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Winning Post 17 – 06 -16

Australian in-play – changing the rules of engagement

Last Friday, Australia’s Northern Territory regulator informed its licensees (substantially all Australian corporate bookmakers) that they must desist from offering mobile in-play betting within 28 days, ahead of a new licensing condition being added which will prohibit ‘click-to-call’ in-play. Ladbrokes has already pulled its in-play product in Australia. The regulator’s reasons for this course of action could not be clearer: “…to head off [potential] future action by the Federal Government, which may ultimately result in it taking control of the online wagering industry”.  This is now all well-known – but it is worth highlighting some clear lessons for the industry, which apply across jurisdictions, sectors and products.

Supply-side regulation is becoming less powerful

Online gambling has its licensed roots in supply-side regulation, eg: Gibraltar for UK-facing betting; Curacao for US-facing (pre-UIGEA); the Philippines for Asia, and; Northern Territory for Australia. NT is part of Australia, so it is not ‘offshore’ on a Federal basis, but is separate from the populous states (principally Victoria and New South Wales) in a federal system which regulates gambling by state. Indeed, the battles between State and Federal in Australia largely mirror the offshore – Member State – EU issues in Europe: mostly because the underlying causes are so similar.

Globally, more and more populous jurisdictions are adopting a ‘Point of Consumption’ approach. Europe (EU) is leading the way, with 56% of its c. 500m population now under some sort of POC gambling regime (ex. Germany). This is directly reducing the importance of supply-side regulation.  Indirectly, however, supply-side jurisdictions are also feeling the pressures of POC. Almost by default, POC jurisdictions are (relatively) large and populous; POS jurisdictions are the opposite: NT’s population is under 250,000; Malta’s is c. 420,000, Curacao’s c. 150,000 and Gibraltar’s just 30,000. These jurisdictions need the support of their larger neighbours for a whole host of things: regulators might talk a good game with regard to defending liberal regimes in the face of POC intervention, but politically they are simply not equipped to do so (though there have been some notable efforts, such as Gibraltar vs. UK; Antigua vs. US through the WTO). Stakeholders should expect more pressure of this type going forward, both direct and indirect.

Demand-side regulation is far less interested in supporting the sector

The other side of this ‘heads I win; tails you lose’ (for .com) coin is that many operators have grown up with POS regulators which are, broadly speaking, supportive of the sector. This is logical: jurisdictions with small populations like attracting the HQs of a range of cross-border businesses, remote gambling being just one. They gain economically from the corporate presence and so it is in their interest to keep the supply happy. This is not the case with POC regimes, there biggest concerns are consumer facing, whether real (player protection, keeping crime out), self-serving (protecting incumbents) or political (eg, reflecting a moral stance on gambling). In this environment, being (perceived to be) too liberal with operators can invite political intervention to tighten regulations. Moreover, it is (increasingly) POC regimes where the consumers are. The dynamic is completely different, and requires handling in a completely different way by all stakeholders, operators in particular.

Annoying governments is a really bad idea

With this – fairly obvious and completely remorseless– dynamic in mind, gambling stakeholder management needs to change. It must be collaborative, not combative. It must be responsible as well as (sometimes instead of) commercial. Compliance, political management and good governance must be – and be seen to be – driving behaviour at the highest level. In a POC world, it is no longer good enough for senior management to operate well and leave engagement and compliance to others: it is now the key job of board-level management, or they risk damaging their business and their sectors, potentially irreparably. During the First World War, French PM George Clemenceau said that war was too important to be left to the generals – he was proved right; remote gambling is now too important to be left to the ‘operators’: a new style of management is required if the sector is to enter the next phase of strategic growth, rather than face further costly regulatory defeats.

UK: in Parliament: Worrier Bishops and a troubling Motion

On Monday, a new Private Members Bill to endow local authorities with the powers to restrict FOBTs (B2 machines) in betting shops was read for the first time in the House of Lords. The bill was introduced by the Bishop of Bristol on behalf of the Bishop of St Albans.

Meanwhile, Carolyn Harris’s (Lab, Cardiff South) Early Day Motion to reduce staking limits on B2 machines added a couple more signatures to the list, including Alan Johnson MP (Lab, West Hull and Hessle). The former Home Secretary joined Chuka Umunna (Lab, Streatham) and 46 other MPs in calling for a Government crackdown on the machines.

The EDM is now the tenth most supported in this Parliament, having been signed by 48 MPs (7% of all MPs). Unsurprisingly, it has received particularly strong support from the Opposition parties with 24 Labour MPs (10% of the Parliamentary Labour Party) and 13 SNP MPs (24%) endorsing the motion. The bill is also supported by 100% of the Green Party’s parliamentary representation (i.e. Caroline Lucas of Brighton Pavilion).

The strongest support comes from constituencies in Scotland (14 MPs or 24% of the total) and Wales (23% – nine MPs including two of the three Plaid Cymru Members), which may be interesting given moves to devolve gambling regulation to Holyrood and the Welsh National Assembly. With the ‘Excessive Gambling Wales’ conference taking place in Cardiff next week, we may well see Welsh support for the bill increase.

UK: Regulation: Banged to Rights said Fred

BetFred this week became the latest British gambling operator to be sanctioned by the Gambling Commission for compliance failures in respect of its anti-money laundering and social responsibility measures. The statement centred on a recent court case in Yorkshire involving the theft of more than £850,000 from a company by an employee. The court heard that “by far the largest portion” of the stolen funds were used to gamble online with BetFred.

BetFred has agreed to pay £817,000 in respect of failings in its ‘Know Your Customer’ checks. This comprises £443,000 in reparations to the victims, £344,500 in lieu of a fine for “socially responsible causes” and £30,240 to cover the costs of the Gambling Commission’s investigation.

Over the last ten months, sanctions from Gambling Commission have resulted in the payment of £3.75m in reparations in respect of such failures – from amongst the biggest names in Britain’s betting and gaming industry. Quite aside from the financial penalties (which, given the sums taken in the first place, are not punitive), the industry has been asked to consider the lessons from these cases and improve. This represents a tolerant and enlightened approach from a regulator seeking to influence rather than coerce higher standards. It also demonstrates a faith in the industry’s willingness to learn from mistakes – a faith that gambling has a clear self-interest in repaying quickly and fully: it is unlikely that being caught a second time will see such benevolent justice.

Match Fixing: Cypriot FA introduces tough structure

The Cyprus Football Association (CFA) have this week announced a set of disciplinary regulations intended to punish any team or individual involved in match fixing. Suspicions of match fixing within the Cypriot league has been high over recent years, with whistle-blower accounts from referees and players offering details of matches that may have been effected. CFA president, Costakis Koutsokoumnis, has previously admitted that the league suffers from match fixing, so this week’s announcement should be seen as a positive step to fix the problem.

Previous accusations of match fixing have not always suggested fixing as a means to profit from gambling, instead, the fixing may have been done to effect league positions of the teams in question. However, the identification of possibly effected matches has often come through patterns in betting markets, which have been picked up by UEFA’s integrity unit. It is reported that the Cypriot league received 21 alerts from UEFA last season.

The CFA’s new disciplinary regulations use UEFA’s alerts to calculate the appropriate punishment. The punishments for a team are detailed as follows:

  • 1st alert – €5,000 fine
  • 2nd alert – €10,000 fine
  • 3rd alert – Team loses CFA funding
  • 4th alert – 3 point deduction
  • 5th alert – 6 point deduction
  • 6th alert – 9 point deduction
  • 7th alert – Team relegated
The CFA’s data driven approach with potentially tough punishments is a welcome approach to combatting such an important matter in a league where problems have been high. However, we question whether the mechanic of using UEFA alerts as a trigger is a sensible one. UEFA alerts are generated when there are irregularities in betting markets, which can be caused for reasons other than fixing (for example: weather can effect goal expectancies, team news can effect goal supremacies). Furthermore, the Cypriot league isn’t a particularly high turnover/liquidity league, so it could in fact be possible to manipulate a market with the intention of generating an alert, triggering a punishment, at a relatively low cost.US: State Regulation: Stairway to heaven?

This is a busy week and month for remote gambling legalisation in USA, promising much progress in the last day of the legislative process in several states before the summer break. Today is the day in NY, Mass, Penn, where remote poker, sports DFS and casino are variously up for approval; Michigan’s session, possibly the favourite as next state to legalise egambling, concludes in ten days; Missouri and Colorado should conclude now also, albeit only on DFS legislation. Unlike in upward chromatic scales, no copyright infringements arise in legal drafting, happily, as much of this sudden progress appears to coincide or else relate indirectly to the DFS trade association FSTA successfully promulgating template legislative drafts across multiple states. Although FSTA’s basic proposition, that DFS is not gambling, would appear to uncouple that development from sportsbook, poker, and eCasino legalisation proposals elsewhere, it does appear to have added momentum in a generally more supportive environment for the acceptance, regulation (and taxation) of eGambling.

The 3rd Circuit Court of Appeal’s review of New Jersey’s sportsbook/ PASPA by-pass proposal has disappeared into the mists of their deliberations (three months and counting now); although that kite could fly – and would positively impact the development of several similar propositions elsewhere across New England.

Sen. Gray’s internet poker bill may yet crash and burn in California, on the back of interminable discussions of bad actor provisions; however, that won’t happen just yet as that state’s legislative process runs on into July. There is no certainty that other states will prioritise gambling legislation in the last day/s of business; in fact New York’s mayor has specifically excluded it from his list of priorities for their last day, Thursday; which might make life very uncomfortable for Fan Duel and Draft Kings, both facing fines big enough to change their future if their activity is not regularised there. When the various assemblies all return in the new session, it will be dominated by the election of a new President, so prospects may look very different for fledgling remote gambling (within the law) in USA – maybe more like a lead zeppelin, again.

South America: POC regimes: progress and pain

South America features less heavily in many .com ‘emerging markets’ than could be expected from its population and wealth (eg, Brazil’s population is 210m and its GDP per capita is US$12k; Colombia’s figures are 48m and US$8k – not dissimilar to Poland). This could be starting to change, however, as both of these countries are considering POC regulation (along with others in the region).  Brazil is a federation of 16 states and its President has just been impeached, which is likely to make progress difficult, to say the least. However, Colombia is on the brink of publishing a remote gambling licensing regime – leading the way in South America – that in many respects aligns with Denmark’s open, liberal POC licensing arrangements.

Nevertheless, some wrinkles exist in the Colombia plan – including local incorporation requirements and a tax on player deposits. The attractiveness of an optically sensible proposed gambling tax rate of 15% is clouded by the application of VAT to player deposits, which not only inflates the overall cost to much less commercially attractive levels, but is also likely to encourage non-locally-licensed supply. If these issues are addressed, then an effective flagship South American regime may be established.

But these are as nothing compared to the issues arising in Brazil’s progress towards the same goal. With a very significant grey remote gambling market, Brazil has contemplated the potentially material value to its stagnant economy of introducing a remote gambling tax and licensing regime ahead of the soccer World Cup in 2014; it missed this deadline and it is likely to miss the (far less important for gambling) Olympics also. The country’s position is significantly encumbered by the state monopoly lottery operator Caixa, which has some limited on-line activity; and by potentially complex social objectives to re-finance football clubs with betting revenues. Two current bills conflict over the inclusion of sports betting or gaming, apparently due to the involvement and views of impeached President Roussef. Her interim replacement has about 140 days left in his appointed stay to resolve something, but there is little chance of effecting anything relevant in the near term.

Corporate Updates: GVC – New Jersey licensing approval

The New Jersey Division of Gaming Enforcement declared GVC and its officers fit and proper, concluded its preliminary investigation, terminated the Monitoring Agreement in place and confirmed GVC’s ability to operate in New Jersey under its current licences. The decision is very significant not only for GVC but also for the wider sector, since it demonstrates that the ‘black and white’ position of (some) stringent US regulators has been softened by the realities of remote gaming. However, while this should certainly be seen as ‘good news’ for operators with .com revenue and an appetite for US state markets, it is not the same as a clean bill of health for the cross-border effects of high regulatory risk. The US regulators, like the UK, require details of countries in which licensees operate; they also require to be notified of any enforcement action and/or change in law/regulations. Consequently, a licence in a very visible jurisdiction which considers licensees’ wider business its business, makes it much harder to hide away (or even explain away) any developing issues in the .com environment. The NJ DGE’s decision has meant that operators might not have to choose between white and grey now, but it does mean that compliance is becoming increasingly global and increasingly strict – this is still something the sector is not entirely prepared for, either in terms of operations management or cash flow resilience.
Financial Updates: Gala Leisure FY2015 – bingo resilience continues

Gala Leisure posted results for FY September 2015, a period prior to its acquisition by Caledonia Investments. The business, which operates 130 bingo halls across the UK (Mecca now 87), continued to display resilience. Revenue was up 1.6% to £284.7m (£2.19m per club vs. Mecca run-rate of £2.52m). Pre-exceptional EBIT turned positive to £17.6m (6.2% margin), with reported EBITDA up 90% to £42.3m – driven by positive tax changes and effective cost control (eg, £4.6m reduction in staff costs; changes to leases amounting to £7.0m). EBITDA margins were 14.9%, vs. Mecca 18.9%.  A cash flow statement was not provided, but the extent of the operational turnaround would suggest a highly cash generative business. NB, on acquisition, the unaudited EBITDA given for the same period was £52.7m (18.5% margin), which is probably a more accurate reflection of the underlying position.

UK land-based bingo’s medium-term stability remains impressive, though structural challenges are still faced (channel shift, demographics). Under new ownership, the challenge is to build upon a strong retail footprint and medium term resilience to mitigate downside risk and drive long term growth.