22Sep

Gambling Commission establishes Industry Forum

22nd September 2023 Bahar Alaeddini 153

On 14 September 2023, the Gambling Commission announced the establishment of an Industry Forum, to be made up of representatives from the British gambling industry, with the role “to provide further insight into the views of operators… share industry views on areas such as account management, consultations and the Commission’s data programme.”

There will be approximately 10 cross-industry members.

The recruitment of a Chair will begin in September 2023, when the Gambling Commission will be inviting expressions of interest from industry to become a member. Details will be published on the Gambling Commission website.

We welcome this announcement. We also very much welcome that the Gambling Commission has listened with increased industry engagement, recognising that better relationships with industry leads to better outcomes. However, we make two important observations:

Why is the Industry Forum only being created now? It is: (a) nearly three years since the Gambling Act Review kicked off and the Lived Experience Advisory Panel was formed; (b) nearly six months since the publication of the White Paper; and (c) critically, the most important Gambling Commission consultations have already been published.

Cynically, it is titled a “forum”, which suggests the possibility (however remote) it may not be viewed with much value within the Gambling Commission itself. Why is the Industry Forum not placed on an equal footing to the Lived Experience Advisory Panel, Digital Advisory Panel and Advisory Board for Safer Gambling? The Lived Experience Advisory Panel is described by the Gambling Commission as “provid expert independent advice based on its members personal lived experience of gambling harms”. Putting aside the issue with this description and lack of members with positive experience (which I have written about previously and was raised by the DCMS Committee on 5 September 2023) why is the new forum not an “Industry Panel” providing “advice” to the Gambling Commission? Plainly, advice is just that and it can be ignored.

Further, as industry lawyers, we have not had any structured engagement with the Gambling Commission for two years since the last Industry Lawyers’ Group meeting in September 2021 (which used to meet once or twice a year) and even that had fairly limited value when the questions raised were not answered for six months.

Whilst we acknowledge, as Andrew Rhodes explained before the DCMS Committee on 5 September 2023, that the Gambling Commission has held more stakeholder engagements in the last year (220 to be precise), it appears to have been selective. In particular, it has excluded certain parts of the British gambling industry, including longstanding, experienced and balanced stakeholders and advisers, including us!

Industry lawyers are an important buffer between the Gambling Commission and applicants/licensees. This is perhaps most obvious in our immersion in compliance and enforcement. The Gambling Commission (in its current form) seems to confuse lawyers being unhelpful with lawyers acting on their clients’ instructions. Nowadays, the latter tends to require us to hold the Gambling Commission to account to comply with its own policies and procedures and the law. We very much hope the establishment of the Industry Forum will prompt the Gambling Commission to take a more strategic and holistic approach, and perhaps create, like other regulators, a framework for stakeholder engagement.

Whilst we are encouraged by the establishment of an Industry Forum, we are disappointed by its delay and remain keen to hear what other plans the Gambling Commission and its leaders have to engage with the industry and its stakeholders.

22Sep

White Paper Series: Regulatory Panel changes – Fair or unfair?

22nd September 2023 Bahar Alaeddini 154

In this blog, we consider the Gambling Commission’s most recent proposals to the Regulatory Panel.

It will not come as a surprise to readers that, as gambling lawyers, we have serious concerns about the proposals to:

use Adjudicators with only a minimum of five years’ post qualification experience (“PQE”); and
change the default from oral hearings to paper-based decisions subject to a fairness test.

Regulatory Panel and its importance

The Regulatory Panel provides an important opportunity for applicants and licensees to attend an oral hearing to challenge decisions made by Gambling Commission staff. It is the only avenue of recourse, outside the expensive options of the First-tier Tribunal and judicial review, when the Gambling Commission is going against you. Whilst we accept it is still, in fact, the Gambling Commission, it is an important accountability mechanism for Gambling Commission employees making decisions under delegated powers. This narrow and non-independent avenue of recourse should not be further eroded.

2020 consultation

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 the quorum as follows: (a) for operating licences: one Commissioner and one Adjudicator; and (b) for personal licences: one Adjudicator.

At the time, we were so concerned by the proposals and that the duty to act fairly was being compromised that we submitted a response to the 2020 consultation and shared it on our blog to assist others in preparing responses.

More than 14 months later, on 21 July 2021, the Gambling Commission published its consultation response which summarised the 22 written responses received from gambling operators, trade associations and others, including Harris Hagan. As explained in our August 2021 blog, The overwhelming majority of respondents disagreed with each of the Gambling 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 my May 2020 blog.

2023 consultation

The two main proposed changes are:

Quorum and composition

The Regulatory Panel will no longer comprise up to two to three Commissioners, advised by an independent legal adviser. Instead, it will be chaired by a legally qualified Adjudicator sitting alongside one Commissioner and one senior Gambling Commission employee. The Adjudicator would sit alone on case management matters and personal licensing cases.

The main reasons for the proposed change are to improve availability, improve governance and accountability and provide an enhanced skillset for decision making.

Our main concerns are:

Adjudicators will, as proposed in 2020, be employed by the Gambling Commission. In a small feat of victory, we note from the draft Governance Framework (published this time as part of the consultation) the Gambling Commission has acknowledged some of our previous concerns by indicating that Adjudicators’ will be home-based and appraisals will be run by a Commissioner.

Adjudicators will only need a minimum of five years’ PQE. The idea that someone with potentially as little as five years’ PQE would be adjudicating on a £20m fine, suspension or revocation of a licence is frightening. Where is the Gambling Commission’s evidence to support that five years’ PQE is appropriate? How is this a sufficient level of experience, bearing in mind they are likely to have absolutely no experience of gambling and, given their lack of seniority, very minimal experience making unsupervised decisions?

Unlike the 2020 consultation which failed to specifically mention other adjudication frameworks, this time, the Gambling Commission has made fleeting mention to the General Medical Council (regulates medical doctors), Ofqual (regulates qualifications, examinations and assessments) and Solicitors’ Regulation Authority (regulates law firms and solicitors) to support the move to a mixed model of decision-making. We remain wholly unconvinced by the Gambling Commission’s rationale. There are about 90 statutory regulators in the UK and yet the consultation includes no details, or evaluation, of the different models of adjudication and relative advantages and disadvantages (including appeal rates) of each model. Nor is there any reference to the determining factors for the chosen mixed model or the appropriateness of application to the regulation of commercial gambling. As with the 2020 consultation, we are left to assume this is deliberate given many of the other models appear impartial, independent and robust. 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: (i) none of the members are employees; and (ii) the committee has its own legal advisers and support staff.

The Principles of inspection and enforcement, as set out in Philip Hampton’s Reducing administrative burdens: effective inspection and enforcement report state: “egulators should be accountable for the efficiency and effectiveness of their activities, while remaining independent in the decisions they take setting out a number of core principles of effective regulation – the standard against which all regulators’ performance should be judged.” At a minimum, the Gambling Commission must publish its research into each adjudication model and its evaluation criteria for monitoring the “efficiency and effectiveness” of each model, together with the impact on applicants/licensees.

There is no mention of a trial period of using Adjudicators.

Default of paper decisions

Another proposal is to change the default from oral hearings to paper-based decisions. An oral hearing can be requested by the applicant/licensee; alternatively, the Panel itself may decide it is “required” – using a test of “fairness”, for example, where there are “material and significant disputes of fact”.

The main reasons for this proposed change are to reduce the burden on applicants/licensees particularly where they have unrepresented and find it difficult to navigate, and to increase the promptness of decision making.

Our main concern is that applicants and licensees will be denied the opportunity to bring their arguments to life. What is the test of fairness and why do we need one?

The requirements of fairness are flexible and fact specific. Legal history places huge importance on oral argument and, in our view, with good reason. Over 20 years ago, Lord Justice Laws recognised “oral argument is perhaps the most powerful force there is, in our legal process, to promote a change of mind.” Further, in R (H) v Secretary of State for Justice EWHC 2590 (Admin), Cranston J summarised the legal position in respect of oral hearings as follows:

Procedural fairness sometimes demands an oral hearing. There can be greater confidence with an oral hearing that the relevant standards have been properly applied and that the facts on which the decision is based are accurate. The oral hearing also gives the person affected by the decision the opportunity to tailor the arguments to the concerns of the decision maker.

Another concern is the matter of mutual respect for the Gambling Commission and the applicant/licensee with the latter’s perception of the process being central, as acknowledged in Osborn v Parole Board UKSC 61, in which Lord Reid referred to the principle that:

…justice is intuitively understood to require a procedure which pays due respect to persons whose rights are significantly affected by decisions taken in the exercise of administrative or judicial functions. Respect entails that such persons ought to be able to participate in the procedure by which the decision is made, provided they have something to say which is relevant to the decision to be taken.

We feel strongly that the Gambling Commission’s proposals do not conform to the necessary standards of fairness. The proposed barrier should therefore be removed, and the policy should simply say that an oral hearing can be chosen on request. This will address the Gambling Commission’s main reason for the proposed change whilst still enabling those who want one, a fair hearing.

The consultation cites the stress that the unrepresented applicants/licensees experience in attending hearings as a reason for changing the default to paper decisions. However, there is no mention of how many of the 12 requests, to the Regulatory Panel, last year were unrepresented. The Consultation is silent (no doubt, intentionally) on the introduction of a policy dealing with unrepresented parties.

Concluding thoughts

It is undeniable that the Gambling Commission is a very powerful regulator. How many other UK regulatory authorities can impose limitless fines, commence criminal proceedings and decide to close multi-million pound businesses?

It appears that the Gambling Commission’s primary focus is to cut costs. Inevitably, good decisions will not be made in the public interest, nor will those decisions be made following a fair process. The new proposals will have a far bigger negative impact than announced changes in 2021, which will be implemented at the same time (as amended). The only possible – dim – glimmer of hope is that decisions will or should be quicker. However, if those decisions are of poor quality and unfair, it means that they will be more routinely appealed to the First-tier Tribunal, which will be lengthy, uncertain and expensive. Therefore, any possible benefit gained from quicker decisions will be more than outweighed by the drawbacks.

If we look at the regulatory landscape, the Gambling Commission is proposing to make these significant changes at the same time as it is escalating fines and sanctions.

Effective regulation requires effective accountability, and it seems to us that the Gambling Commission is removing a weakening mechanism which holds the regulator to account for its own policies and procedures and the law.

In conclusion, and repeating the final words from my May 2020 blog, 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 compromised.

Respond to the consultation

We strongly encourage industry and its stakeholders to respond to the consultation, which closes on 18 October 2023.

22Sep

White Paper Series: Defining the Future VIXIO Webinar

22nd September 2023 Harris Hagan 160

On 15 September 2023, Bahar Alaeddini appeared as a panellist on a VIXIO Regulatory Intelligence (formerly GamblingCompliance) webinar titled “UK White Paper: Defining the Future” together with Tim Miller from the Gambling Commission, Sarah Fox from the Department for Culture, Media and Sport and Dan Waugh from Regulus Partners. The panellists had an insightful and lively discussion about some of the proposals in the recent wave of consultations and next steps:

01Sep

Gambling Commission sets its sights on late regulatory returns and incorrect fee categories

1st September 2023 Gemma Boore 160

In its latest E-Bulletin, the Gambling Commission has reminded operators that it is a licence condition (15.3.1 of the Licence Conditions and Codes of Practice) to submit regulatory returns on time.

The update goes on to note that the Gambling Commission is aware that some regulatory returns have been overdue since 1 April 2023, and advises operators to bring these up to date “immediately”.

“Operators who fail to submit returns on time will be escalated to our Enforcement team to consider regulatory action and may result in a financial penalty under section 121 of the Gambling Act 2005.”

This is an important reminder from the Gambling Commission, which should not be taken lightly, and it is clear a tougher approach is now being taken.

Background

Gambling licence holders in Great Britain are required to submit a regulatory return for each type of activity for which they hold a licence.

Depending on licence type, regulatory returns must be submitted on a quarterly or annual basis. Quarterly returns must be submitted within 28 days of the end of each quarterly reporting period. Annual returns must be submitted within 42 days of the end of each annual reporting period.

All returns must be submitted via the online regulatory returns system within the Gambling Commission’s eServices Hub.

The Gambling Commission uses the information to publish bi-annual industry statistics and to inform its understanding of its licensees and the wider gambling industry. The information also helps the Gambling Commission ensure licensees are within the correct fee category for their licensed activities.

An imperfect system

The Gambling Commission publishes information on when and how to submit regulatory returns in its Regulatory Returns Guidance, which is split by licence type.

However, the guidance is simple, and a repetition of what is asked within the regulatory return forms. There is no additional detail as to the type of information that should be captured in the form, and where. The lack of clarity, in our experience, has sometimes resulted in incorrect data being provided with the regulatory returns, or being provided under the wrong licensable activity.

In our experience, licensees often require assistance with the following:

Non-GB revenues – they should only be reported if taking place in reliance on the Gambling Commission operating licence;

B2B online casino revenues that are not revenue shares – the form only allows for GGY (revenue share) to be reported, and not fixed fee revenues, although the Gambling Commission is now aware of this issue from us.

It is important that information provided in regulatory returns is accurate. If a licensee misrepresents or fails to reveal information that it is asked to provide, unless it has a reasonable excuse it will commit an offence under section 342 of the Gambling Act 2005.

Beware exceeding your fee category

Regulatory returns go hand in hand with ensuring a licensee is in the correct fee category and, recently, we have noticed an increase in the Gambling Commission using regulatory returns to identify and contact licensees that it believes have exceeded the upper threshold of their fee categories.

Fee categories are a licence condition, included on the face of an operating licence. Therefore, an application to vary the fee category must be submitted before the upper threshold has been exceeded and it is a licensee’s responsibility to proactively monitor its fee category to ensure the upper threshold is not exceeded.

We urge licensees to routinely consider whether they are approaching the maximum limit of their fee category and whether a change of fee category is warranted. Licensees should be aware that the fee category licence condition follows the licence year, and will not necessarily align with the regulatory returns reporting period.

The process for submitting an application to vary is relatively simple. The applications can be completed through the eServices portal and carry a fee of £40. It is important to note that:

fee category increases by one level do not require any supporting documentation;
fee category increases by two levels or more must be supported by:
- new or updated financial projections;
- new or updated business plan;
- evidence of how the expansion of the business is funded;
decreases in fee categories must be supported by a full explanation.

Gambling Commission working group

In order to address some of the issues with the regulatory returns system, the Gambling Commission has established a working group and is seeking feedback from licensees on the questions currently posed in regulatory returns.

The last time the regulatory returns process was reviewed was in 2020 when, following a Consultation on changes to information requirements in the LCCP, regulatory returns, official statistics, and related matters, the Gambling Commission simplified the regulatory returns processes. In its consultation response, the Gambling Commission also committed: (1) to publish guidance for regulatory returns (which went live on 4 May 2021); and (2) to improve the usability, accessibility and availability of the regulatory returns system.

Three years on, the system is under review again – but it appears there will be no consultation and, consequently, fewer licensees will be aware there is an opportunity to help shape forthcoming improvements.

Next steps

We strongly recommend licensees use the online contact form to tell the Gambling Commission about their concerns with the regulatory returns process, forms and guidance as soon as possible, so they can be improved.

We hope that the working group will use this, as well as our recent feedback on the Gambling Commission’s guidance, to improve the current system.

In the meantime, licensees should also:

submit any outstanding regulatory returns as soon as possible;

endeavour to submit complete and accurate regulatory returns within the timeframes set by the Gambling Commission. The Gambling Commission is taking a much tougher approach and late and/or inaccurate regulatory returns will be referred to the Enforcement Team; and

routinely review whether they are in the correct fee category and, if necessary, submit an application to vary before exceeding the upper threshold of a fee category.

Please get in touch if you have any questions regarding the regulatory returns process and/or if you would like our assistance preparing a regulatory return or changing your fee category.

With credit and sincere thanks to Jessica Wilson for her invaluable co-authorship.

24Aug

Gambling Commission publishes new remote customer interaction guidance

24th August 2023 Adam Russell 156

On 23 August 2023, the Gambling Commission announced that they have published new remote customer interaction guidance in relation to Social Responsibility Code Provision 3.4.3 (“SRCP 3.4.3”) of the Licence Conditions and Codes of Practice.

Context

In April 2022, the Gambling Commission introduced new “stronger and more prescriptive” remote customer interaction requirements for remote gambling operators under SRCP 3.4.3, which tightened the rules on identifying at-risk customers and taking “proportionate timely action to reduce harm”.

At the time, the new remote customer interaction requirements were due to take effect on 12 September 2022 and in June 2022, the Gambling Commission published associated guidance, designed to support compliance with the new requirements under SRCP 3.4.3.

However, to widespread surprise, in September 2022, the Gambling Commission announced their decision to delay the implementation of:

paragraph 3 of SRCP 3.4.3 (“Licensees must consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified. Licensees must take account of the Commission’s approach to vulnerability as set out in the Commission’s Guidance”);

paragraph 10 of SRCP 3.4.3 (“Licensees must prevent marketing and the take up of new bonus offers where strong indicators of harm, as defined within the licensee’s processes, have been identified”); and

other references in SRCP 3.4.3 to the guidance,

until at least 12 February 2023.

In the intervening time, the regulator decided that it would “be beneficial to use the time now available” to conduct a consultation on the guidance itself.

The consultation on the remote customer interaction guidance closed in January 2023.

The Gambling Commission also announced that, irrespective of the consultation on the guidance, requirement 10 of SRCP 3.4.3 would come into force on 12 February 2023 in any event.

New customer interaction guidance now published

Seven months after the consultation closed, the Gambling Commission have finally published the new remote customer interaction guidance, together with the associated consultation response.

The new remote customer interaction guidance contains various updates to the guidance originally published in June 2022, which we will explore in an upcoming blog.

Remote operators will be required to take into account the new remote customer interaction guidance from 31 October 2023.

In addition, SRCP 3.4.3 requirements:

to take into account the guidance; and

to “consider the factors that might make a customer more vulnerable to experiencing gambling harms and implement systems and processes to take appropriate and timely action where indicators of vulnerability are identified”,

will come into force on the same date.

Next steps

We are closely reviewing the new guidance and consultation response, and will be sharing our analysis and insights in due course.

Please get in touch with us if you would like to discuss this development, or if you would like assistance on drafting/updating your policies and procedures in light of the new guidance.

18Aug

White Paper Series: Gambling Commission’s remote game design proposals – simply following suit?

18th August 2023 Jessica Wilson 161

On 26 July 2023, the Gambling Commission’s opened its first consultation (the “Consultation”) following the White Paper. This included proposals to amend the Remote Gambling and Software Technical Standards (“RTS”) “to reduce the speed and intensity of on online products while making them fairer and increasing consumer understanding about game play”. In the White Paper, Government concluded that products other than slots should be considered to create wider design codes and safer product design standards for other online products. In this blog, we summarise the proposals.

The Gambling Commission last made changes to the RTS in October 2021 when it introduced design requirements for online slots products, including limitations on speed of play, auto-play and the illusion of false wins. In June 2023, the Gambling Commission published a report assessing the impact of those changes, noting that they have “reduced play intensity…and not resulted in harmful unintended consequences”. Tim Miller, Director for Policy and Research, noted that whilst the results are positive, “we aren’t complacent and will continue to monitor this specific part of the sector for both any unintended circumstances, or non-compliance.”

The Gambling Commission made it clear in its response to its consultation regarding slots game design that those changes were “just one step in reducing the risk of harm”. Given the positive outcome from the October 2021 design changes for slots, it is not surprising that requirements for other products are likely to follow suit.

Summary of Gambling Commission proposals:

Proposal 1: Player-led “spin stop” features. Removing features which can speed up play to reduce the harm experienced by consumers who are gambling particularly quickly or intensely

Impact: Amendment of RTS requirement 14E – The gambling system must not permit a customer to reduce the time until the result is presented.

Applies to: all gambling (not just slots).

Proposal 2: 5 second minimum game speed

Impact: New RTS requirement 14G – It must be a minimum of 5 seconds from the time a game is started until the next game cycle can be commenced. It must always be necessary to release and then depress the start button or take equivalent action to commence a game cycle.

Applies to: all casino games (excluding peer to peer poker and slots)

Proposal 3: Prohibition on autoplay extended to all online products

Impact: Replacement of current RTS8. New RTS8 – The gambling system must require a customer to commit to each game cycle individually.

Applies to:all gaming.

Proposal 4: Prohibition of features which may give the illusion of “false wins” extended to all casino products

Impact: Amendment to RTS requirement 14F – The gambling system must not celebrate a return which is less than or equal to the total stake gambled.

Applies to: all casino games (not just slots).

Proposal 5: Prohibition on operators offering the ability to play multiple products simultaneously

Impact: amendment to RTS requirement 14C – The gambling system must not offer functionality which facilitates playing multiple games or products at the same time.

Applies to: gaming (including bingo) and betting on virtual events (not just slots).

Proposal 6: Extending requirement to display elapsed time and net spend

Impact 1: amendment to RTS requirement 13C – The elapsed time should be displayed for the duration of the gaming session.

Impact 2: amendment to RTS requirement 2E – All gaming sessions must clearly display a customer’s net position, in the currency of their account or product since the session started.

Applies to: casino (excluding peer to peer poker) (not just slots).

Proposal 7: Technical update to RTS security requirements to reflect the 2022 update to ISO 27001

Impact 1: the addition of 11 new controls in line with the 2022 update.

Impact 2: the addition of ISO27001 2022 standard section 5.23 regarding information security for use of cloud services as an RTS requirement for security audits.

Applies to: remote operating licensees (excluding betting intermediary) and non-remote gaming machine technical and gambling software operating licensees.

As anticipated, the majority of the proposals aim to align the requirements currently in place for slots with other online gambling products. Given the positive impact of the October 2021 changes, and the important harm minimisation effects, it is unsurprising that the Gambling Commission is taking this approach.

However, we note the Gambling Commission is mindful of the fact that certain online gambling products have different features to slots, and therefore certain RTS requirements cannot have a blanket application across all online products. For example, the Gambling Commission has noted that the majority of games it sampled (including online roulette, blackjack, and live versions of games) have a slower minimum game speed than the 2.5 second restriction applied to slots products. Proposal 2 (to introduce a 5 second minimum game speed) is therefore more reasonable and appropriate than simply extending the current restriction for slots to other products.

Further, in respect of Proposal 6 (display of elapsed time and net spend), the Gambling Commission notes that this should not be a requirement for peer to peer poker as, whilst time spent gambling is a risk factor, poker does not require a customer to be staking every hand to participate, unlike other casino games. The Gambling Commission itself notes that it is “mindful of imposing unnecessary regulatory burden” and we welcome this considered and reasonable approach.

Respond to the consultation

The Gambling Commission is accepting responses until 18 October 2023. We strongly encourage gambling businesses to respond to the Consultation.

Please let us know should you require any assistance preparing a response.

11Aug

White Paper Series: Give your two pounds’ worth on DCMS’ consultation for online slots stake limits

11th August 2023 Chris Biggs 159

The consultation season well and truly began on 26 July 2023, with the Department for Culture, Media and Sport (“DCMS”) publishing the first two of its promised consultations from the White Paper. In this latest edition of our White Paper Series, we discuss DCMS’ proposals and reasoning for a maximum stake limit for online slots games in Great Britain (the “Slots Consultation”) and strongly encourage the industry to respond.

1. Background

As discussed in our previous White Paper Series blog on stake limits, DCMS foreshadowed its reasons for the Slots Consultation in the White Paper.

It noted that slots have the highest average losses per active customer of any online gambling product, the highest number of players, the longest play sessions and the greatest potential for financial harm, due to the velocity at which people can stake, with no statutory limit on the amount they can stake. On the other hand, it was acknowledged that online operators are uniquely able to regularly monitor and scrutinise their customers’ spending on slots and intervene where necessary.

In the end, having considered the evidence available to it, DCMS concluded that reform was necessary. Although evidence of a clear causative relationship was limited, there was sufficient evidence of an association between higher stakes on online slots and identified risks of harm. DCMS determined it was time for change: there would be a consultation in summer 2023 on a stake limit for online slots of between £2 and £15. In addition, DCMS would also consult on a preferred £2 limit for those aged 18 to 24.

2. The proposals – General population

The Slots Consultation has now been published and DCMS has proposed four options for the maximum stake limit which should apply for online slots, seeking opinions on which option “strikes an appropriate balance between preventing harm and preserving consumer freedoms”.

We discuss the options and DCMS’ headline reasoning for each stake limit below:

Option 1 – A maximum online slots stake limit of £2 per spin

The industry knew £2 stake limits were going to be the starting point for the Slots Consultation and unsurprisingly, this option would have the greatest impact on consumers and businesses alike. DCMS recognises that 97% of all individual online slot stakes are below £2. However, up to 35% of players stake over £2 on a single spin at least once a year. Of course, £2 is a relatively low bar especially given that stakes over this threshold contribute to an estimated 18% of annual slots gross gambling yield (“GGY”). Option 1 would therefore have a significant impact on online casino operators and the industry’s GGY broadly.

Option 2 – A maximum online slots stake limit of £5 per spin

A £5 maximum stake per spin, as DCMS notes, is equal to the highest limit currently permitted on any land-based gaming machine.

There may be a superficial attraction to aligning online slots with the limits imposed on their land-based counterparts, but it would not come without a significant impact to the online industry which already has a wider system of safer gambling protections in place. Indeed, DCMS acknowledges this in the White Paper:

“The stake limits already applied to electronic gaming machines in the land-based sector could be a sensible starting point. However, taking an equitable approach to product regulation should take account of the wider system of protections in place online. For instance, the opportunity for data-driven monitoring of online play may justify a higher limit for online products than in relatively anonymous land-based settings.”

DCMS estimates stakes over £5 represent only 0.5% of online slots staking events but represent approximately 7.4% of slots GGY.

Option 3 – A maximum online slots stake limit of £10 per spin

Although a £10 maximum stake per spin is higher than any stakes permitted on a land-based gaming machine, DCMS is considering whether these higher limits are appropriate in the online world given that there are additional protections for online players, who are required to create an account to play and can therefore be more adequately monitored by licensed operators for signs of gambling-related harm (as suggested in the above quote).

This is particularly relevant given that DCMS does not anticipate severe disruptions to the majority of slots players if Option 3 is implemented, noting that 37% of all stakes placed above £10 were made by high and medium risk players.

As we hinted in our previous blog, it is possible DCMS will be drawn to setting £5 (Option 2) as the maximum stake limit for online slots, noting this figure appeared in an earlier leaked version of the White Paper. However, given its acknowledgement in the above quote, we believe DCMS is open to considering evidence-based responses which favour a higher limit. This is of course dependent on the industry submitting compelling evidence-based responses to the Slots Consultation.

Option 4 – A maximum online slots stake limit of £15 per spin

As with Option 1, the industry was aware a £15 stake limit would represent the maximum stake per spin in the Slots Consultation. Broadly, DCMS considers this stake limit would impact only a small minority of “habitually or occasionally high-staking players”, where stakes over £15 represent 0.05% of all stakes on online slots and 2% of GGY. We consider it unlikely that Option 4 is the option that will finally be adopted.

3. The proposals – 18 to 24 year olds

As we previously discussed, the White Paper committed to consulting on additional protections for young adults aged between 18 to 24 years on the basis that this age group may be a “particularly vulnerable cohort”.

The Slots Consultation cites the Gambling Commission’s Advice to Government for the Review of the Gambling Act 2005 in identifying a number of potential factors influencing gambling behaviours in young adulthood, including continuing cognitive development, changing support networks and inexperience with money management. DCMS separately noted that problem gambling rates are highest in the 16 to 24 years age group, according to the Public Health England and Gambling-related harms evidence review of 2019.

Accordingly, the Slots Consultation seeks views on the following three options:

Option A – A maximum online slots stake limit of £2 per spin for 18 to 24 year olds
Option B – A maximum online slots stake limit of £4 per spin for 18 to 24 year olds
Option C – Applying the same maximum stake limit to all adults, but building wider requirements for operators to consider age as a risk factor for gambling-related harm.

In setting out its evidence, DCMS acknowledges that typical online slots stakes for those aged 18 to 24 are lower than for other adult age groups. Data captured between July 2018 to June 2019 indicates the mean stake in this cohort was £1.05 compared to £1.30 across all adults aged 25 and over, and DCMS cites data indicating the age group’s average stake is 20% lower than the average for all adults (according to Patterns of Play).

In respect of the specific limits proposed in Options A and B, DCMS does not cite data that specifically indicates either maximum stake limit would be best suited to this age group. The reasoning simply appears to be that as a potentially vulnerable cohort, there should be extra protections in place, i.e. lower maximum stake limits than those for the general population.

Option C would of course be the least intrusive option for operators and their customers, and any action required of operators would likely align with the Gambling Commission’s consultation on, and likely increase to, the requirements for operators to check customers’ individual financial circumstances in respect of indicators that their losses are harmful. Watch out for more on this in a forthcoming White Paper Series blog.

4. DCMS data and considerations

The status quo

In the Slots Consultation, DCMS cites Gambling Commission data in summarising the best available statistics about current slots play, set out below:

Furthermore, DCMS sets out staking behaviour for the 2022/23 financial year (representing more than 76 billion spins) which it uses to underpin its consideration of the likely impact of each maximum stake limit:

(The estimated % of slots GGY in Figure 2 assumes that all slots games have a 95% return to player and the distribution of spend within each bucket is modelled as non-linear.)

Aside from the sheer scale of online slots activity in the last financial year, the data presented in the Slots Consultation (including that shown in the above two figures) breathes life into DCMS’ proposals which, if we return to first principles, have been drafted in order to address the fact that there is evidence of a relationship between higher staking on slots and gambling-related harm.

By removing the ability for an arguably very small proportion of slots players to stake high(er) amounts on slots, will this aim be achieved? From the above data, we can see that most online slots spins from the last financial year would not be impacted by any of the proposed stake limits. However, the changes would result in a significant reduction in the industry’s GGY (we discuss this in further detail below).

Potential impact

So, has an appropriate balance been struck? Whilst we do not think there is a straightforward answer to this question (hence DCMS releasing the Slots Consultation), the potential impact of each of the options considered are set out in DCMS’ Online Slots Stake Limit Impact Assessment (the “Impact Assessment”), published alongside the Slots Consultation.

Interestingly, the Impact Assessment models the estimated reduction in annual GGY in the industry for each option considered in Slots Consultation, as follows:

To summarise this data, the Impact Assessment suggests that there will be an estimated reduction in the current annual online slots GGY of between 0.5% to 13.8%, ranging in real terms, from a £16.1m to £413.5m reduction in revenue annually.

Aside from the costs to business, the Impact Assessment also sets out the potential benefits of the maximum stake limits and shares the associated assumptions that DCMS made in coming to these conclusions. It is particularly worth noting that DCMS acknowledges it is difficult to accurately estimate gambling harm reduction from stake limits, stating:

“Gambling harm is complex and often the result of numerous factors both within and external to the actual gambling environment. It would be difficult to isolate the causal mechanism between staking at various levels (that will no longer be available) and the reduction in gambling harm.”

However, it goes on to note that there are clear, qualitative benefits to the stake limits for both the customer and the public sector. To pick a crucial example, the Impact Assessment identifies that each stake limit will have an impact on a customer’s risk of incurring runaway losses, and suffering gambling harm as a result of these losses.

Additionally, public sector benefits would include potential reductions in costs incurred by the public sector in respect of harmful gambling costs which include:
a) Primary care mental health services, secondary mental health services, and hospital inpatient services;
b) Job seekers allowance claimant costs and lost labour tax receipts;
c) Statutory homelessness applications; and
d) Incarceration costs.

We encourage all licensees and stakeholders to review the Impact Assessment, in addition to the Slots Consultation, for a closer look at the estimated costs and benefits of the proposed stake limits and to better inform views on where the balance between protection from harm and consumer freedom lies.

5. Responding to the Slots Consultation

The Slots Consultation will be open for responses for eight weeks only, until 11:55pm on 20 September 2023. Responses can be submitted through DCMS’ online survey, or as a Word or PDF document to [email protected]. DCMS is encouraging evidence from all parties who have an interest in the way gambling is regulated in Great Britain, including any international evidence.

Following the consultation period, DCMS will publish a formal response setting out its decisions in relation to the maximum stake limit proposals and its reasoning, as well as a final impact assessment, before implementing the changes. Changes will likely be made by way of the introduction of secondary legislation, e.g. the creation of a new licence condition for Gambling Commission licensees.

In the short time before the Slots Consultation closes, we strongly encourage all licensees and other stakeholders to consider the impact the proposals would have on their businesses and respond with evidence-based submissions. Now is the opportunity to influence positive change for consumer protection whilst tempering a potentially damaging blow to the commercial viability of the online slots industry in Great Britain.

Please get in touch with us if you would like assistance with preparing a response to this or any other DCMS and Gambling Commission consultations.
With thanks to Gemma Boore for her invaluable co-authorship.

11Aug

White Paper Series: Transforming corporate culture by “driving personal accountability and responsibility” for lookers-on seeing most of the game?

11th August 2023 Bahar Alaeddini 173

The White Paper included a fleeting mention of extending the requirement to hold a personal management licence (“PML”). In the recent first wave of consultations, the Gambling Commission recently announced plans to change licence condition 1.2.1 to “clarify and extend the roles” that trigger a requirement to hold a PML. The goal is “ personal accountability and responsibility”, allowing the Gambling Commission to “take necessary action against individual (personal) licensees when failures are found.” The key proposed changes are to extend the requirement to hold a PML to a licensee’s Board Chair and, on a case-by-case basis, to CEOs and directors of “parent companies or subsidiaries in the group”. In this blog, we consider the current requirements, the proposals and what they mean. Before we do so, we pause to consider the correlation with corporate culture.

Corporate culture

These proposals come at a time when regulatory uncertainties in the British market remain a daily challenge for gambling businesses, their Boards, their PMLs and their other key decision-makers. Every decision must be underpinned by the licensing objectives if it is to minimise harm and help ensure the success and sustainability of the industry we cherish. There is no one-size-fits-all approach, but business leaders undoubtedly play the most important role in building a strong foundation and effective corporate culture that protects the most important asset – a gambling licence. It is corporate culture that tends to be the key driver of conduct and deficient culture which results in poor standards of behaviour.

Corporate culture is not mentioned in the White Paper or consultation, but we think both DCMS and the Gambling Commission would agree that it is inextricably linked with personal responsibility and accountability.

What is culture?

Culture is a set of behaviours and mindsets that characterise a business. As we know from our client experience, whilst there are commonalities, the culture of every gambling business is individual.

Why is it important?

Business leaders are generally expected to manage the drivers of behaviour to create and maintain culture. Designing a good culture is obviously easier than implementing and embedding the culture, particularly in large multinationals with hundreds or thousands of employees. In sophisticated regulated industries, the regulator is also considered to play an important role given its central position, unique viewpoint and often a desire to drive change. However, trust in the Gambling Commission is low and seemingly not many gambling stakeholders place much trust in the Gambling Commission’s own culture. The Gambling Commission was however named last year as one of the UK’s Best Workplaces, so maybe we can expect to see improvement soon.

Financial services

The Financial Conduct Authority has been very alive to the topic of transformational culture, since at least 2015, seemingly working collaboratively with financial services, having identified culture as the key cause of harm in firms:

“We are working to promote healthy cultures across the industry. Firms’ cultures have been a major root cause of conduct failures, and our work supporting firms in delivering real and sustainable culture transformations will help prevent harm caused by inappropriate behaviours.”

The Financial Conduct Authority has a Culture and governance webpage dedicated to this topic, including publication of a discussion paper and hosting a conference dedicated to transforming culture, in 2018:

“The success of our work depends not only on the involvement of firms and their leaders but everyone with an interest in transforming financial services culture for the better. Our work so far includes how we are transforming culture by improving the accountability of individuals in financial services, including leaders, by extending the Senior Managers and Certification Regime (SM&CR) to all authorised firms.”

SM&CR was initially introduced, in 2016, following the global financial crisis in 2007-2008 and Libor scandal in 2012 following concerns that the regulatory system did not have sufficient focus on individual accountability. The regime’s core aim is to instil “a culture of compliance and good behaviour within firms, rather than being a reactive regime that relies on regulatory enforcement action.” Although certain aspects of SM&CR are currently subject to Government consultation, with the response awaited, there is widespread support for the regime amongst industry and regulator. Over 90% of respondents to UK Finance agreed that the regime had brought about meaningful change for the better and many firms expressed the view it was “having an impact on the mindset of senior managers, with a stronger tone and ownership from the top.” It is therefore difficult to see any major drawback from the Gambling Commission’s proposals, other than self-preservation for the person holding a PML. As a PML is personal to the individual he/she could have their PML reviewed, potentially affecting their future employability in the gambling or another regulated industry.

Who needs a PML currently?

Under licence condition 1.2.1, any person responsible for a “specified management office” must hold a PML. The purpose of this requirement is to ensure individuals with certain responsibility are suitable, which is checked every 5 years (not, “renewed” as the Gambling Commission incorrectly states because PMLs are indefinite in duration!).

“Management office” is defined in section 80(5) of the Gambling Act 2005 as:

the “office of director” (where the licensee is a company); and
any position where the appointment terms require the person “to take or share responsibility for”:
“the conduct of a person who performs an operational function in connection with a licensed activity”; or
“facilitating or ensuring compliance with terms or conditions of the operating licence”.

What are the proposed changes?

The Gambling Commission proposes to:

make clear that the person responsible for “overall management and direction of the licensee’s business or affairs” (which triggers a PML requirement) “is likely to be the CEO, MD or equivalent”;
require the person “chairing the Board (where the licensee has such a body)” to hold a PML (note: this does not mean you need to appoint a Chair and it specifically refers to the licensee rather than a parent company);
make it clearer that those responsible for AML and CTF, including the Money Laundering Reporting Officer and Nominated Officer, need to hold a PML; and
assess, on a case-by-case basis, whether CEOs and directors of “parent companies or subsidiaries in the group” need to hold PMLs too.

Why is it changing?

The consultation is very clear on this; the Gambling Commission is “concerned” by the number of enforcement cases and repeated failures by the same licensee:

“In cases over the last five years, eleven licensees have been subject to enforcement action multiple times. The majority of these cases relate to similar, repeated failings linked to anti-money laundering and social responsibility. By increasing the personal accountability of individuals within a licensee, seek to reduce this risk. This also supports wider work to raise standards, including through tough enforcement action at operator level.”

Individuals make decisions, and, therefore, these individuals will determine whether or not a gambling business is compliant. These proposals therefore come as no surprise. They are a blunt instrument for, firstly, “driving personal accountability and responsibility” and, secondly, ensuring the Gambling Commission has “adequate regulatory reach over individuals when failures are found”. From our extensive enforcement work, both for gambling businesses and PMLs, the Gambling Commission, has a mounting focus on identifying who (generally within senior and executive management) was responsible for failures. So, what does “responsibility” mean? It could mean day to day responsibility or executive responsibility. In our experience, not enough consideration is given by gambling businesses or the Gambling Commission – outside enforcement action – to mapping out individuals’ responsibilities (in full or shared) and considering governance and control aspects.

In principle, and against the backdrop of the SM&CR, it seems to us that the Gambling Commission is striking the right balance with these proposals, particularly with the requirement that Chairs must hold PMLs. Increasing the number of PMLs, particularly at a senior level, will drive personal accountability and responsibility, and thereby hopefully enhance the corporate culture.

Where the licensee has a Chair, they play a critical role in promoting the effectiveness of the Board and directors. This role is very different from the role of a CEO, with the Harvard Business Review noting “he Chair is responsible for and represents the Board, while the CEO is responsible for and is the public face of the company.” Unlike a CEO who is accountable to the Board, the Board is accountable to shareholders. A key aspect of that accountability is risk management so, arguably, the Board should be promoting a culture of compliance and good behaviour, and be concerned by excessive risk-taking that would threaten the company’s financial and economic stability. As the 16^th century proverbial saying goes, “lookers-on see most of the game”!

By personally licensing the Chair of the Board, the Gambling Commission will “ensure that those responsible for scrutiny, strategy and leadership at the most senior level within the organisation” will improve Board focus on, and accountability for, the licensing objectives and encouraging them to set the tone from the top and lead a culture of compliance.

It is worth noting, the Gambling Commission could have proposed that each member of a licensee’s Board hold a PML. Whilst it did consider this option, it decided it would have unintended consequences of diluting accountability and making it harder to take enforcement action.

“Implementation issues, timelines and practicalities”

Question 106 of the consultation requests feedback about implementation issues, timelines and practicalities. Unpicking the proposals, we make the following initial observations:

Will there be a grandfathering period?
How will the new Chair and potential director PML requirements be applied to large multinational gambling businesses? Will it extend to the Chair of a parent company? Based on the current wording, this seems unlikely, but clarity is required.
Although not expressly mentioned, it seems clear to us that the requirement as presently drafted applies to both Executive and Non-Executive Chairs.
Will Part III of the LCCP, setting out the personal licence conditions for PMLs, remain unchanged? Or will the Gambling Commission use this is an opportunity to set an enhanced standard of conduct for a Chair or business leader? Note, the Financial Conduct Authority and Prudential Regulation Authority have an enhanced standard of conduct applicable only to Senior Managers and certain other individuals, regulated under the SM&CR.
Will there be a delineation between the responsibilities of Board members’ holding PMLs and others? Note, the SM&CR requires firms to submit documentation on the scope of a Senior Manager’s responsibilities known as the Statement of Responsibilities. This includes a statutory requirement for senior managers to take reasonable steps to prevent and/or stop regulatory breaches in their areas of responsibility.

Harris Hagan services

PML applications

We regularly work with clients to prepare PML applications for their employees, senior managers and Board members. Please get in touch if you would like our assistance.

Training

Borne from our strong desire to help clients navigate the complex framework and landscape in Great Britain, we offer Partner-led PML training covering the key legal, regulatory and licensing issues for PMLs, Boards, Compliance Committees, employers and those in supporting roles, as well as scanning the horizon on key changes, including the Gambling Review, and providing practical advice based on our extensive knowledge, experience and expertise. Please get in touch if you would like to discuss your training needs.

Next steps

There are 8 questions in the consultation about these proposals which appear at questions 102-109. The consultation will last for 12 weeks and will close on 18 October 2023.

Please get in touch if you would like to discuss the consultation further or receive a deck about our training services, including client testimonials.

A specified management office is defined in licence condition 1.2.1(2) as:

the overall management and direction of the licensee’s business or affairs
the licensee’s finance function as head of that function
the licensee’s gambling regulatory compliance function as head of that function
the licensee’s marketing function as head of that function
the licensee’s information technology function as head of that function in so far as it relates to gambling-related information technology and software
oversight of the day to day management of the licensed activities at an identified number of premises licensed under Part 8 of the Act or across an identified geographical area
in the case of casino and bingo licences only, oversight of the day to day management of a single set of premises licensed under Part 8 of the Act.

“Operational function” is defined in section 80(6) of the 2005 Act as: (a) any function which enables the person exercising it to influence the outcome of gambling, (b) receiving or paying money in connection with gambling, and (c) manufacturing, supplying, installing, maintaining or repairing a gaming machine.

27Jul

Source of funding: A glimmer of hope on the horizon?

27th July 2023 Jessica Wilson 165

It is no secret that source of funding has been an area of uncertainty and, often intense, frustration in recent years. Whilst source of funding is a mandatory aspect of the licensing lifecycle, there continues to be a distinct lack of clarity from the Gambling Commission as to what is expected from applicants, licensees, and their investors. In our view, this breaches the Regulators’ Code which requires the Gambling Commission to have clear information, guidance and advice to help those they regulate meet their responsibilities to comply. Without such guidance, insurmountable regulatory and commercial risks are attached to the British market, potentially rendering it unviable and unattractive for new entrants and their investors, particularly where they are financial institutions. In view of the importance of this issue to our clients and the industry generally, we submitted a freedom of information request to the Gambling Commission in March 2023. Coincidentally or otherwise, there is now a glimmer of hope on the horizon as the Gambling Commission plans to publish source of funding guidance this Summer.

What is source of funding?

Source of funding involves establishing the legitimacy of the source of the capital and revenue finance used in the licensee’s operation.

Disclosure is required to ensure (1) that the first licensing objective has not been compromised (preventing gambling from being a source of crime or disorder, being associated with crime or disorder, or being used to support crime), and (2) that the licensee or applicant is suitable to hold a licence (as detailed in the Gambling Commission’s Licensing compliance and enforcement policy statement), which includes “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.”

When is disclosure needed?

The common touchpoints for disclosure to the Gambling Commission are:

operating licence applications – where “there is a positive obligation on applicants to show that they are able to satisfy the licensing objectives” and the Gambling Commission “will also wish to be satisfied as to the sources of the applicant’s finance to satisfy itself that such funds are not associated with crime or disorder.”
key event notifications following the taking of new loans / funding, or the disclosure of new shareholders; and
changes of corporate control.

Under section 122 of the Gambling Act 2005, the Gambling Commission may also request source of funding disclosure for the purpose of determining the suitability of a licensee to carry on the licensed activities.

The current requirements

Currently, there is no formal or detailed source of funding guidance setting out the Gambling Commission’s requirements and each case is considered on its merits.

From our extensive experience, we know that applicants and licensees are required, using a risk-based approach based on their knowledge of the investor and the size of the investment, to:

Follow the “breadcrumb trail” of money and provide documents (i.e. bank statements) to evidence the flow of funds from the original source, to the ultimate investment in the licensee / applicant.
Provide documentary evidence for the source of funding. This depends widely on the specific circumstances but, by way of example, if an investment was funded by:

a) a share sale, the SPA could be provided along with a bank statement showing receipt of the funds from the sale; or

b) personal savings, the Gambling Commission would wish to understand and see evidence as to how these savings had accrued and over what time period.

The onus is always on the gambling business, which can be challenging when the Gambling Commission rejects incomplete applications and the majority of the information can only be obtained from third parties; however, it is vital that they have used their reasonable endeavours to secure the necessary information.

Challenges and moving goalposts

Source of funding is a complex area, particularly if money has been raised through an investment fund with underlying limited partner (passive) investors, where often there are complex confidentiality agreements in place. It has also been known for gambling businesses to encounter investors who simply refuse to disclose their personal documents or are only willing to provide documents that are heavily redacted.

Ultimately, as set out in the Licensing compliance and enforcement policy statement, the Gambling Commission must “assess the likelihood of risk presented by and the potential impact that the risk if realised will have upon the licensing objectives.” In our view, this does not mean pursue a risk-free approach by testing every £.

Nowadays, the Gambling Commission’s expectations for source of funding are burdensome and follow a novel and unpublished approach (generally led by Forensics), often exceeding those of financial or other gambling regulators around the globe. In extreme circumstances, this creates tension between the gambling business and its investors, and the Gambling Commission and the gambling business (including us!). Published guidance is critical to ensure consistency and provide certainty to gambling businesses and their investors.

Glimmer of hope on the horizon

Turning to the positive, we understand that the Gambling Commission will be publishing guidance on its website regarding its source of funding requirements to “provide better information to applicants”. It is expected that the guidance will be published by the end of July 2023.

At this stage, we understand that the guidance will be non-exhaustive, but will include example scenarios, including those relating to investment funds.

We further understand that the guidance will explain how the Gambling Commission divides investors into two groups when determining its source of funding requirements:

a) Regulated – meaning entities that are regulated by any form of financial service regulator, including the Financial Conduct Authority and Securities Exchange Commission.

b) Unregulated.

For each group, the Gambling Commission will take either a percentage of the total value of the investment / transaction, or an investment amount (e.g. £50,000) and consider source of funding for investors that cross that threshold. Where investors do not fall within either category, the Gambling Commission will look to take a dip sample, which reflects our recent client work. We further understand that the Gambling Commission will want investors identified so it can carry out open source and online checks before deciding if further source of funding information is required for particular investors.

Of course, the exact detail of the guidance will not be known until it is published. We are hopeful that it will provide some clarity on the Gambling Commission’s requirements and explain the basis for such requirements.

How we can help

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

27Jul

White Paper Series: Cryptoassets

27th July 2023 Hilary Stewart-Jones 160

Adopting the term cryptoassets as opposed to cryptocurrencies, the White Paper devotes little time to the fast growing consumer demand in the online gambling sector. The Department for Culture, Media and Sport (“DCMS”) acknowledges that there are no specific laws which preclude a customer’s use of cryptoassets to fund gambling, but indicates that it has thus far relied upon the Gambling Commission taking a “rigorous stance” against their use to date where: (i) they are used by end users as a means of depositing into online gambling accounts; (ii) the operator accepting the cryptoasset payment has raised funds via the issue of cryptoassets; or (iii) the business owners’ source of funds includes ownership and trading of cryptoassets. The net result, unsurprisingly, has been that currently the Government does not feel the need to intervene further with legislative changes, because there already exists a de facto ban for gambling usage. Sadly, this was a missed opportunity to oversee and probe the Gambling Commission’s application of its discretion, all the more so given that cryptoassets will be fully financially regulated in Great Britain in the not-too-distant future, and where their burgeoning use in offshore gambling will be another deterrent for end users in Great Britain to only wager with Gambling Commission licensees.

Plainly, the discretion afforded to the Gambling Commission on licence applications can give it a multitude of reasons to decline licence grant, only one of which may be a business plan/funding which includes cryptoassets. To that point, the Gambling Commission states in its Blockchain technology and cryptoassets guidance that its approach to assessing a licence applicant’s source of funds is to be sure that the business is not being funded by proceeds of crime and it needs the same level of assurance for all licence applications. The Gambling Commission further emphasises its position in this guidance:

“If you are considering using to fund a gambling business, we recommend that unless you are able to provide a full and complete history of with your application, do not submit as we will not consider Operating Licence applications with a crypto funding element without this evidence provided in full at application stage”

For existing licensees, the Gambling Commission’s controls are set out in licence conditions (“LCs”). LC 5.1.1 requires that:

“Licensees, as part of their internal controls and financial accounting systems, must implement appropriate policies and procedures concerning the usage of cash and cash equivalents (e.g. digital currencies) by customers, designed to minimise the risk of crimes such as money laundering, …”
“Licensees must ensure that such policies and procedures are implemented effectively, kept under review, and revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.

In addition, licensees are required by LC 15.2.1(8) to notify the Gambling Commission as soon as reasonably practicable, and in any event within five working days, in circumstances where there is: “ny change in the licensee’s arrangements as to the methods by which, and/or the payment processor through which, the licensee accepts payments from customers using their gambling facilities…”. This is a notification, and not a clearance requirement, albeit there is no doubt that the Gambling Commission would investigate notifications that relate to licensees’ acceptance of cryptoassets. The DCMS assert that on data provided by the Gambling Commission that there have been “no instances” of licensed operators making a key event filing regarding cryptoassets. This is hardly surprising when the known response would be negative.

The implication suggested by DCMS/the Gambling Commission in the White Paper that licensees may have no desire to accept cryptoassets because of inherent volatility/bet closing values and transparency issues, is unlikely to be the root cause of this reluctance. It is far more likely to be due to their concerns about the negative attention they would attract from their regulator and potential for licence review. In this regard, most licensees remain painfully aware of a fine meted out to one operator in circumstances where it did not accept cryptoassets as payment but allowed a customer with a regulated (as a financial service) digital wallet to deposit with fiat, in which wallet there was a risk that cryptoassets may have been (but not necessarily had been) deposited. The Gambling Commission justified the censure as a demonstrable lack of AML due diligence by the operator on the payment service provider, merely because it allowed deposits in fiat and cryptoassets, in circumstances where the wallet was, as stressed, regulated and there was nothing to preclude its commercial offering of the product. If that comprises a gambling regulatory benchmark, then on a broad application surely it should also preclude a relationship with any number of banks/payment service providers, many of whom offer cryptoasset trading services? One has to ask, the funding and suitability issues aside (of which more below), what is the real concern? Most gambling operators who accept cryptoassets do not do so anonymously as all require a form of KYC/CDD/EDD to open an account. The larger operators also tend to only accept stable coins, and do not allow any form of trading exchange within the gambling ecosystem i.e. USDT in, USDT out. In short, a very limited scope for anonymous money laundering.

The Gambling Commission’s antipathy seems to be primarily rooted in cryptoassets’ opaque nature, having stated “the anonymity afforded by some , along with any weaknesses in the process of obtaining them, have consistently caused problems for applicants….”. However, this suggests that the cryptoasset itself can be tainted by a previous illegal use, despite the fact that the current cryptoasset owner would be fully disclosed to the operator and by extension (if requested) the Gambling Commission. Meanwhile, back in the real world, none of us can account for prior uses of all money in our bank accounts since the creation of that currency. For proceeds of crime/AML purposes one can understand that fiat monies can taint other fiat monies in a single account (where they cannot be separately identified) but not cryptoassets where each unit is separately reported in the blockchain. In addition, as can be inferred from Europol’s December 2021 report, the early adoption by criminals for payment in non-private cryptoassets for illegal activities (e.g. human trafficking and money laundering) through such transactions is actually on the wane. The report observes that unlike private coins where the ledger is obfuscated, there is with most types of reputable cryptoassets a public blockchain ledger, so that all trades are recorded: the detail retained therefore leaves a trail that cash could not. Indeed, as Europol emphasises, that ledger was key to unlocking the source of funds in several prosecutions, demonstrating that the prior users were neither truly anonymous nor untraceable. In any event in its conclusion, it points out: “….., the use of cryptocurrencies for illicit activities seems to comprise only a small part of the overall cryptocurrency economy, and it appears to be comparatively smaller than the amount of illicit funds involved in traditional finance.”

Both the DCMS and the Gambling Commission also allude to cryptoasset volatility and that such issues would impact gambling because of the problems of establishing financial limits and affordable gambling. However, again the criticism does not seem to be well thought through. A customer who has bought cryptoassets has presumably had the wherewithal to do so, affordability issues aside. If they then gamble with an element of the cryptoasset that goes up in value after the deposit but before any wager, then any safer gambling (“SG”) limits pegged to fiat (which could be easily imposed as a LC) would still snag before the sums were wagered, as the exchange rate could take place before play. If the volatility is in the licensee’s favour on pay-out (and it could go either way) the customer has still not lost any more than the SG limit set, which is entirely in line with the current loss limit philosophy that underpins the White Paper’s approach to consumer protection. In any event, the Gambling Commission should not ignore that cryptoassets are fast becoming a real and critical part of the world’s economy, and certainly the case for continued objection to licensees accepting deposits in fiat, where the known source is cryptoassets or there had been a digital wallet intermingling cryptoassets traded via a licensed exchange, seems antiquated. Meanwhile other regulators appreciate the need to accommodate change. The Markets in Cryptoassets (“MiCA”) regulation was passed by the European Union (“EU”) in May 2023. MiCA has four objectives:

to provide a legal framework to regulate cryptoassets;
to support innovation and fair competition;
to protect consumers, investors and market integrity; and
to guard against the financial uncertainty

These regulations will sit alongside the existing cryptoasset travel rule which requires entities enabling the exchange , transfer, sale or related financial services and safeguarding (the so called “VASP” services) to let the sender and recipient of cryptoassets have personal identifiable information of the other (legal name, address and account number) for all transactions over USD 1,000, or as determined by each Financial Action Task Force (“FATF”) member state (by way of example, the current U.S. rule is USD 3,000).

Whilst Great Britain is no longer part of the European Union, it is expected that it will ultimately pass legislation which will address the high risk nature of cryptoassets, to reach parity with high risk investment services (e.g. those requiring a consumer cooling off period) and to attach criminal offences to non-compliance (currently British-based firms providing cryptoasset services are obliged to register with the Financial Conduct Authority (“FCA”) and to comply with existing money laundering regulations and obligations). It is also notable other gambling regulators already have well advanced regimes for the acceptance of cryptoassets for gambling, albeit that the majority of the operators accepting cryptoassets have tended to cluster in traditional grey-market licensing hubs.

Despite this, and the moves for financial services regulation of cryptoassets already in motion, the Treasury Committee’s report Regulating Crypto, published on 10 May 2023 (the “Fifteenth Report”), instead called for cryptoassets to be regulated as gambling, emphasising that:

“… their price volatility exposes consumers to the potential for substantial gains or losses, while serving no useful purpose. These characteristics more closely resemble gambling than a financial service…”

Whilst one can understand there being a false sense of security for a volatile, albeit financially regulated asset (the so called “halo” effect) this proposal would put Great Britain out of step with the vast majority of other jurisdictions. Moreover, it would be the ultimate irony were the Gambling Commission be called upon to regulate an industry for which it plainly has the greatest mistrust Mercifully, the proposal does not have the support of Government and on the 19 July 2023, it made its response to the recommendations contained in the Fifteenth Report clear; cryptoassets would remain financially services regulated:

“Such an approach would run completely counter to globally agreed recommendations from international organisations and standard-setting bodies… …These recommendations are grounded in the principle of ‘same activity, same risk, same regulatory outcome’, meaning that any cryptoasset activity that performs a similar function, and poses similar risks, to those in the traditional financial system (for example, operating a trading platform or providing custody services) are subject to regulation that ensures equivalent outcomes.
The Committee’s proposed approach would therefore risk creating misalignment with international standards and approaches from other major jurisdictions including the EU, and potentially create unclear and overlapping mandates between financial regulators and the Gambling Commission.”

In conclusion, the dithering over cryptoassets and gambling needs to stop. Again, time has been lost with the distraction over the Fifteenth Report. Some online casinos accepting cryptoassets have reported gross gambling revenue of USD 2.6 billion for 12 months trading alone, so the product is clearly of appeal. One cannot simply assume that all or a majority of those end users have nefarious intentions. Given the ongoing profits of fiat-only operators too, one must also assume they are reaching an as yet untapped gambling demographic. The Treasury Committee report noted that in Great Britain alone 10% of adults hold or have held cryptoassets, with the majority of those concluding that it was a “fun” asset and where the transaction costs were considerably less than with fiat transfers. Given this is no longer: (a) a niche pastime; or (b) the preserve of criminals only, the Gambling Commission would be advised to give priority to what would comprise adequate safeguarding for cryptoasset usage in gambling rather than de facto fettering its discretion and imposing an outright ban. In addition, the longer the wait the less likely it is for governments and regulators to adequately anticipate/safeguard against the next wave of technology advancements in the cryptoasset space. The sooner the dialogue and the desire to find middle ground starts, the better.

With thanks to David Whyte and Gemma Boore from Harris Hagan for their invaluable co-authorship.

See paragraph 135 on page 68 of the White Paper.

See the Gambling Commission’s Blockchain technology and cryptoassets guidance note.

In this regard DCMS is using the terminology also used by the Gambling Commission, which had in turn adopted that used by the Treasury Committee (see its Twenty-Second Report of Session 2017-19 published September 2018).