UK Gambling regulation: dial 888 for trouble?

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UK Gambling regulation: dial 888 for trouble?

888 has reported to investors that it is in a spot of bother with the Gambling Commission. How much bother we don’t really know, but the company’s RNS statement on Monday morning, disclosing the fact that the GB regulator was conducting a review of 888’s UK licence (specifically relating to social responsibility across operating platforms), was enough to send the shares almost 6% lower by the close.

There have been a number of recent high profile cases where the Gambling Commission has exacted contributions from operators found to be wanting in social responsibility measures, eg:

  • Rank Group, £950,000 relating to AML and SR issues between 2008 and 2011 (September, 2015)
  • Paddy Power, £280,000 relating to AML and SR issues in 2014 (February, 2016)
  • Coral, £880,000 relating to AML and SR issues between 2012 and 2015 (April, 2016)
  • BGO, £300,000 relating to SR issues In May – July 2016 (April, 2017)
These are sizeable sums, even for large companies, though they have not significantly threatened the overall value or public perception of the businesses involved, nor have the earlier settlements (prior to BGO) involved a punitive element (simply paying back the value of the sums at issue). However, the majority of these examples (pre BGO) relate to a ‘learning curve’ period for British licensing, which has now passed. Gambling Commission CEO Sarah Harrison made this clear in November last year:

“One of the principles in the Commission’s existing statement for licensing and regulation is a preference for pursuing compliance through means that stop short of a licence review, in favour of a regulatory settlement. We propose to remove this bias in favour of settlement. We will put access to all tools, including licence review (both of the operator and personal management licences), on an equal footing.”

The GB Gambling Commission is therefore becoming increasingly serious about ensuring that breaches are clearly and firmly dealt with. While we do not know the details (or severity) of the 888 case, the glib assumption from many stakeholders that a manageable fine and a public slap on the wrist is the worst that operators can expect is a dangerously wrong one.

More broadly – and especially as the first news of the review was issued via RNS – the episode raises the question of how shareholders in gambling companies can be sure that they understand the regulatory-political risk associated with their investments. Typically, institutional investors look to management teams to assess these risks for them – and yet gambling executives have (at best) a fairly patchy track record in this domain.

This issue is particularly pertinent in the area of M&A. 888 Holdings has been a repeated target for acquisition in recent years, with Ladbrokes, William Hill and most recently Rank (with WH) making a play for the respected online operator. The public difficulty that the company now finds itself in highlights the importance of regulatory-political due diligence in deal-making for gambling. However, this is often considered a relatively ‘niche’ area and is unlikely to be a core competency of banks and mainstream financial advisers (despite their own familiarity with regulated activity).

In extremis a licence review could mean curtains for the company concerned, if it results in a licence revocation; or for PMLs, senior executives personally licensed by the Commission (although no-one is suggesting this as a likely outcome for 888). Nevertheless, it is a useful reminder that failure to gauge regulatory risk effectively may result in significant value destruction. In the case of M&A, it is even possible that severe systemic failures in compliance or duty of care might effectively ‘infect’ the acquirer (and so put its licence at risk), if issues are not identified and dealt with early on.

Just last year, the Gambling Commission launched a trial run of an industry Assurance Statement. Aimed at the forty-or-so high and moderate impact licensees (£25m of annual GB GGR qualified companies for this group), the Assurance Statement required operators to set out how they managed risk to the licensing objectives (keep gambling fair, protect children and vulnerable people, and keep crime out). It marked a welcome shift from simple compliance with the regulations to a need to demonstrate insight and effectiveness.

At the time of its launch, some operators criticized the new process, bemoaning increased bureaucracy. It is now clear that the Assurance Statement is a gift for licensees if they use it as an internal risk management tool; as well as, potentially, a springboard to rebuild public trust in the sector (a prerequisite for positive regulatory reform).

In its consultation on enforcement, the Gambling Commission has also set out a view that good (or bad) character will be taken into consideration when dealing with regulatory breaches. This is a sensible principle and one which ought to drive out some of the short-sighted belligerence that we have seen in gambling’s relationship with Government and the regulator (it is not so very long ago that one former gambling CEO called for Government oversight to be transferred back to the Home Office and away from the “Ministry for Ballet”).

One additional point that the episode highlights is that domestic (‘Point of Consumption’) licensing for remote operators is first and foremost about ensuring public safety through protective regulation. The allegation that the on-shoring of licensing was simply a stalking horse for tax collection has been exposed repeatedly in the two-and-a-half years since a British licence was required for the British market. In particular, it will be interesting to see what action (if any) the Gibraltar Gambling Commission now takes in respect of any sanctions to the licensing propriety requirement for one of its biggest (and therefore most important) licensees.

With the Department for Culture, Media and Sport, the Competition and Markets Authority and the Information Commissioner’s Office all currently running reviews, gambling in Great Britain is under its most intense political-regulatory scrutiny for a decade. For management teams and financial stakeholders in this £13bn+ industry, getting a grip on the detail and underlying risks in this area has rarely looked so critical.