SBC News Winning Post - Gambling debate rages on in British Parliament

Winning Post – Gambling debate rages on in British Parliament

Regulus Partners, the strategic consultancy focused on international gambling and related industries, takes a look at some key developments for the gambling industry in its ‘Winning Post’ column.

Belgium and Australia: Fiscal-regulatory policy – The house doesn’t always win

Gambling operators have been on the wrong side of global fiscal-regulatory developments with alarming regulatory of late; but trends are there to be bucked. This week, the Kindred-led challenge of Belgium’s application of VAT to online (adding an effective 17% to an 11% regional GGR tax) was upheld in domestic (Constitutional) courts. Complex and multi-layered tax policies can cause material market distortions (from high turnover taxes to the application of input VAT on only domestic businesses in the UK and elsewhere) and are more the rule than the exception. Therefore, Kindred’s victory should be seen as a rare blow for clarity and common sense against over-bureaucratic and typically self-defeating policy.

The yin to Belgium’s yang was Australia’s proposal to ban betting on all lottery products, including international draws (shortly after reinforcing bans on online in-play and gaming). This was a long time in the lobbying and is a more stringent example of the UK’s Euromillions position. The fungibility of lottery betting and underlying play is moot (there is a basic common-sense overlap, there is also likely to be material divergence in critical heavy user cohorts); the enormous difference in relative tax take is not.

Governments the world over are grappling with a simple, inevitable and remorseless (in both senses) problem: offshore digital businesses are much harder to tax than domestic landbased ones (half fixed in Belgium by landbased licensing criteria, although likely causing more problems than it solves in this case; Australia’s fix is emerging state POC regimes), and the economic direction of travel is obvious. This is not a gambling specific problem, but gambling monopolies have been the ultimate in tax collection (often c.50% of revenue, including hypothecated good cause and sport contributions, regardless of the products covered by the monopoly), while remote gambling companies have been some of the most adept tax-avoiders within the digital economy (among very broad and diverse company).

Policy-makers are therefore left with three choices from a gambling-specific point of view – all in different ways unpalatable. First, they could choose to oversee an expansion of gambling to plug the tax hole: since this would have to be c.2-3x on a like-for-like basis, this is a big task regardless of the potential for moral panic. Second, they can aim for higher online taxes to mitigate the impact (vide Belgium’s 11%: half the headline rate of VAT and no federal position; the unsatisfactory opposite of Australia’s federal 10% GST but historically no provincial position). This can be effective but the risk of poor channelling is high (especially if the taxes are mechanically ill-considered). Finally, they can simply try to reinforce the monopolies as much as possible and kick the can down the road. The political attractiveness of this solution is as obvious as the problems for commercial gambling operators and potentially for customers.

The only way remote operators can hope to mitigate this very serious medium-term fiscal-regulatory threat, in our view, is to demonstrate that: a) they have issues with bad tax policy, but not paying sensible rates of tax per se; and b) that they are safe places for citizens to gamble. The problem for the industry’s burgeoning risk register is that far too many operators have been woefully bad at demonstrating either.

UK: Regulation – Gambling Commission reaches for remote control

The future regulatory landscape for remote gambling in Britain moved into sharper focus this week with yet another announcement from the Gambling Commission. Having shown a bit of ankle in its advice to the DCMS last week, the regulator lifted the hem a bit further in announcing four areas of regulatory tightening and giving notice that greater scrutiny could be expected in other areas too.

The first two issues highlighted in the Commission’s ‘Review of Online Gambling’ related to customer verification and due diligence. The regulator clearly intends to require operators to verify a customer’s age prior to the commencement of gambling (including free-to-play games) rather than within 72 hours of deposit. This change is long overdue (indeed, it was one of the neglected recommendations from the Budd Report in 2001) and closes the gap between remote and landbased regulation. There is also an expectation that greater customer due diligence (rather than simply age verification) will take place prior to gambling and that gambling may need to be restricted while assurance is pending.

The Commission used its review to remind operators that it was also consulting on changes to marketing (in the light of the joint investigation with the CMA); and that it would issue new guidelines in order to beef up customer intervention procedures.

In addition to these well-flagged issues, the Commission has identified a number of aspects of remote gambling that it considers in need of further investigation. It will seek to assess the effectiveness of responsible gambling measures (where there is often a gap between the hyperbole of PR and the real world); risk ratings of particular products and features; the protection of customer funds and dormant account charges in particular; the anomalous (compared with landbased licensing) practice of permitting gambling by credit card; and account withdrawal processes (as highlighted by both the CMA investigation and by Jonathan Parke in his review of online gambling last year).

The regulatory environment is clearly constricting for both landbased and remote operators. It was always likely that there would be a leavening at some point – and for a while there may have been a chance of mutually beneficial harmonisation. For now, that prospect appears to have disappeared. The instinct for operators may be to push back on the Commission’s proposals – but it will be in their own interests to first consider why the regulator feels the need to pursue these changes and work out which (if any) of them are actually unreasonable.

There may be a chance to divert the course of regulatory change – but this will require operators to come up with better solutions than the Commission is advocating in order to achieve better outcomes on licensing objectives. For a long time, the regulator has been prepared to allow operators to take the initiative. Ironically, patience appears to be running out at precisely the time that operators are being most active in this area. Thus, while the Commission may feel entirely in becoming more assertive, it will need to balance this against the need to maintain an enterprising (rather than merely compliant) approach to responsible operation.

UK: In Parliament – Harris bombs on

Carolyn Harris is a persistent soul. This week, the Labour Member of Parliament for Swansea East piled in another seven Parliamentary Questions on FOBTs and other gambling matters. Harris, who is running for Deputy Leader of the Welsh Labour Party probed on the extent of ministerial engagement with betting firms on the one hand and faith groups on the other; money laundering in gambling; the accuracy of KPMG’s ‘Scarlet Pimpernel’ report for the ABB; and the effect of stake reduction on B2s of reducing the maximum stake to £2 a spin.

This last PQ coincided neatly with the publication of a new report from the Centre for Economics and Business Research which estimated that problem gambling in relation to FOBTs resulted in costs to the public purse of “£116m in hospital inpatient visits, £32m in mental health services and £16m through criminal behaviour”. The Cebr report was funded by bacta whose antipathy towards the FOBT is no secret – and illustrates the threat to gambling companies as the focus of public policy shifts from problem gambling prevalence rates to harm and cost. We can expect more reports like this in the future – and not all of them will be aimed at the betting shop operators.

Elsewhere, Lucian Berger (Lab, Wavertree) returned to the theme of problem gambling and health services. Berger tried to bring attention to this issue some years ago when serving as shadow minister for mental health – largely without success. In the current environment – and with her own party running a review of gambling and mental health – she is likely to encounter a warmer response this time around. Meanwhile Thelma Walker (Lab, Colne Valley) pushed the Government on plans to enforce the 9pm watershed for gambling adverts. This time around at least she seems destined to be disappointed.

UK: Regulation – Sorry seems to be the simplest word

This week, it was the turn of Sky Betting & Gaming to receive a “spanking” from the Gambling Commission for licensing failures. The Leeds-based operator agreed a £750,000 punitive settlement (rounded up to just north of £1m after dispersal of ill-gotten gains) with the regulator for both allowing excluded customers to set up new accounts, for continuing to market to excluded customers and for failing to return funds to excluded customers.

The sanction appeared to confirm that there is a market rate for self-exclusion breaches online. SBG coughed up around £600 per customer, which is broadly consistent with the amount that 888 paid under similar circumstances (though applied to around ten times as many customers) last year.

The £50,000 sanction for failure to return funds to excluded customers may appear the harshest element of the package given that on average, SBG held on to an average of just £1.41 per customer (and no amounts above £4 were involved). It is questionable how much harm occurred as a result of this – but the company took its medicine without complaint. Indeed, in the statement from the company’s chief executive there was that rarest of events in gambling – an apology.

In recent times, we have seen a number of CEOs humbled by regulatory naming and shaming. There are very few major operators who have escaped the process – but expressions of remorse have often been qualified.

Flint’s comment that the company “could and should have made it harder for self-excluded customers to open duplicate accounts with us and for that we are sorry” is an important component of rebuilding trust – and an example to regulator and regulated alike.

USA: Sports – what’s the catch?

One of the more controversial on-field issues in American sport has been addressed this week, as the NFL’s 32 teams voted unanimously to approve changes to the ‘catch’ rule. The previous rule required the player to retain control of the ball while going to ground, a process that often isn’t immediate, therefore allowing a window of time between when a catch seems to be complete, and when it is ruled so. The new rule simply requires two feet, or another body part, to be on the ground while the player is in control of the ball, followed by another “football move” – the NFL has provided a list of examples.

The two main objectives of this change seem likely to be achieved: first, reducing the number of instances of touchdowns being ruled ‘good’ on the field, only to be overturned through replay; and second, simplifying the rules for the fans. The possibly unintended (but not entirely negative) consequence will be an increase in the number of fumbles and in consequence, defensive touchdowns.

From a betting point of view, this change may be a small headache for those operators using fully automated models (with the probability of completion and fumble both increasing). However, with traders able to quickly judge the result of every play, we may see improvements to market up-time, an important step for growth of the product, both within Europe and potentially the US.

Global: Cricket – What do you get if you put a piece of sandpaper down your trousers?

Cricket Australia (CA) has acted swiftly to ban its men’s team captain, Steve Smith, and vice-captain, David Warner, from international cricket for one year each, and opening batsman Cameron Bancroft for nine months, in the wake of the ball tampering scandal which emerged last week. Both Smith and Bancroft have been suspended from captaining Australia for at least two years, while Warner has been told he will not be considered for any team leadership positions in the future. Each player will also undertake 100 hours of voluntary service in community cricket. The sanctions imposed by CA are swift and meaningful (some say harsh) and send a strong message.

Interestingly, the ICC had already given Smith the maximum penalty it could under its Code of Conduct – effectively a one match ban and a fine of 100% of his match fee.  Bancroft received slightly less (perhaps due to some recognition that he was the player apparently asked to field with a piece of sandpaper down his trousers), while Warner was not sanctioned by the world governing body.

Also this week, a Zimbabwean cricket official was banned for 20 years by the ICC for approaching the Zimbabwean captain in a match-fixing attempt. There is a (logical) general consensus that match-fixing is more serious than cheating to win. However, given the widespread condemnation across the game (and beyond) for the way these Australian players have acted, and the differences between the ICC’s and CA’s approaches to sanctioning them, we wonder whether the ICC has sufficient tools in its enforcement armoury to adequately address all issues which affect the integrity and reputation of the game.

UK: Sports integrity – Red faces and green backs

UK punters (or some generous bookmakers) were left out of pocket this week as the result of a miscalled photo finish at Kempton racecourse. While costly and embarrassing, mistakes happen and it is difficult to see a better solution than the occasional red face and empty satchel (the cost of effective insurance is likely to be prohibitive). This status quo for the UK and the vast majority of countries recognises that while betting and sport are very closely entwined, especially from an integrity perspective, participation is at respective industries’ own risk.

This could change if a significant transfer of value were to occur from betting operators to sport specifically for the purposes of integrity. Something should never be for nothing and while an integrity fee which in theory further protects the sport (and therefore also bookmakers and customers) from integrity issues might suit some, it won’t stop mistakes happening, nor is it likely to be what many stakeholders had in mind when they first saw the dollar signs.

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