Harris Hagan: Legal Eye… Why Culture Counts on PML demands

Seeking to improve the industry’s accountability, the UK Gambling Commission (UKGC) has signalled its intent to tighten its reins on individual licence holders.  Bahar Alaeddini, Partner at Harris Hagan for online gambling, breaks down why transforming corporate culture by driving personal accountability and responsibility will be the key to better outcomes.

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 “[to drive] 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” [1] 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:

1. the “office of director” (where the licensee is a company); and
2. any position where the appointment terms require the person “to take or share responsibility for”:
3. “the conduct of a person who performs an operational function [2] in connection with a licensed activity”; or
4. “facilitating or ensuring compliance with terms or conditions of the operating licence”.

What are the proposed changes?

The Gambling Commission proposes to:

1. 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”;
2. 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);
3. 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
4. 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, [the Gambling Commission will] seek to reduce this risk. This also supports [its] 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 “[t]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 16th 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 with Harris Hagan if you would like to discuss the consultation further or receive a deck about our training services, including client testimonials.

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

1. the overall management and direction of the licensee’s business or affairs
2. the licensee’s finance function as head of that function
3. the licensee’s gambling regulatory compliance function as head of that function
4. the licensee’s marketing function as head of that function
5. the licensee’s information technology function as head of that function in so far as it relates to gambling-related information technology and software
6. 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
7. 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.

[2] “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.