GOLdILOCKS ANd ThE ThREE LICENSING

OBjECTIvESveryone is familiar with the tale of Goldilocks, whoupon entering the house of the three bears seeksto find a bowl of porridge, a chair and a bed thatis “just right”, not too hot and not too cold, not too

soft and not too hard. In many ways the British GamblingCommission faces much the same dilemma, they too mustfind the “just right” approach to each of the three licensingobjectives (in summary, preventing gambling from beingassociated with crime, protecting children and vulnerablepeople from being harmed by gambling and ensuringgambling is fair and open). Regulation that is “too soft”allows regulated entities to fail to reach the requiredstandards, but regulation that is “too hard” risks drivingbusiness into an unregulated black market.

There is no denying that the Commission’s approach over thepast few years has become “harder”, resulting in an increasingnumber of investigations and licence reviews. Anunprecedented level of regulatory action by the Commissionover the past 12 months has led to a total of around £24m infinancial penalties being paid by gambling operators. Whetherthey have been the subject of enforcement action, aninvestigation or a routine compliance assessment, licensedoperators will certainly be feeling the effects of an increasedregulatory burden.

Despite this, Tom Watson MP, Deputy Leader of the LabourParty, believes that we “have inadequate regulation” (debate inthe House of Commons on Problem Gambling, 2 July 2019) and,in a speech to the Demos think tank on 18 June 2019, called forthe creation of a gambling ombudsman, asking of the current

Melanie EllisPartner

Northridge Law

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system “where is the framework of consumer protection?”. So, with accusations of being both “too hard” and “too soft”,has the Commission in fact got things “just right”?

PenaltiesOperators may understandably be wondering what use has beenmade of the £24+m paid in penalties in the last year. Just overhalf of this amount represents fines imposed by the Commission(these go into the Consolidated Fund – essentially theGovernment’s bank account), around £9m went toGambleAware, “accelerating delivery of the National Strategy toReduce Gambling Harms” or more generally a “gambling harmrelated charity”, and around £2.4m was repaid to victims ofcrime. It certainly seems fair to say that the level of fines hasgenerally increased, with seven figure sums being far morecommon that they had been in the past, and penalties as highas £7m should certainly make operators sit up and take notice.

The Commission launched the new “National Strategy toReduce Gambling Harms” in April this year. Teasing out how thefunds given to accelerating delivery of this Strategy this willactually be spent is challenging, as the Strategy’s“implementation plan” has yet to be published. It appears fromstatements such as “The aim is to make significant progresstowards an effectively commissioned, comprehensive nationaltreatment and support offer that meets the needs of currentand future service users” that some of the money will gotowards increasing the availability of treatment and supportservices, such as the helpline provided by GambleAware,although the strategy document notes that “waiting lists foraccess to these services are relatively short”. It would be fair tooperators paying significant sums to support the Strategy toreceive more specific information about what the money will beused for; hopefully this information will be forthcoming soon.

To put these amounts into context, however, using figuresput forward in the recent Problem Gambling debate in theHouse of Commons, the gambling industry generates around£14.5bn in GGY per year and £3bn in tax revenue. The annualcost to the economy of gambling addiction is estimated at£1.2bn. It may well be fair to expect the costs of gamblingaddiction to be met by the industry, in which case its taxpayments more than cover it. But if the gambling industry issupposed to cover the costs of gambling addiction in additionto the tax revenues, the revenue from fines, financialsettlements and voluntary donations comes nowhere close.

Enforcement themesWith so much on the line, what can be done to minimise therisk of enforcement action if you are an operator? A goodstrategy is to understand the failings made by your peers andlook to make sure your own policies and procedures don’t leaveyou open to the same charge.

The public statements published by the Commission showsimilar recurring issues. One of the main themes is failings inenhanced due diligence, which often become apparentfollowing customers spending significant sums of money which

turn out to be stolen or obtained through fraud. Often,enquiries have been made about the customer’s overall wealth,but no evidence has been obtained of the source of the actualfunds received by the operator. Another common theme is thatthe operator failed to interact with a customer either earlyenough, properly, or at all. As demonstrated by the past years’enforcement action, customers are sometimes able to spendsignificant sums of money before any enquiries are made toassess the legitimate origin of the funds and/or whether thecustomer may demonstrating problem gambling behaviour.

An emerging theme is that of “affordability”. Increasinglyoperators are being expected to consider whether a customer’slevel of gambling is affordable for them and, in its recentEnforcement Report, the Commission has been more specificabout what this should involve.

Source of Funds enquiriesIn the recent case of Platinum Gaming Limited (aka Kindred andUnibet), a customer lost a total sum of around £620,000 in a 21day period in October 2017. The customer had been flagged asa high-risk player when he first played at a significantly lowerlevel in February 2017, however the Commission say theoperator did not make “adequate enquiries” about the sourceof funds (“SOF”) he was using to gamble. After 18 days of playin October the operator made source of wealth (“SOW”)enquiries and once it received a completed SOW questionnairefrom the client it requested SOF information. The customer didnot provide this which led to the account being closed, however

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by this time the customer had spent £620,000 of what turnedout to be fraudulently obtained money. If the operator hadrequested SOF information in the first few days after thecustomer returned in October, it is likely that the account wouldhave been closed before such large sums were spent.

The Commission has always been reluctant to specify anexact figure which should trigger a requirement for SOFevidence, perhaps fearing that it would lead to a “race to thebottom”, with enquiries being carried out unless and until thatfigure was hit. However, the fact that a large proportion ofenforcement action relates to customers, frequently thosesuffering from a gambling addiction, spending six figure sumswhich turn out to be stolen, indicates that the current regulatoryapproach is not “just right”.

A step towards the Commission being more specific as towhat is required was made in the recent case of Casino 36Limited. As part of a regulatory settlement with the operator,the Commission imposed new licence conditions, including thatthe licensee must carry out, on an annual basis, enhanced duediligence on its top 125 customers by drop and top 125customers by loss. The licensee also agreed to instructindependent auditors to carry out a review of the current top100 customers in respect of their SOW and SOF and report backto the Commission on the results.

Customer interactionThe Commission has recently carried out a public consultationon customer interaction. It proposes to introduce a new licence

condition which states that:“Licensees must interact with customers in a way whichminimises the risk of customers experiencing harms associatedwith gambling. This must include:1. identifying customers who may be at risk of experiencing

harms associated with gambling.2. interacting with customers who may be at risk of

experiencing harms associated with gambling.3. understanding the impact of the interaction on the

customer, and the effectiveness of the Licensee’s approach.”

Without wishing to downplay the importance of carrying outinteractions with at-risk customers, in my view, the proposals gotoo far. Perhaps unintentionally, the proposed wording of thenew licence condition seems to impose a strict liability onoperators to identify and interact with all customers who maybe at risk of experiencing harm. A failure to identify one at-riskcustomer, to interact with them and/or to understand theimpact of the interaction on them, would potentially be alicence breach.

The proposed condition confuses the desired outcome(customers who are at risk are identified and subject to aneffective interaction) with the required behaviour of licensees.The latter is the appropriate subject for licence conditions. TheCommission should require operators to implement policies andprocedures which maximise their chances of identifying at-riskcustomers, but cannot require them to actually identify everysuch customer.

The outcome of the consultation and final wording of thenew licence condition is still awaited.

AffordabilityA further theme of recent Gambling Commission commentaryhas been the issue of “affordability”. On the one hand, it is clearthat if an individual’s gambling is not “affordable” for them,there is a risk that they are suffering from problem gamblingand/or turning to criminal activities to fund their gambling. Onthe other hand, “affordability” is very difficult to measure orestimate and, perhaps more importantly, gambling operatorsare put in the difficult position of dictating to a customer onwhat they should or should not spend their income or savings.Certainly, for higher value or “VIP” customers, affordability hasalways been considered, perhaps indirectly, under EDDprocedures. If EDD on a customer spending £10,000 per monthreveals that they have personal wealth in the hundreds ofmillions, it would be reasonable to allow them to continuegambling because (in the absence of other indicators) the riskthis spend level is indicative of problem gambling or criminalactivity is low, in other words, they can easily afford this level ofgambling activity.

The Enforcement Report, however, focuses on the averageperson in its section on affordability. The Commission gives datafrom a YouGov survey which asked participants how much“discretionary income” they had to spend each month. TheCommission concluded that the reasonable range of disposable

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income was between £125 and £499 for much of thepopulation. The Commission states that “the above disposableincome data identifies clear benchmarks that should drive SocialResponsibility (SR) triggers”.

I’ve replicated the data published by the Commission belowbecause there is some mysterious missing data: one wouldexpect the total percentages for each age range to add up to100%, because they ranged from £0 to £1,500+ and shouldtherefore encompass every possible disposable income. But,for example in the 18-24 age range, only 74% of the populationare represented. Even if 26% answered an unshown option“don’t know”, the accuracy of this data has to be questioned.No link is given to the survey results to enable operators to usethe source data to form an evidence-based view on affordabilityfor their own target market.

Source: Raising Standards for Consumers: Enforcement report 208/19, Gambling

Commission

Concerns about the YouGov data aside, the Commission isimplying that, in the absence of documentary evidence of thedisposable income of their actual customer base, operatorsshould be assessing affordability for those customers whosespend exceeds that which would be realistic for someone withan average amount of disposable income. In the EnforcementReport the Commission recommends that operators “considertheir customer base and their disposable income levels as astarting point for deciding benchmark triggers” and “if anoperator is going to set specific triggers for a customer base notrepresentative of the general public, various documents sourcesshould be relied upon, but they must contain sufficientinformation to substantiate the trigger level set.”

The Commission does not set out how the affordabilityassessment should be done, but it would presumably need togo further than an assessment of the customer’s income. Anindividual with an annual income of, say, £50,000 could have amonthly discretionary spend ranging from nothing (for exampleif they are the sole earner for a family of five), through £3,000(for example if they live at home with no expenses other thantax), or higher (for example if they have considerable inheritedwealth). Gathering more detailed information than a customer’sannual income will inevitably be a complex process and it mustbe questioned whether it would be proportionate to carry outsuch an investigation on all customers spending the suggestedfigure of £125-499 per month.

What should be done based on the affordability assessmentis also not the subject of any recommendations. Acommunication from a gambling operator to the effect that“we’ve done some digging and decided that you’re spending too

much on gambling as compared to what we’ve found out aboutyour annual income” is quite likely to be unwelcome. As ever,there is a need to balance individual freedom to spend moneyon gambling as a legitimate leisure activity with the need toprotect the public from the dangers of problem gambling andgambling using stolen funds.

Whilst there are obvious difficulties in assessing affordabilityand then acting on that information, there may be commercialbenefits to doing so. As long as a customer is gambling in waythat is affordable for them, they are likely to continue to be agood customer on a long-term basis. Whilst (subject toconcerns about the accuracy of the figures) it is helpful that theCommission has given some guidance here as to when checksshould be carried out, it ought to clarify what those checkswould entail and what operators should do based on the results.

“Just right”?The story of Goldilocks ends with the little girl waking up to findthe three bears looking down at her, whereupon she jumps outof Baby Bear’s bed and runs away into the forest. It was nevermade clear in any version of the story I read whether shesuddenly felt remorse for her actions and saw the error of herways, or was just running away to find another house to causehavoc in. The comparison between Goldilocks and the GamblingCommission breaks down a little here, but it is does raise apertinent question: to the extent that gambling operators areunder increased scrutiny by the Commission, will it lead tobetter customer outcomes, or just more uncertainty foroperators?

I would suggest that action taken out of fear of enforcementaction is unlikely to be as effective as changes made out of agenuine understanding of the risks and potential harms to thebusiness. The approach to regulation that I would like to see istherefore not “harder” or “softer” but “more collaborative”.Rather than just specifying the ultimate outcome to be achieved(for example at-risk customers being identified or customersgambling in a way that is affordable) and highlighting caseswhere that outcome is not met, the Commission could betterpromote the three licensing objectives by guiding licensees towhat acceptable procedures would be. :: CGi

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Melanie Ellis is a partner at Northridge Law LLP, with 13years’ experience as a gambling regulatory lawyer. Melanieadvises on all aspects of gambling law including licenceapplications, compliance, advertising, licence reviews andchanges of control. She has acted for a wide range ofgambling operators including major online and land-basedbookmakers and casinos, B2B game and software suppliersand start-ups. She also frequently advises operators ofprize competitions and social gaming products. Melaniehas a particular interest in the use of new technology forgambling products and novel product ideas.

MELANIE ELLIS