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Winning Post 24 – 06 -16

Brexit Special – Down and Out?

The UK has voted to leave the EU. This time, the pollsters (margin of error) were a little closer to reality than the bookmakers (final Leave price 11/2) and global markets (rallying all week). It is still impossible to know exactly what the decision means on nearly every level, but initial reactions are predictably clear: Sterling has fallen over 8% against the US$ (and 5% vs. €); the FTSE 100 is down 3% (rallying from an 8% drop early morning reaction); the FTSE 250 (far more directly exposed to the UK than the global FTSE 100) is down 7%; the EURO 50 is down 9% (demonstrating a market assumption of lose-lose); most UK-listed gambling stocks are also down 5-14% (ie, in line with the mid-cap market but not markedly singled out).

The UK is out and everything is down. The impact of the decision will be far reaching, not only in terms of the nature of the exit but also in terms of British politics, given PM David Cameron’s resignation. The impact could also dismember the UK itself, given the SNP’s demands for another referendum after Scotland’s (as well as Northern Ireland’s) clear Remain majorities. Tellingly, Gibraltar also voted to Remain by a 91% margin (unsurprisingly by far the highest). We examine each of the key areas which are likely to impact gambling and related businesses over the coming months.

The Economy

Gambling companies have a habit of focussing on supply, but the biggest issue flagged during the campaign was the potential impact on demand. Remain made it very clear that Brexit was likely to be (very) bad for confidence, investment, trade and jobs. An impact on the consumer economy would clearly affect gambling, a (strongly) rising interest in political betting notwithstanding. However, the medium-term impact is likely to be muted-to-nil, in our view, for three reasons. First, it will be at least three months before a new PM formally starts the Leave process, which is likely to take at least two years (EU laws and structures are likely to remain in force for two years after the invocation of Article 50 in any event), meaning very little will change quickly. Second, while a number of companies will be assessing options with regard to HQ and investment, it is unlikely that decisions can be taken quickly and illogical for decisions to be taken ahead of the facts of the exit arrangements. Third, currency oscillations notwithstanding, to quote Harold Wilson, “the pound in your pocket will not be devalued”; a weak sterling may impact a wide range of imported goods and services but the point remains more true than untrue. It is probably worth considering that the market seems to broadly agree with this: big moves might have occurred today but few medium-term trading ranges have been breached.

Overall therefore, the macro demand environment in the UK is likely to be ‘business as usual’ for a while to come. Indeed, issues such as the US, ‘rump EU’ and Chinese economies, as well as the medium-term impact of the National Living Wage, are likely to rapidly take precedence over EU politics from a macro demand driver perspective (in substance if not in noise). In the longer term, whether EU exit is handled well by all sides is the key driver of whether Brexit is an economic opportunity or threat: this remains completely unknown; the only ‘known’ is that pain is a possibility, not an inevitability.

UK government policy on gambling

A change of Prime Minister is likely to have a much greater impact on the UK gambling sector in the short to medium term than manoeuvring over the terms of Brexit. The identity of the next PM will remain unknown for a few months, but three simple assertions can be made: the candidate is likely to be from the right of the Conservative Party; the candidate will have to have a platform of ‘bridge building’ to hope to get anything done in a slim majority Parliament (which would have voted overwhelmingly for Remain); the candidate will have ‘one job’ for the next two years at least: negotiate Brexit and make it work.

What does this all mean for gambling? It is mixed, in our view. Legislation that could be made difficult by EU law has seen a challenge / impediment (largely) lifted: attempts to block POC tax and probably also invoke horseracing levy state aid are likely to wither regardless of grandfather periods. Equally, the Right of the Conservative party is about the only group where there isn’t a majority anti-FOBT view (albeit Boris was publicly anti as London Mayor), so the gathering pace of anti-FOBT regulatory pressure may be slowed or reversed.

However, on the flip side, the new government will not only be ‘busy’, it will also have a very problematic mandate: the public has made one thing clear (Leave the EU) but there are a range of issues both within and beyond this which still divide the House – and to state that the Right of the Conservative Party cannot govern alone has a word too many (c. 50-100 MPs out of 650). To get anything done, only two courses of action are feasible: a programme of feeding vested interests in the Commons to get legislation through (watch out FOBTs / broader devolved powers), or; a snap election in the hope that a mandate is clarified and a Commons is returned with a clearer view. The latter scenario is likely to change the face of British politics, especially given how close UKIP and the Right of the Conservatives have become; how split Labour is; the clear agenda of the SNP, and; how more people probably miss the Liberal Democrats than they ever thought possible. This scenario cannot be ruled out and, if it happens, pretty much all bets are off pending a result that is impossible to predict.

The Remaining Union

The Leave vote has not only triggered the end of Britain’s involvement in the EU, it has also threatened the Union of the United Kingdom. Two components voted emphatically to Remain: Scotland (62%) and Northern Ireland (56%). London, that country within a country (with a Labour mayor) also voted the opposite way to the rest of England (60%). The SNP has already voiced its desire for another Referendum, while Sinn Fein has suggested the case for a united Ireland has been strengthened and that a Referendum on the question would not be illogical. London Mayor Sadiq Khan is also likely to want to portray himself as the leader of a City apart and call for more powers. The only positive for gambling in this would be the burgeoning number of politics specials that could be offered. Scottish politics is certainly anti-FOBT and anything which increases Scotland’s powers is likely to be bad for that sector of gambling at least. In Northern Ireland (where Gambling Act 2005 does not apply), there is less to lose, but equally not much to gain.

It is unlikely, but not impossible, that any such referenda will be called ahead of understanding the Brexit terms, during which time a lot can happen (especially within and to the EU). However, pressure from both components of the Union is, at the very least, likely to make Westminster’s job harder; leading to grid-lock at best, and anti-(some forms of) gambling ‘sop’ legislation at worst. Further devolution could also be considered as a ‘fix’, which would also create more headaches for all forms of land-based gambling, including in the English regions and London (which will not want to be left out).

Cross-border businesses

Most gambling companies are multi jurisdiction. This causes two issues from a Brexit perspective. First, the free movement of people is key to ensuring the right talent is doing the right job in the right place; especially when growing new markets or managing multi jurisdiction HQs (London – Dublin – Gibraltar being the most obvious). Anything which limits the free movement of people is going to make hiring and business growth harder, potentially materially so. This is especially true given the extent to which remote expertise tends to be such a Europe-centric diaspora.

Second, a number of EU-based regulated jurisdictions forwent a local presence for an EEA presence. If UK – Gibraltar is no longer in the EEA, then companies will be forced to create a local / EEA-hub presence, increasing costs and business disruption.

The Gibraltar question

Within this free movement issue, Gibraltar is clearly the biggest issue. Currently it scores five out of five as a jurisdiction: it is in the EU, it is 0 VAT, it has a permissive but internationally recognised supply-side regulatory regime, it has a large pool of talent, and it has an easy border with somewhere a critical mass of people actually want to live. Being on the wrong side of the EU stops the jurisdiction being an EEA hub and also potentially makes it (very) vulnerable to an angry Spain (especially in terms of border movement and personal tax/residence issues); Gibraltar’s special status may also be up for ‘negotiation’ in any Leave package. It is unsurprising that Gibraltar voted Remain by 96%: Gibraltar is key to UK-facing remote gambling in particular and its status is now highly uncertain. Operators with material operations in the jurisdiction should probably start thinking about contingency planning: this is no small job, especially since it affects so many operators and there are comparatively few choices.

M&A

M&A is likely to be impacted on two levels. First, market turmoil is bad for raising money regardless of sector and the noise created by the Brexit process is likely to add to volatility whatever the reality on the ground; this would be especially true if other EU countries start to seriously demand a similar vote. Second, cross-border M&A involving the UK now contains a dangerously undefinable risk: what does the UK look like legally and economically in two or three years’ time? Nobody knows, and this uncertainty is likely to affect both the volume and the value of transactions for a material period of time.

Payments

Payments is the lifeblood remote gambling, while AML and other financial regulation has a material impact on land-based as well as remote gambling. In this area, levels of European harmonisation are impressive, while levels of European resentment over UK financial services success are equally high. This therefore opens up a risk that EEA-based payments solutions will require different treatment under direct FCA regulation. Although the likelihood of the FCA being particularly onerous is relatively low, it would be wrong to under-estimate how much occurs relatively seamlessly under the Payment Services Directive (etc), and so levels of disruption, especially on more ‘exotic’ solutions could be material. Equally, while the UK is likely to adopt and keep AMLD4, further out harmonisation is less likely, with unknown but undoubtedly more fiddly consequences.

Perhaps more seriously in the longer-term, the UK has been a strong voice within Europe for liberal financial services policies, which are ‘passported’ throughout the EEA under MiFiD. The UK’s exit will remove this voice and could even reverse it in a (potentially) rancorous exit process. ‘Rump EU’ could adopt stricter and less flexible payments and financial services rules over time, potentially impacting the sector’s ability to do business in terms of cost and also grey market access.

Horseracing

For horseracing, Brexit is potentially bitter-sweet. As mentioned above, the funding of British Horseracing could benefit from leaving, in that EU State Aid legislation (Art 107 TFEU) will not apply to UK government decisions from c. 2018. However, a heavily distracted government could potentially cause the derailment of Levy Replacement plans, while EU laws will apply (albeit increasingly weakly in spirit) on the current (2017) timetable due to the exit timetable.

However, not all are necessarily winners within the industry, with racehorse trainers, breeders and convalescence facilities likely to be hit by a lack of funding through the EU Common Agriculture Policy (unless replaced by UK funding, which is far less certain). The current Basic Payment Scheme subsidises many areas from muck heaps to temporary training areas (although gallops are not allowed under the Policy), with the biggest payments coming for permanent pasture land, a staple for large stud farms and an important supplementary income.

Finally, the freedom of travel of horses between the UK, Ireland and France is likely to remain unaffected due to a Tripartite Agreement between the nations which (usefully) pre-dates the EEC. Equine freedom of movement could get sucked into the periphery of Brexit negotiations if they become acrimonious, but this is likely to be an area where common sense and common interest prevails.

Other sports

Freedom of movement allows any EU member state citizen to live and work in any other EU country (with certain restrictions). The UK’s exit from the EU could have implications for this freedom, thereby impacting upon all UK sport, most notably the English Premier League. There is a possibility that EU Member State citizens will now have to apply for a work permit in order to play professionally in the UK, similar to non-EU players.

Currently there are over 100 EU players in the Premier League who could be affected by this change. While it is possible that players already in the league would be exempt from requiring a permit, the flow of talent from EU states could be impacted. In order to obtain a permit under current rules, the player must have played a percentage of their national team’s games. Players such as Henry, Ginola, Cantona & Ronaldo may never have graced the English game had this requirement been in place in their day.

Much has been spoken over the last two decades about how the English national game has suffered due to foreign talent in the domestic leagues (currently only 30% of EPL players are English). Brexit may influence a change here in two ways. First, as with the freedom of movement point, less foreign talent may be available to play in the EPL, therefore potentially freeing up space for English players. Second, EU laws that had previously prohibited competitions from imposing restrictions by nationality, are not relevant, so the ability to impose a restriction, or ‘encourage an outcome’ is possible.
In a scenario where Scotland (and Northern Ireland) achieved their own independence from the United Kingdom, the national team structure in the remaining UK may be subject to further change. The four UK FAs currently hold enough political power to keep their national teams separate, however, a UK comprising of only England and Wales, may not retain that power.

The removal of the Freedom of Movement allowances will be damaging for lower league football teams in that any EU player that they require, is unlikely to meet work permit criteria. Good UK players will rise in value as the supply chain has decreased.

Grass roots teams will suffer in a different way due to losing EU funding, although they may benefit from being part of the supply chain The Kolpak Ruling states: “a citizen from a country that has signed European Union Association Agreements has the same right to freedom of work and movement within the EU as EU citizens.” This ruling is used to allow a number of players to play professional cricket and rugby (both codes) in the UK. Brexit will likely mean that these players will require work permits, so may not be eligible The NFL have committed to play regular season games in the UK until the end of 2027. While the UK is a major market in itself, it is seen as a route into the also lucrative European market. The NFL may see Brexit as damaging to their strategy. So far, they haven’t commented