent appointment to either of those positions.

3. Licensees must, within 14 days of the departure or removal of any individual appointed to the positions mentioned in 2 above, notify the Commission of such departure or removal.

A number of concerns were raised about the Gambling Commission’s proposal, with respondents requesting further guidance on the types of breaches that should be reported under licence condition 15.2.3(1) if the Gambling Commission wanted reporting to be consistent, non-subjective and not overly burdensome. Concerns were also raised that the requirement to report potential breaches was significantly beyond that prescribed in the Regulations.

The Regulations are comprehensive and amongst other things contain customer and enhanced due diligence, record keeping, training and risk assessment requirements. This reporting requirement, in particular the requirement to report potential breaches, is therefore likely to cause confusion and will significantly increase the burden of compliance on licensees.

Key points to note:

Despite some of the requirements of the Regulations being explicit (for example CDD being required before establishing a business relationship or in relation to a transaction that amounts to 2,000 euros or more), others require a risk-based approach. A breach in this sense may constitute a failure to take a risk-based approach and not a certain decision that in hindsight is deemed regretful.

In some cases, it will be very difficult for licensees to determine, on a risk-based approach, whether or not they have potentially breached the Regulations. Licensees may therefore choose to take a subjective view when considering whether or not a potential breach as occurred. Other relevant factors may include:

whether a licensee’s policies and procedures have been adhered to;

given that a breach of a policy implemented on a risk-based approach may be indicative of a potential breach of the Regulations, licensees may wish to review their policies and procedures to ensure that they are not overly committal in certain areas. For example, the Regulations require the regular provision of training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing. If licensees have deemed in their policy that this training will be provided annually, has there been a potential breach if this training is late and delivered after 13 months? A simpler approach to avoid this may be to specify in policy that training will be delivered regularly and at approximately 12-month intervals, this allowing for flexibility without the pressure of considering Gambling Commission notification.

Are there processes in place to ensure that the notification requirements will be adhered to? What is the procedure? Who is responsible for making the decision on notification?

Have licensees conducted a gap analysis against the Regulations to ensure that all of the requirements are covered by existing policies and procedures?

In circumstances where a decision is made not to notify the Gambling Commission, licensees may consider it sensible to document their decision making process such that this justification can be provided to the Gambling Commission in the event of challenge at a later stage.

The Gambling Commission has made it clear in the Consultation Response that it does not expect licensees to notify it about customer accounts suspended due to a lack of satisfactory source of funds documentation. It is actual or potential breaches of the Regulations – by the licensee – that the Gambling Commission expects to be notified about.

In addition, under licence conditions 15.2.3(2) and (3), licensees are required to notify the Gambling Commission within 14 days of the appointment, and/or departure, and/or removal of both:

the officer responsible for their compliance with the Regulations; and
their nominated officer.

The Gambling Commission makes it clear in the Consultation Response that the notification should include the full details of the individuals, the date of their appointment and details of their position within the business, senior management or role on the board. The Gambling Commission also points out that it intends to consult on the status of the nominated officer role later in 2020.

We strongly recommend that licensees review their AML/CTF policies, procedures, controls and training programmes now to ensure that adequate provision has been made for adherence to these changes before they come into force.

The changes come into force on 31 October 2020.

If you would like to discuss any of the issues raised, please do get in touch with us.

20Jul

Gambling Commission Consultation on High Value Customers

20th July 2020 Julian Harris 288

Introduction

Following a breakfast briefing conducted by Neil McArthur in October 2019, the Gambling Commission announced the formation of three industry working groups, one of which was to focus on high value customer incentives.

The proposals from the working groups, co-ordinated by the Betting and Gaming Council (BGC), was published on 1 April 2020 with operators agreeing to implement the changes rapidly, some by as soon as 14 April. At the time of publication of the proposals the Gambling Commission stated that it “would launch formal consultations to ensure that the new measures are incorporated into its regulatory framework.” The Gambling Commission further stated that it “expects the industry to implement its code as soon as possible and considers most measures should be implemented within 3 months” and that it “will monitor and support implementation of the industry’s code as an interim measure.”

The proposals made were to:

Restrict and prevent customers under 25 years of age from being recruited to high value customer schemes.
All customers must first pass through checks relating to spend, safe gambling and enhanced due diligence before becoming eligible for high value customer incentives.
Reward programmes will also be required to have full audit trails detailing decision making with specified senior oversight and accountability.

The consultation was published on 26 June 2020 and closes on 14 August 2020.

New Licence Condition

The Gambling Commission proposes to introduce a new licence condition on rewards and bonuses. This will apply to all licences, except gaming machine technical and gambling software licences and will require that:-

any incentive or reward scheme must be designed to ensure that the circumstances and conditions are clearly set out and readily accessible to customers to whom it is offered;
neither the receipt nor the value is dependent on gambling for a pre-determined length of time or frequency, or alters or increases if the activity or spend is reached within a shorter time;
if the benefit comprises free or subsidised travel or accommodation the terms are not directly related to the level of gambling
if incentives or reward schemes are offered to customers designated “high value”, “VIP”, or equivalent, they must be offered in a manner consistent with the licensing objectives.

Most importantly, licensees are required – by use of the word “must” – take into account the Gambling Commission’s guidance on high value customer initiatives.

New Guidance

In its guidance, the Gambling Commission goes further than the three points that are outlined above. For example, in addition to those, it requires:-

Specific policies and procedures for the operation and governance of HVC schemes, to include authority levels for key decision making, and appropriate oversight arrangements.
A named individual, at senior executive level or equivalent, accountable for the programme’s compliance. Except for small scale operators this should be a PML holder.
Licensees should consider what additional steps are required to ensure staff are equipped and motivated to manage HVCs effectively, including enhanced training on safer gambling and AML risks specific to HVC management; job descriptions reflecting that protection of the licensing objectives are the basis for all activity carried out by staff involved with HVC rewards programmes; staff should not be incentivised or remunerated based on a customer’s loss, spend, or activity; the performance management of HVC staff should be consistent with the principle that commercial pressures should never override regulatory considerations or customer welfare; and ensuring staff managing multiple accounts retain their ability to assess risk on an individual basis.
HVC incentives should not be used to exploit vulnerable customers or to encourage problematic behaviour. Licensees must be able to evidence how their rewards and bonuses are compliant with the provisions in section 5.1 of the codes of practice.
Licensees will be expected to take all reasonable steps to verify the information provided to them and conduct ongoing checks, with frequency of checks to be determined by the assessment of risk from ongoing monitoring of the customer’s activity, behaviour and circumstances. In the absence of any change in the risk assessment, licensees should as a minimum undertake a review of a HVC’s account at least quarterly.

It is important to note the Gambling Commission’s statement at paragraph 1.5 of the proposed guidance: “We have used the word ‘must’ to denote a legal obligation, while the word ‘should’ is a recommendation of good practice, and is the standard that we expect licensees to adopt and evidence. We expect licensees to be able to explain the reasons for any departures from that standard.”

The Gambling Commission has consulted on these proposals, as it is required to do under section 24(10) of the Gambling Act 2005, before issuing or amending a code of practice. However, the addition of lengthy and detailed guidance bears resemblance to the approach the Gambling Commission has taken to customer interaction. The VIP guidance makes it explicitly clear from the wording above that, despite using the word “should”, it expects licensees to adopt the standards set out and maintain evidence of doing so. This is essentially a requirement. The manner by which the guidance has been issued, arguably opens the door to the Commission taking similar steps to that which it took in relation to customer interaction, this time in relation to the requirements for VIP customers. Essentially the Gambling Commission will be able to amend this guidance, perhaps substantially, and to add onerous additional requirements, without consultation. Whether they will do so remains to be seen, but we highlight the point as a warning to operators to be watchful. The guidance is detailed, and as we know, the devil lurks in the detail.

We recommend to operators that they reply to the consultation, seek clarity as to paragraph 1.5, and make it clear that they expect the Gambling Commission to consult prior to amending its guidance further.

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

10Jul

Gambling Commission Consultation on Online Slots Game Design and Reverse Withdrawals

10th July 2020 Bahar Alaeddini 348

On 9 July 2020, the Gambling Commission announced a consultation on online slots game design and reverse withdrawals. The former follows the work of the Safer Product Working Group, which we wrote about in our blog on 2 April 2020, and the draft Betting and Gaming Council industry code, which is due to be published in September 2020.

In April 2020, the industry and Safer Product Working Group agreed to:

A minimum spin speed of 2.5 seconds on all slots.
Removal of game features which may encourage intensive play such as slam stops and turbo buttons.
Removal of split-screen slots which have been associated with potential loss of control.
A more detailed work plan which will include in-game messaging and the creation of a Betting and Gaming Council Testing Lab to investigate other game features.
Publication of the final industry code in September 2020.

Reason for the consultation

In its introduction to the consultation, the Gambling Commission explains:

“Our interest in online slots is because it is the largest online gambling product by Gross Gambling Yield (GGY) – played by relatively few but with a high average spend. Structurally it has a number of features which can combine to significantly increase intensity of play. This means it poses a relatively high risk, reflected in its associated problem and moderate-risk gambling rates.”

Slots are the largest online gambling product in Great Britain by GGY. 1.2% of adults participate in online slots and GGY from online slots has grown by approximately 50% since November 2014. The Gambling Commission believes “this implies a sharp increase in average spend per consumer”.

In a section titled Why are we consulting the Gambling Commission explains the industry proposals are insufficient and the “consultation goes further to keep slots players safe in a number of other additional areas”. It goes on to add that “the strength in the proposals will come from effective compliance by operators… the industry can expect what has described as “relentless escalation” to continue when see consumers not being protected from harm.”

The Gambling Commission is particularly concerned about the accelerating intensity of slot games which aim to increase the time and spend of players. The stated aim of the consultation is to make play of online slots safer by adopting an industry-wide and consistent approach, not just an industry code for Betting and Gaming Council members, and going further by implementing additional measures above the draft industry code.

It acknowledges these are not the only ways to improve player protection and invites views on other aspects of game design to consider for future changes. It refers to its interim Experts by Experience Group, which has suggested stake levels and different product labels to help customers understand potential risk better. The Gambling Commission’s Digital Advisory Panel highlighted the need for friction to reduce the likelihood of players placing impulsive bets.

New controls aimed at reducing potential harm of online slots

The consultation proposes to amend the Remote gambling and software technical standards (RTS) as follows:

Insert a high-level definition of slots: “casino games of a reel-based type (includes games that have non-traditional reels)”.
Add a new requirement RTS 14C: “The gambling system must prevent multiple slots games from being played by a single account at the same time.”
Add a new requirement RTS 14D: “It must be a minimum of 2.5 seconds from the time a game is started until a player can commence the next game cycle. It must always be necessary to release and then depress the ‘start button’ or take equivalent action to commence a game cycle.”
Add a new requirement RTS 14E: “The gambling system must not permit a customer to reduce the time until the result is presented.”
Add a new requirement RTS 8C: “The gambling system must require a customer to commit to each game cycle individually. Providing autoplay for slots is not permitted.”
Add a new requirement RTS 14F: “The gambling system must not celebrate a return which is less than or equal to the total amount staked.”
Add a new requirement RTS 2E: “All gaming sessions must clearly display the net position, in the currency of their account or product (e.g. pounds sterling, dollar, Euro) since the session started.”

Testing

Licensees must satisfy themselves that they are offering compliant games. Where they are not sure, any existing game will require third party retesting.

All new games published after the implementation date for these new requirements will need to be tested otherwise, they will need to be removed until retesting has been completed.

Although slots are casino games (and therefore not separately licensed), the Gambling Commission plans to stipulate testing reports to declare whether the game is identified as slots.

Reverse withdrawals

On 14 May 2020 we wrote about the Gambling Commission’s new “additional formal guidance” for online operators in response to “evidence that shows some gamblers may be at greater risk of harm during lockdown”. This included a prohibition on offering reverse withdrawals until further notice.

At the time, we questioned the reliability of the data used by the Gambling Commission because it showed a decrease in reverse withdrawals. It was clear to us that this measure was not based on the data published by the Gambling Commission, and we questioned whether it was necessary and proportionate. The Gambling Commission, supported by research, already considered reverse withdrawals to be a flag for potential gambling harms; however, action to tackle this through an industry consultation would have been more appropriate than a strict measure introduced under the guise of guidance. The Gambling Commission has now issued the consultation to make the change permanent, but without the evidence to support it.

This consultation will make it a permanent prohibition by adding a new requirement RTS 14B: “Consumers must not be given the option to cancel their withdrawal request.” Operators will be required to make this withdrawal process as “frictionless as possible”.

Respond to the consultation

The consultation closes on 3 September 2020.

09Jul

Gambling Commission Creates Interim Experts by Experience Group

9th July 2020 Bahar Alaeddini 303

On 19 June 2020, the Gambling Commission announced the creation of an interim Experts by Experience Group. The interim group “will provide advice, evidence and recommendations to the Commission to help inform decision making and raise standards, along with co-creating a permanent Experts by Experience Advisory Group to advise the regulator on a more established basis.”

An unidentified spokesperson for the interim group said:

“ comprises a group of people who have suffered a wide range of gambling harms, including recovering gambling addicts, family and partners of addicts, and those who have lost children to gambling suicides…the establishment of the group is long overdue. We are determined…to play a continuing and much more active role in the deliberations and decision making across the whole remit of the Commission as part of the National Strategy to reduce gambling harms. We bring a new and vital perspective on key issues of regulation and even how the Commission itself works.”

The interim group will be in place for at least six months, at which point the Gambling Commission plans to move to a permanent Experts by Experience Advisory Group, similar to the Advisory Board for Safer Gambling and the Digital Advisory Panel.

No terms of reference are published for the interim Experts by Experience Group and its members are not known. Names may be sensitive or confidential; however, at a minimum, the number of members, members’ backgrounds, the reason for their appointment and a register of interests should be published. Otherwise, the interim group runs the risk of being labelled a quasi-lobby group, financed and supported by the Gambling Commission.

Although it is only an interim group, plainly, it has a strong level of influence over the Gambling Commission’s work. It should, therefore, be treated no differently from the Advisory Board for Safer Gambling and the Digital Advisory Panel.

The objective bystander might wonder why the interim group’s members only comprise those who have experienced gambling harms when there are 400,000 people classified as problem gamblers and 32 million gamblers in Great Britain.

Unfortunately, the Gambling Commission’s lack of transparency detracts from the real and genuine value of the Experts by Experience Group and devalues contributions made by its members. To build a sustainable gambling industry, we could all learn and develop significantly from the work of the interim group and the experiences of its members. This requires us to work in partnership and adopt a balanced approach.

It seems the Gambling Commission has failed, again, to be transparent, balanced and independent.

25Jun

Gambling Commission Consultation on Regulatory Panel Reforms – Our Response

25th June 2020 Bahar Alaeddini 310

On 18 May 2020, the Gambling Commission announced planned changes to its Regulatory Panel, which included: (1) the recruitment and appointment of legally-qualified Adjudicators, solely for the purpose of sitting on the Regulatory Panel with the “presumption” they will also provide legal advice; and (2) reconstituting quorum as follows: (a) operating licences: one Commissioner and one Adjudicator; and (b) personal licences: one Adjudicator.

In our blog on 28 May 2020 we expressed our serious concerns on the proposed reforms, which do not offer a practical vision for adjudication that is consistent with good regulatory and legal practice. 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.

We have, today, submitted our response to the Gambling Commission in advance of the deadline tomorrow.

We strongly encourage other industry stakeholders to respond to the consultation. If you would find it helpful, please feel free to download and use our consultation response.

Harris Hagan Consultation Response Download

24Jun

Preserving the Value of Regulatory Assets in a Restructure

24th June 2020 Hilary Stewart-Jones 326

Covid-19 has not been all bad news for the beleaguered gambling industry – both anecdotally and from the statistics released in the public domain the online gambling industry is having a booming trading period (a current growth rate of 13.2%). However, as the retail industry braces itself for a cautious re-opening, and the ensuing expected second wave, it is inevitable that a number of companies, with a large retail footprint will need to think about restructuring and possible sale of assets.

However, there are key regulatory issues in Great Britain that cannot be neglected at this critical time despite the wider trading challenges. Compliance adds value, which may be key to assessing the business proposition in any due diligence required by a lender in a rescue situation – it also would be ironic if the rescue package itself caused operational non-compliance. Administration or receivership (as well as creditor schemes) of any company is a priority key event needing to be disclosed to the Gambling Commission (as a licence condition requirement ) under the Licence conditions and codes of practice (“LCCP”). Disclosure needs to be made as soon as reasonably practicable, and, in any event within five working days and any failure to do so (whether intentional or not) will be treated seriously, all the more so where the story may be picked up in media in advance of disclosure. Likewise, the making of any loan by an entity not regulated by the FCA or the non-UK equivalent and any investment not by way of shares (see licence condition 15.1.2(1), (5) and (6) of the LCCP) needs disclosure. It is also not entirely clear how the Gambling Commission may regard the various governmental loans/cash bailouts to UK businesses, but it is probably best to err on the side of caution.

Restructuring falling short of an insolvency (where it impacts a key position is also notifiable) as are the breaches of banking covenants (see LCCP 15.1.2 (9) and (11)). (Any re-organisation is also a code disclosure requirement). Whilst only liquidation will cause a licence to lapse (see section 114 of the Gambling Act 2005), any large scale operational changes will undoubtedly lead to regulatory scrutiny, and may even prompt a licence review, despite the operator being able to avoid any formal creditor arrangements. Furthermore, insolvency practitioners are not necessarily or likely to be well versed in the wider regulatory constraints in selling or extracting value from regulated assets.

Operating licences are not assignable, which adds to the complexity of an asset sale, and changes of corporate control after a sale can be time consuming without any certainty of outcome, especially where there is a desire to take key functions away from the old management (prompting PML or Annex A applications). The peculiarity of the provisions under section 102 of the Gambling Act 2005 allowing for the sale to complete before Gambling Commission approval has proven endlessly perplexing for corporate advisors. Corporate restructures short of an administrative sale commonly require a financial advisor to take a Board seat, and even if this does not require the individual (likely to be from an audit firm) to hold a PML , he or she may have to undergo suitability , personal probity checks not commonly sought for other industries. In short, this would require some navigation and clever strategizing, to create value for the operational business and creditors where the regulatory issues should not be (but could very well be) inhibitors to a third-party financier’s involvement.

Also, few operators are solely based in the UK; many of the online and retail operators hold a multiplicity of licences in a number of different jurisdictions so the impact of any reporting of a restructuring event or the event itself will vary as well as the likely outcome. Worse than that there may be a jurisdictional tug of war to establish which court and legal system should lead on any administration or insolvency, and strategies around timing may be critical. The location and value of the underlying businesses may be hard to determine where, for example, IP may be used across several business verticals. The new Corporate Insolvency and Governance Bill may assist in the UK (if passed) for a moratorium on some debts but may not trump the entire insolvency process in a complex multi-national business restructure.

Key supply contracts may also be imperilled; provisions which may have created a breathing space with a properly drafted force majeure clause will in most cases still enable the non-breaching party to terminate in the event of an administration event, ceasing to trade or changes of control. Certainly, in a number of gambling supply contracts there is a catch all provision for any wider regulatory taints, and depending on the circumstances may also prompt key suppliers to consider their options prompted by, for example a distressed operator undergoing a regulatory review because of an administration event.

However, the industry has always been resilient even with the constant media and regulator criticisms and challenges it currently faces as well as the economic uncertainties. If the various financial downturns in Las Vegas have taught us anything, then banks operating regulated assets is far from ideal, albeit the various stakeholders may have little choice in the short term. What is clear is that the myriad parties involved cannot lose sight of the importance of maintaining the licences, without which there is no viable business to trade out of the crisis or to sell. Some early checks with regulatory lawyers will at least eradicate or pre-empt the predictable snags, when the energies and focus of management and third-party advisors may be elsewhere.

With thanks to my colleague David Stevens for his invaluable co-authorship

28May

Changes to the Gambling Commission’s Regulatory Panel Procedure Rules

28th May 2020 Bahar Alaeddini 328

On 18 May 2020, the Gambling Commission announced planned changes to its Regulatory Panels. Claiming to improve how it regulates, and to provide further clarity to applicants and licensees on how the Regulatory Panel will decide on matters of procedure, the Gambling Commission proposes various changes to its procedural rules, as detailed in this blog.

Documentary and other evidence

Bundles will be sent to the Regulatory Panel no later than 21 days (presently seven days) prior to the hearing. Further evidence after this point will require the “express permission” of the Regulatory Panel and only admitted with “good reason”. If the bundle is disputed, the applicant/licensee must share their no later than 14 days prior to the hearing.

Arranging a hearing

A choice of three hearing dates over a two-month period will be provided. Parties are expected to be “flexible” and “proposed dates will not be changed unless it can be demonstrated that there are good reasons why none of the proposed dates are workable.”

Representations and evidence

An application to admit late evidence, by any of the parties, must be made to the Regulatory Panel. The application will need to address the nature of the document, the reasons for it being produced at a late stage and whether and how its admission is necessary for the fair disposal of the hearing. Such an application which will necessitate an adjournment will require “particularly good reasons”. No details of “good” are provided; however, a reminder has been added that “an application is likely to be refused if reliance is placed on material which should have been provided with the original licence application, or which involves a material change to the application.”

Financial penalties

In determining whether a financial penalty is appropriate the Regulatory Panel will be able to ask the Gambling Commission for “any information it considers appropriate”, noting that this may include further representations from the Gambling Commission in response to any representations made by the licensees. Licensees will have 30 days, from the date of any notice confirming the financial penalty, to make payment (presently, 14 days).

Dates for decisions

Decisions will be confirmed in writing within 21 days (presently, 14 days).

These proposed changes are set out in the following track changed Gambling Commission documents:

The consultation closes on 26 June 2020.

28May

Changes to the Gambling Commission’s Regulatory Panel

28th May 2020 Bahar Alaeddini 328

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.

18May

New Gambling Commission Guidance for Online Operators: Changing the Basis of Regulation?

18th May 2020 Julian Harris 338

Introduction

The Gambling Commission’s recently published purported “guidance” for online operators (“New Guidance”), issued under social responsibility code provision 3.4.1 (“SRCP 3.4.1”) of the LCCP, highlights how carefully it is focusing on a perceived risk presented by the current COVID-19 crisis. If this risk does exist – and the evidence on which the Gambling Commission (the “Commission”) relies is questionable at best – it is unlikely that anybody would dispute the need to recognise and address it: operators do not want to benefit from problem gamblers, consumers must be protected, and the depreciating reputation of the industry in the wider public eye must be addressed.

However, the manner by which the Commission has implemented the New Guidance and the strength of its content, is suggestive of the Commission taking a novel approach that facilitates prescriptive changes to its regulatory framework without consultation or notice.

The data is, we have said, questionable, which is an issue for separate discussion. However, even if accepted at face value, it does not support emergency measures introduced at little notice without consultation. In their press statement, the Commission notes that “during lockdown gambling participation is down overall” and concludes that “there is no evidence to suggest an increase in problem gambling.”

The law

The Commission issued SRCP 3.4.1 under section 24(2) of the Gambling Act 2005. Section 24(10) which requires that before issuing or revising a code of practice, the Commission shall consult (inter alia): the Secretary of State; Her Majesty’s Commissioners of Customs and Excise; one or more persons who appear to the Commission to represent the interests of persons who carry on gambling businesses and are likely to be affected by the code or revision; and one or more persons who appear to the Commission to have knowledge about social problems relating to gambling.

SRCP 3.4.1 is not a licence condition; it is a code provision that, by virtue of section 82 and as a consequence of it being a SRCP, is subject to the licence condition that it is complied with. This is an important distinction as, were it to be a general licence condition under section 76 the requirements for general licence conditions under that section would apply. These prescribe that, before specifying the licence condition the Commission must consult and that at least three months’ notice be provided to the holders of affected operating licences. Section 76(5) permits the Commission to specify a licence condition without providing this required notice “if it thinks it necessary by reason of urgency”, but requires it to “give as much notice as it thinks possible in the circumstances”.

By combining its reference to SRCP 3.4.1 and the New Guidance in the same paragraphs when publishing it on its website, the Commission has caused confusion and led some operators and commentators to conclude that it has amended this SRCP. This misapprehension is then compounded by the fact that when the Commission first introduced its guidance on customer interaction in July 2019 (the “2019 Guidance”), it consulted on that change.

The Commission cannot properly have amended SRCP 3.4.1; had it done so, it would have acted in breach of the requirements of the Gambling Act 2005 by failing to consult in line with section 24. In this case, the Commission has introduced additional formal guidance under the SRCP.

2019 guidance

SRCP 3.4.1 requires that licensees “take into account the Commission’s guidance on customer interaction”. The 2019 Guidance sets out why customer interaction is a requirement and provides operators with suggestions as to how the Commission’s expectations can be met. The Commission states in this guidance:

“For compliance and enforcement purposes, we will expect licensees to demonstrate how their policies, procedures and practices meet the required outcomes. This can be through implementing relevant parts of the guidance or demonstrating how and why implementing alternative solutions equally meet the outcomes.”

Introducing guidance under SCRP 3.4.1 was an arguably sensible approach. It enables the Commission to outline to operators in more detail how they can meet its expectations in applying the SRCP.

The New Guidance: not what it seems

The New Guidance issued by the Commission is not as broad as the 2019 Guidance. It uses very different wording and is less outcome focused. It requires licensees to undertake specific measures. This is clear from the requirement that operators “prevent reverse withdrawal options for customers until further notice”, an issue that has justifiably been on the Commission’s radar for some time, now brought into effect and, given the Commission’s reference to a consultation on this issue following later this month, that is unlikely to change. By including such specific directions, this is guidance in name only; the consequence being that whether intentional or not, the Commission has amended the SRCP by the back door, avoiding the need to adhere to the requirements of the legislation

The New Guidance is made all the more difficult for operators to understand, given the mismatch between the press statement accompanying the New Guidance, and the New Guidance itself. An example of this is the statement included that “operators must take account of the Commission’s guidance, which makes it clear they should: … interact with customers who have been playing for an hour in a single session of play”. This is inconsistent with the New Guidance, which requires operators to “specifically, review time indicators to capture play in excess of one hour as this is a proxy for potential harm”. Should all customers be interacted with after an hour, or is this just an indicator to be considered?

Operators therefore find themselves in an unenviable position. Despite their ongoing efforts to protect consumers during the COVID-19 crisis, they are forced, with little notice and no consultation, to make immediate changes to their policies, procedures, terms and conditions and processes, in order to take into account prescriptive guidance. In the absence of any consultation, this guidance is difficult to interpret, it is based on limited and questionable data, and may be inconsistent with their own experience and observations: all at potential detriment to other valuable projects in the consumer protection field that may have to be side-lined.

Nobody would challenge efforts by the Commission to protect consumers throughout this crisis. However, a demonstrable understanding of the industry it regulates, sympathy for the time it takes to implement change, and adherence to the outcomes based flexibility that allows operators to focus on the consumer risks identified in their business, may ultimately produce better results. Arguably, a consultation, however short, would have enhanced the impact of the New Guidance, avoided confusion, and provided at least some notice.

A sign of things to come?

By taking the course of action that it has, the Commission has perhaps signalled a questionable new approach. Its introduction of guidance under SRCP 3.4.1 has, whether intentionally or not, made indirect, prescriptive changes to code provisions carrying the weight of licence conditions, without it having to consult, or provide notice. Operators should be aware of this and be ready to take prompt action the next time the Commission introduces further guidance at short notice. Whatever the merits of changes introduced by the Commission, it is vitally important that it acts transparently, proportionately and fairly in accordance with its own Statement of principles for licensing and regulation, if high standards are to be achieved and the industry’s trust in its regulator is to be maintained.

With thanks to my colleague David Whyte for his invaluable co-authorship

14May

New Gambling Commission Guidance for Online Operators

14th May 2020 Jessica Wilson 329

On 12 May 2020, the Gambling Commission issued new “additional formal guidance” for online operators in response to “evidence that shows some gamblers may be at greater risk of harm during lockdown”.

Online operators must now take this new guidance into account and they are “expected to make changes to act on this guidance as soon as possible”.

The new guidance is issued under social responsibility code provision 3.4.1 of the LCCP which requires licensees to interact with customers in a way which minimises the risk of customers experiencing harms associated with gambling. This includes identifying customers, interacting with customers, understanding the impact of the interaction, and taking into account the Gambling Commission’s guidance on customer interaction, which now includes the new guidance of 12 May 2020.

The new measures, to be “implemented into customer interaction frameworks” by licensees, are as follows:

Reviews of all thresholds and triggers used to track vulnerability to ensure that they reflect changed financial circumstances that many consumers will be experiencing. An emphasis should be placed on those thresholds and triggers being proactively reset on a precautionary basis to ensure customers with emerging vulnerability, such as increased time spent at play or increased spend can be identified
Specifically, reviewing time indicators to capture play in excess of one hour as the Gambling Commission believes this is a proxy for potential harm.
Set additional or modify existing thresholds and triggers which are specific to new customers reflecting the operator’s lack of knowledge of that individual’s play and spend patterns.
Implement processes that ensure the continual monitoring of the operator’s customer base, identifying customers whose patterns of play, spend or behaviours have changed in the last few weeks.
Conduct affordability assessments for customers identified by existing or new thresholds and triggers which indicate customers experiencing harm. Consider limiting or blocking further play until the checks have been concluded and supporting evidence obtained.
Prevent reverse withdrawal options for customers until further notice.
Stop bonus offers or promotions to customers displaying indicators of harm.

Guidance or requirement

Whilst guidance may be appropriate to ensure vulnerable customers are protected, particularly during the current Covid-19 pandemic, it is questionable whether the measures can be considered to be “guidance” and whether they are wholly proportionate and necessary in the light of the data on which the Gambling Commission has based these measures. The wording of the measures appears to create an obligation on the part of licensees to “stop bonus offers” and “prevent reverse withdrawals” which give the impression of requirements, rather than guidance.

Data

The Gambling Commission published two sets of data. A first set collected through a YouGov survey and a second from “the biggest operators, covering approximately 80% of the online gambling market”.

YouGov data

The YouGov data was collected from just over 2,000 people, some of whom may have taken the survey multiple times. The data is based on gambling habits of customers within four weeks from “mid-March 2020”. Whilst the data does show increased spend on online gambling, for example a 2% increase on online slot games and 1.7% on sports betting, the biggest increase of 16.4% was on National Lottery products which are regulated separately and to whom the new guidance does not apply. The data analysis also fails to consider the potential adjustment of gambling habits due to the closure of land-based venues as an explanation for the increase of spend and time on certain products, as opposed to an increase in gambling habits.

Gambling Commission data

The second set of data was collected over the period 31 March 2019 to 31 March 2020. This period only covers one week in which the country was in lockdown. It follows that this data cannot be reliable evidence that customers are at a greater risk of harm during lockdown. Further, the data shows a decrease in reverse withdrawals. The new guidance at point 6 above includes the prevention of withdrawal options until further notice. It is clear that this measure was not based on the data published by the Gambling Commission, which questions whether it was necessary and proportionate to be included within this particular guidance. The Gambling Commission, supported by research, already considered reverse withdrawals to be a flag for potential gambling harms; however, action to tackle this through an industry consultation would have been more appropriate than a strict measure introduced under the guise of guidance.

Absence of consultation

The absence of an industry consultation on the guidance is particularly disappointing. When a code of practice is amended, the industry would usually be offered the opportunity to respond to a consultation on the proposed new amendments. This was the case when the Gambling Commission last issued guidance under social responsibility code 3.4.1 in July 2019. However, it seems that the Gambling Commission has decided to omit this stage due to lockdown being a present and continuing issue. The press statement notes that the Gambling Commission will bring forward plans to consult on whether further targeted protection measures are required on a permanent basis.

The Gambling Commission’s Statement of principles for licensing and regulation begins by stating that the Gambling Commission regulates in a “straight-forward, risk-based and transparent manner”. The lack of industry consultation here is plainly neither transparent, nor based on sufficient evidence of risk.

The new requirements are significant and will no doubt be burdensome for licensees to implement “as soon as possible”. However, they are likely to be welcomed by Culture Minister Nigel Huddleston (see our blog of 24 April 2020) and the Public Accounts Committee following Neil McArthur’s appearance at the session Gambling regulation: problem gambling and protecting vulnerable people on 27 April 2020.

To comply with the new measures significant updates are likely to be required to systems, customer terms and conditions and policies, each requiring input from different people, perhaps even third-parties, which will no doubt be a challenge given the current crisis. If, as the press release suggests, operators are expected to “interact with customers who have been playing for an hour in a single session of play” the impact will be significant, particularly for large operators who may have several thousand active customers at any one time. The threat of interim licence suspension, or licence review, increases this burden, which was thrown upon licensees without consultation, warning or a timeframe to implement the required changes.

As Julian Harris wrote in our previous blog, “for regulation to be effective it requires a healthy and collaborative working relationship between regulator and whom it regulates”. This statement is echoed here and whilst both the Gambling Commission and the industry as a whole are in agreement that new measures should be introduced to protect the most vulnerable during this novel and rare situation, any changes should be proportionate, necessary and founded upon strong and clear evidence.

A further blog post on the implementation of the new guidance will follow.