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Honesty is the best policy

On the subject of gaming, the last Government seemed not to know whether it was coming or going. The general election result has at least sorted out that conundrum for the next few years, but the consequences of their ill judged attempt at regulating Remote Gaming in the UK will be with us for some time. Labour’s vacillation between the strident anti-gambling stance of the Daily Mail (allied, of course, to their own much proclaimed moral values) and the desire – indeed, need – to generate income led to the hugely watered down Gambling Act of 2007. The Act, of course, was not a bad idea. Consumers need to be protected and the stipulation that only those companies who were regulated either by the EU countries or an approved ‘white list’ of regulators could operate in the UK was an eminently sensible step in ensuring that the operators all played by, broadly, the same rules and to, broadly, the same high standards.

Yet the diminution of all the expansionist parts of the Act meant that the former Government’s projections of what it could earn out of regulated gaming nosedived and, in a panic, they imposed a 15% duty on all UK based operators. The result, which was no surprise to anyone remotely connected to gaming, was that practically all the operators who could afford to – including notably the Government’s own gambling operator, the Tote – relocated their businesses overseas either in whole or in part, in an attempt to ensure some degree of commercial survival. Not to have done so would have left them all in a fantastically disadvantaged position against all overseas competition. That said, due to the ‘White list’ of regulators, consumers did benefit as a consequence of playing in a regulated market. Furthermore, all the Gambling Commission’s research indicated that, despite all the marketing efforts of the operators, not only was there no evidence of an increase in problem gamers but also that gaming remains a minority pursuit. Indeed, the majority share of the Gaming market belongs to the National Lottery and scratch cards, which, it’s worth noting, are not subject to the same regulatory requirements as gambling operators.

All of which makes the now ex-Minister of Sport, Gerry Sutcliffe’s announcement on 7th January 2010 that the Department for Culture, Media and Sport, would consult on “the feasibility of extending the existing licensing system for remote gambling to overseas-based operators that offer services to or advertise in the UK” even more puzzling. However, the publication of the consultation paper on the Regulatory Future of Remote Gaming, which emanated from it, was even more puzzling still.

The three stated prime objectives of the Consultation are to keep crime out of gambling, to ensure gambling is fair and open, and to protect children and vulnerable adults from harm. Objectives all reputable operators would be more than happy to endorse and support. However, what is not clear is in what respects the current Act that the Consultation seeks to change is not delivering against these objectives. Certainly, there are improvements that can be made. Take the National Lottery, for example, which offers by far the largest ‘wins’ around. Does anyone know of a gambling operator who offers a £100k instant win scratch card to under 18s, with the promise of ‘it could be you’ and where a winner can simply walk into a retailer and claim their small win of several hundred pounds without any requirement to provide any verification? Yet this, notwithstanding the objectives of the Consultation, remains entirely legal and the DCMS has no plans to change it, while the Gambling Act that is only a couple of years old and which the Department claims has “had considerable success” is to be changed, despite the fact that there is no evidence to support the need for change in the first place. The truth, of course, is that from the Government’s point of view, this isn’t about regulation at all. It’s about money. As the consultation itself says, the DCMS “has launched a consultation on licensed online gambling, underlying which has been the increasing trend for UK operators to move offshore”; the reason for which, self-evidently, is the lower tax rates available offshore.

Yet, unbelievably, this consultation is not being done in tandem with the Treasury. As Nick Hawkins of Danoptra said at the recent GTECH G2 Breakfast Seminar to discuss this issue, the Government felt they needed to do something. This was something. And they were doing it.

The limitations of the Consultation, however, do not stop there. The three fundamental criteria for the consultation – and, therefore, the then Government’s policy -are consistency, fairness and cost recovery. Well, it could be argued that the only consistent thing about the last Government’s approach to gaming to date has been its inconsistency, but, if consistency really was its aim, was it planning to address the anomaly of the National Lottery? Did it even propose to come up with a formal definition of ‘gambling’? As for fairness, they appear to be on pretty thin ice too. It is not even proposed to have a uniform set of requirements. This will, inevitably, introduce a degree of subjectivity which, in turn, will provide less robust protection for the consumer. What’s more, the proposals are toothless and the Consultation even concedes that it would be unable or unwilling to pursue any perpetrators since that would require, at the very least, the express support of overseas regulators and law enforcement bodies. Indeed, one suspects that, even if it could, it wouldn’t, as it would cost too much; which leads us on to the cost recovery part of their criteria.

To begin with, cost recovery does not seem to include a desire to spend less or, at the very least, spend more effectively. Rather they argue that regulation costs money and so they seek merely to expand their scope so that they can justify imposing further costs on the gaming industry. Hence, they propose to duplicate a set of the existing procedures that strong regulators, such as Alderney, already enforce. But why should they care when this is, in reality, only about raising additional income. Hence, the fudge about ‘separating’ regulation and taxation. From an operating perspective, the two are part of the same issue. The Consultation prior to the act had clearly highlighted that operators would willingly stay on shore if the tax rate was set at an appropriate level. And what did the Government do? It ignored the findings of the Consultation and imposed a 15% tax rate and, lo and behold, everyone went offshore. And you don’t have to be a chartered accountant to work out that 15% of nothing is worth a lot less than a smaller percentage of a huge amount. The folly of this became even more apparent when Italy, the next market to regulate itself, found a way of combining Government income with enforced regulation. As a result, the Italian Government is currently making a fortune from its e-gaming industry while the UK Government is making the square root of not very much at all. The urgency of cost recovery can be seen in this light, as the consequence of failure and comes across as being a bit like the gambler who took a punt on a 500/1 three legged donkey against all the better advice of the bookies, but who now wants his money back, because it didn’t result in the win he had hoped for.

However, changing the rules of engagement, which responsible operators had incurred considerable expense in complying with, quite so soon cannot be described as ‘fair’ while the conclusion that only UK regulation will be good enough is hardly ‘consistent’ with the reality of ‘white list’ status and the purpose it was meant to fulfill.

This consultation, in short, seemingly constitutes nothing less than an attempt to try and fix a problem of whose existence there is no proof with a solution that makes no palpable improvements on the current system and, in some areas, makes it significantly worse. For any Government, regulation is clearly about its ability to generate revenue. For an operator, however, it is about a degree of operating certainty, a level playing field, a genuine desire to protect its customers and itself from crime and the opportunity to make a reasonable return on its investment and activity.

Everyone knows that and I don’t know why the last Government couldn’t admit it? Of course, now we have a new Government and, with it, the possibility of some rational and honest conversations about the best way forward. My advice to them would be to be upfront about what they are setting out to achieve and, then, consider carefully which form of regulation and tax is most likely to achieve their objectives rather than the ready, fire, aim approach of the last lot. In particular, they need to distinguish between penalizing the responsible operators just to try and have a crack at the less responsible ones, particularly since they admit they can’t enforce it. They also need to examine what an additional levy of tax or license fee is going to have on the shape and texture of the market place. Virgin Games, for example, which has always played by the rules and not taken bets from markets where it is expressly forbidden, does not have available the deep pockets of many other companies who profited enormously from, say, taking illegal bets from the US. This approach could therefore punish our honesty by asking us to pay too high a price to do business, while leaving those companies, who showed blatant disrespect for the laws of the jurisdiction they were operating in, in complete control of the market. Is that what the new Government wants? I suspect not, but it needs to make up its mind, free from its political inheritance, including this entirely unhelpful Consultation Paper.

As the old saying has it, if you do not know what direction you are sailing to, then no wind is favourable.

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