Battle of Britain: Is the market about to face its biggest shake-up in years?

When the UK government ushered in its point of consumption (PoC) regime in December 2014, predictions were rife of a surge in black market activity and of operators heading for the exit door. Judged on most metrics, however, the UK market has become something of an industry success story and unequivocally the world’s leading regulated market.

Yet UK-facing operators are today facing an arguably unprecedented level of regulatory scrutiny. From the CMA’s investigation into T&Cs, to ever-moving anti-money laundering requirements, to the Triennial Review – the UK gambling sector is well and truly feeling the heat of the regulatory spotlight. “We haven’t seen this level of media and political intensity around gambling since the Gambling Act went through in 2005,” Dan Waugh, a partner at Regulus Partners, claims. “That is the last time we saw this level of public policy speculation and even at that point it was mainly around land-based casinos.”

Since 2014, the regulated UK sector has undergone many changes and, as a relatively young industry still, it is only recently that many laws and regulations have really started to bite. As a result, a number of authorities are taking a much keener interest in the way in which the UK online gambling industry operates. “It is a challenging time for the sector and its legal and compliance teams are having to focus on a number of regulatory issues, pretty much all at the same time, and some of these are very complex,” says Stephen Ketteley, co-head of Wiggin’s betting and gaming group.

“We haven’t seen this level of political intensity since the Gambling Act” – Dan Waugh, Regulus Partners

The impact of many of these regulatory issues and investigations will likely not be felt for a number of months, maybe even years. Some pessimistic experts are calling it a sink-or-swim moment for UK-facing gambling businesses while others are more inclined to play down any overtly negative forecasts. Where there is consensus, however, is that the current level of scrutiny is unlikely to leave the market unscathed.

Driving force

Based on the very nature of gambling, the industry’s inherently adversarial relationship with customers will always make it a target for regulators and policy-makers alike. Having said that, the Gambling Commission has clearly witnessed the number of complaints against the sector escalate in recent months – and this has often been cited as a reason for the need for rapid improvement, particularly in areas regarding consumer rights and protection law.

There also seems to have been a disproportionate number of complaints made to the Advertising Standards Authority (ASA) about gambling ads. Indeed, the watchdog has previously described the volume of investigations in 2016 as being “too high” having received a total of 1,804 complaints in relation to 730 adverts. Ironically, in many cases these are rumoured to have been made by competitor businesses rather than truly affronted consumers.

But a real turning point appears to have been a changing of the guard at the Gambling Commission. Since her appointment nearly two years ago, CEO Sarah Harrison has gained a reputation as someone who is unafraid to ruffle more feathers than her predecessors and prepared to come to the defence of consumers when such action is deemed necessary. Based on her previous regulatory work in the utilities sector, this isn’t exactly a surprise.

Gambling Commission CEO Sarah Harrison has pledged to take “robust and effective” action when necessary. Credit: GamblingCommission.co.uk

Simon French, an analyst at Cenkos Securities, believes the appointment of Harrison was a “key catalyst” for the formation of the current state of play. “What is going on in the UK market at the minute should really come as no surprise,” he claims. “The warning signs have been there for well over a year. The appointment of Sarah Harrison as chief executive of the Gambling Commission was clearly an indicator that there was going to be a change of approach – you’ve only got to look at her past history to realise that.”

Coupled with the appointment of Harrison at the Gambling Commission was the emergence of a Conservative government which, on the whole, seemed to take a far dimmer view of some industry practices. However, Clive Hawkswood, CEO of the Remote Gambling Association (RGA), pours cold water on any suggestion the current level of regulatory scrutiny is part of a joined-up concerted effort to clampdown on the UK gambling sector. “These sort of things are not usually connected,” he says.

“Before the CMA went live with its enquiry, it had been preparing it for more than six months. The Triennial Review was always going to take place at some point and it would have been strange if they hadn’t tried to mop up a few other issues along the way. There has perhaps been a change in emphasis at the Gambling Commission and a change in culture, but anyone who sees some master plan here where all these things are related is well wide of the mark in my opinion.”

Taking action

Whatever the driving force is, the Gambling Commission has already demonstrated that it won’t take any prisoners when operators fall short of its standards. The Birmingham-based regulator, which has also placed 888’s licence under review, has already this year handed down a number of six-figure fines to what is a growing list of online gambling firms. Most recently, Lottoland was slapped with a £150,000 penalty for advertising failings, while a few months earlier BGO was the recipient of the Commission’s first marketing-related financial penalty.

The Alderney-licensed casino operator was handed a £300,000 bill after it was found to have breached social responsibility rules and deceived consumers. The fine was the result of a major review into the publication of “misleading” promotions by the operator and its affiliate partners since July 2015. Arguably of more importance is that the regulator fired a warning shot to the rest of the industry, urging other operators to “take note” of the decision or risk falling foul of its rules.

“Consumers and the public can be assured we will take robust and effective action when gambling companies don’t meet their obligations” – Sarah Harrison, Gambling Commission

And since taking action against certain operators, the Commission also recently announced plans to beef up its enforcement strategy. The strategy includes introducing higher penalties for breaches, particularly for operators the regulator deems to have shown systemic and repeated failings. “The industry can be assured we will use our powers in a targeted way, and consumers and the public can be assured we will take robust and effective action when gambling companies don’t meet their obligations,” Harrison said at the time.

Waugh, who was also previously group strategy director at Rank Group, has mixed feelings as to what the current situation could mean for the industry going forward. He believes that while this is in no way a sink-or-swim moment for the whole sector, individual operators failing to live up to the regulator’s requirements could face severe consequences.

“We’ve seen examples in the land-based sector where regulatory change can have quite a significant impact on the health of the industry, like in 2007 when machines were taken out of bingo clubs and the sector pretty much caved in at that point,” he says. “But for the remote industry today, the regulatory changes we are aware of are unlikely to cause an implosion in the market as a whole. However, if you have your licence revoked, it’s game over – and the Gambling Commission has said that is no longer the option of last resort.”

Under the spotlight

Arguably the biggest UK regulatory game changer in the coming months is the investigation by the CMA. Launched last October in partnership with the Gambling Commission, the competition watchdog’s review was initially focused on the T&Cs of gaming promotions, but the scope of the investigation was later extended to include sports betting offers, as well as sensitive areas such as palpable error. However, while the news was likely music to the ears of groups like Justice for Punters, it wasn’t entirely unexpected either.

The CMA has a history of extending the reach of its enquiries into additional business practices, particularly in the aftermath of a consultation period where the public can make their voices heard. Last year, for example, the watchdog was forced to extend the deadline of its review into the retail banking sector due to the unforeseen scope and complexity of the investigation.

In this case, the CMA seems to be focusing on promotions in terms of enforcement, despite recently extending its sphere of interest to cover withdrawal restrictions as well. “The fact the current enforcement seems to be narrower than the original areas of focus doesn’t necessarily mean the CMA believes now that the industry is passing muster in the other areas it has chosen not to exercise its enforcement powers,” Ketteley claims.

“When you look at some casino promotions and the way they are presented, if you have an understanding of consumer rights law you can see why they have taken issue with the way certain things are presented. However, it could ultimately come down to a question of form over substance, in that it may be more the presentation rather than anything being inherently unfair in a particular casino promotion. That said, there are certain provisions seen in some casino promotions that the CMA really doesn’t like, such as a player unwittingly forfeiting pending bonus winnings when seeking to withdraw their initial deposit.”

With regards to T&Cs, the investigation would appear not to be about practices at the periphery of the industry – at least based on the names of some of the operators involved. In June, the CMA announced it was taking enforcement action against at least five operators suspected of breaking consumer law, with the surprise inclusion of UK heavyweights Ladbrokes and William Hill among those under investigation.

Rumours quickly circulated that the reason particular firms were subject to enforcement action was due to technical issues with third-party suppliers – but this has yet to be corroborated. Hawkswood also claims this is not the main issue. And he is confident that operators can take the bull by the horns and deal internally with many of the failings identified by the CMA.

“They are going to find fault with some companies but most of the companies will have had those discussions and it’s not as bad as some people on the outside would like to think,” he adds. “I’d be very surprised if at the end of this the Gambling Commission didn’t say these practices are no longer acceptable but I’d hope that a lot of them would have been rectified in the meantime. People aren’t daft; they are not going to sit on their hands waiting to get told off by the Gambling Commission.”

Knock-on effect

The final outcome of the CMA investigation is currently not expected until the autumn at the earliest. At this point it will go back to the Gambling Commission, with current wisdom being that the regulator will likely issue new guidance and licensing requirements on the industry as a whole. What this guidance looks like remains to be seen. But depending on how comprehensive it is, it may well force operators to make substantial changes to their customer acquisition strategies.

With the B2B side of the sector doing much of the heavy lifting when it comes to product, promotions and sign-up offers have become one of the key acquisition battlegrounds between operators in recent years. Online casinos in particular have long relied on attractive bonuses to entice customers to their brand, while simultaneously using T&Cs in an effort to improve margin and reduce player churn.

Some restrictions often seem impenetrable but operators can claim this is for good reason. The end of wagering requirements, for example, could completely change the whole nature of what a promotion actually entails. And if certain restrictions that are commonplace across the online casino vertical face a major clampdown, it is not beyond the realms of possibility that the vertical gets closer to the typical promotions of online bingo brands.

An additional headache is the imminent introduction of the tax on gaming free plays. The levy, unveiled as part of the Finance Bill in March 2016, is not yet part of UK law but will be backdated to 1 August once it is officially implemented. By extending the PoC tax to cover gaming bonuses, the profitability of tried-and-tested acquisition strategies could soon come into question, with a shift towards customer retention the most likely long-term outcome.

“We might look back on this in 10 years’ time and see that it actually helped the industry to grow up” – Dan Waugh, Regulus Partners

“I think the impact will depend on where each company is at and what changes they have already made by the time it comes into force,” Hawkswood says, “but I think some of those types of bonuses will no longer be viable given they have to pay tax on all of these things. Commercially there are other ways of doing things and some companies rely heavily on it and some don’t – so the impact will be patchy. I just think the two in combination [CMA and PoC 2] will at least lead some companies to review how they operate.”

Waugh agrees: “I remember before I got into the gambling industry I used to work for Whitbread and one of our clients in the health and fitness club industry at that time was all about recruiting customers but saw massive churn rates,” he reflects. “And then gradually they started to think about retention even more than recruitment. So I think there is a level of maturation in any industry where they go from a headlong pursuit of sign-ups to focusing more on how you keep customers. It’s difficult to say now but we might look back on this in 10 years’ time and see that it actually helped the industry to grow up.”

However, arguably the main worry now for the industry is an increase in the level of taxation as the UK still has a lower tax rate jurisdiction than most of its European peers. Indeed, a number of analysts have predicted that when PoC 2 takes effect, policy makers could decide it is just a simple mechanism to increase the online gaming tax base on an annual basis with a small incremental shift in the tax rate.

Reviewing the situation

The aspect of regulatory scrutiny awarded by far the most national newspaper column inches is the Triennial Review. The emotive subject of fixed-odds betting terminals (FOBTs) is what tends to grab the headlines – and the general industry consensus is that we are likely to see maximum stakes reduced to low double-digits at best. This would clearly be a better outcome than the £2 limit often mooted – which could effectively wipe out many high-street shops – but the hit to licensed betting offices is set to be substantial either way.

And while it might be naïve to assume companies aren’t still crunching numbers or having conversations, the Triennial Review’s importance has often been cited as a key reason for a reduction in M&A activity in the UK sector. “Regulatory uncertainty is not good for the industry and it’s hard to make investment decisions when you don’t know what’s going to happen,” Waugh adds. “However, it doesn’t always stop deals going ahead, particularly if you think you’ve got a particular insight into the way these things are blowing and you think the market is not valuing things correctly.”

The DCMS ministerial team. Credit The Department for Culture, Media & Sport

What is largely forgotten about in the mainstream media and among all the publicity surrounding FOBTs, but arguably of even more importance to the online sector, is a potential crackdown on gambling advertising. A ban on daytime advertising – not off the agenda based on the language of MPs and the Department for Digital, Culture, Media & Sport (DCMS) – would clearly hit the industry hard, although an unintended consequence of this could be a boost to the monetary value of the 8,200 UK shops due to their increased marketing collateral.

But it could also have a detrimental effect on the consumer by creating a barrier to entry for new competitors to advertise. As a result, the industry has been involved in a number of active discussions with the DCMS about how it advertises, with plans in the pipeline to boost the industry’s advertising code and to bring in more measures around social media – a particular concern for the government.

And the RGA appears to be taking a leading role in this regard. The trade body has worked with stakeholders across the egaming industry, as well as advertisers and broadcasters, to come up with some proposals which will focus on one of the government’s explicit concerns on the tone and density of TV adverts.

“Obviously as an industry we can’t restrict who can and can’t advertise when, but one way might be to balance that out with some kind of awareness campaign about responsible gambling,” Hawkswood adds. “It would be much bigger than the Senet Group; I think that’s probably the key. The advertising industry has also taken on board that they’ve got a part in this as well and we would be working with them to put forward a collective package.”

Short-term pain, long-term gain?

It will still take some months before the UK sector learns its fate regarding both the Triennial Review and the CMA’s investigation. Some might look back and argue that operators could have been more proactive with addressing many of the issues they find themselves facing today. But in the industry’s defence, in recent years it has been more preoccupied with jurisdictional risk rather than many of the closer to home regulatory challenges. And at the end of the day, it all points towards the market entering a new stage of maturity.

Operators will quickly need to get used to taking more of the rough with the smooth. On the downside side, the cost of regulation and licences is almost certainly going to continue to rise – although that may play into the hands of the bigger companies which, just like with PoC, will be far better positioned to absorb such costs. But if regulatory costs do become too burdensome and prompt smaller firms to exit the market, this could also mean less choice for the consumer.

The government and Gambling Commission face the tricky task of creating a framework which both protects customers and enables the market to flourish. Just how different the UK sector will look in the coming months and years is almost impossible to predict with any degree of certainty.

But in whatever shape the market takes, operators can take solace in the fact that it is likely to remain the world’s biggest regulated market with strong growth estimated for the foreseeable future. French concludes: “Online gambling is one of the few industries the UK is a genuine world leader in and that’s the point that operators need to be making to government. Let’s not lose sight of this fact.”