David Clifton: Licensing Expert – Dealing with LCCP changes & Key Event reportings

David Clifton

4 April 2018 has seen changes to the Gambling Commission’s Licence Conditions and Codes of Practice (“LCCP”) come into effect for UK licensed gambling operators.

The up to date version of the LCCP is available on the Commission’s website, as too is an LCCP summary of the six key changes that have been made. Three of those changes relate to lotteries, but the following three amended licence conditions affect reportable key events that apply to all operators.

  • 15- 2.1(24): operators are now required to report whether a customer relationship has been discontinued alongside key event information on submission of a suspicious activity report
  • 15 – 2.1 25(b): information about game faults which result in over or underpayment to customers must now be reported as a key event
  • 15 – 2.2: a new key event notification requirement, relating to operator group revenues derived from other jurisdictions, has been added to the existing requirement to notify the Commission of any group company (not licensed by the Commission) actively targeting a new jurisdiction. The new requirement is that a licence-holding company must also submit a key event report on becoming aware of “a sustained or meaningful generation of the 3%/10% threshold being exceeded by the group”.

It is this last change that may generate the most questions and create a potential dilemma for those operators who have previously relied on the limited extent of information required up to now by the Commission about other group companies’ operations in other jurisdictions.

Indeed it is a perceived unwillingness or inability on the part of some operators to provide group data that has led to this additional reporting requirement. The Commission’s underlying concerns relate to:

  • the legality of funding or liquidity to its licensees from other group companies trading in other jurisdictions and
  • its fear that revenues generated in “grey” markets could be used to gain a commercial advantage, for example by funding marketing spend in Great Britain.

The “3%/10% threshold” mentioned above is referring to any jurisdiction where a group of companies gets 3% or more of its total revenue from players or, in the case of groups with total revenue of less than £5million per annum, any jurisdiction where the revenue is more than 10% of the total group revenue. The Commission defines a “group company” as “any subsidiary or holding company of the licensee and any subsidiary of such holding company”. More information about jurisdictions into which gambling businesses may not provide services is contained on the Commission’s website.

In practice, the amendment to licence condition 15.2.2 means that operators (and their suppliers) must address the regulatory consequences of group revenues derived from grey markets where there are real doubts about the legality of the provision of gambling services to residents within those jurisdictions.

Particular focus should be placed on (a) when group revenues are likely to reach the prescribed 3%/10% revenue thresholds and (b) when an additional market is actively targeted by a group company, for example by:

  • directing the home page towards a jurisdiction in that jurisdiction’s language,
  • enabling a choice of that jurisdiction’s currency,
  • including within the payment methods available those that are only available in that jurisdiction,
  • providing on the homepage a customer service for that jurisdiction and/or
  • aiming advertising material at a particular jurisdiction.

These new changes reinforce the need for all operators licensed by the Gambling Commission to bear in mind at all times the importance of reporting key events and how to deal with failings in this respect as and when they occur.

A key event is an event that could have a significant impact on the nature or structure of a licensee’s business. It is closely tied in with the Commission’s expectation under LCCP Ordinary Code provision 1.1.1 that licensees will “conduct their gambling operations in a way that does not put the licensing objectives at risk, work with the Commission in an open and cooperative way and disclose anything which the Commission would reasonably need to be aware of in exercising its regulatory functions”. In the case of key events, such disclosure must take place “as soon as reasonably practicable and in any event within five working days of the licensee becoming aware of the event’s occurrence”. Failure to do so constitutes a breach of a licence condition. Once again, you can find more information about this on the Commission’s website.

Our own experience shows that all too frequently operators, particularly those who are newly licensed, forget to report key events in a timely manner. Examples of failings in this respect include non-reporting of a shareholder acquiring shares (or additional shares) in the issued share capital of the licensee or its holding company so that the 3% shareholding key event reporting threshold is reached or exceeded.

Sometimes, this can result in a much more fundamental breach, where the 10% shareholding threshold is reached or exceeded. That is because, when a person or other legal entity acquires 10% or more of the shares and/or voting power of an existing licensed operator (or of its parent company), a formal application to the Commission for a change of corporate control is required. Failure to do so within five weeks from the date on which that occurs represents a breach of the Gambling Act 2005. In such circumstances, the Commission is required to revoke the operating licence (or licences) in question, unless it extends the five-week period, which it may choose to do, even after the 5 weeks has expired, provided that the licence has not already been revoked.

However, it is by no means guaranteed that the Commission will agree to extend that period and a licensee will need to come up with a convincing and truthful explanation in respect of both the reason for its failure and the improvements it proposes to make to ensure that no such breach occurs again in future. We have successfully assisted a number of operators who have found themselves in such a position.

Of course, mistakes do get made. The Gambling Commission appreciates that. It is how an operator behaves once it realises a mistake has been made that is crucial. For example, it is clear from the recent Sky Betting & Gaming public statement that the penalty package of over £1 million incurred in that case would undoubtedly have been higher had Skybet not:

  • made admission of its failings to the Commission,
  • been proactive and timely in self-reporting of all issues identified,
  • been open and transparent from the outset of the investigation and fully co-operative with the Commission throughout its investigation,
  • initiated thorough internal investigations and taken proactive action to address identified failings and weaknesses, on which it fully reported to the Commission, and
  • provided demonstrable insight into the seriousness of its failings.

It is abundantly clear from the Commission’s Licensing, compliance and enforcement policy statement, Statement of principles for determining financial penalties and Indicative Sanctions Guidance that dishonesty or any attempt to conceal any failure will result in a more extreme sanction being imposed than might otherwise have been the case, not only in respect of the operating licence(s) in question but also in respect of the personal management licence(s) of those senior management individuals involved.

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David Clifton – Director – ‎Clifton Davies Consultancy Limited

The Betting industry’s regulatory agenda and current context will be discussed at the upcoming ‘Betting on Sports Conference’ (#boscon2018 – Olympia London-18-20 September 2018). Click on the below banner for more information…