Point of Consumption Licensing: beware of what you wish for

By Paul Leyland, Principal Consultant, Regulus Partners

“I fear all we have done is waken a great, sleeping giant and fill him with a terrible resolve” Admiral Isoroku Yamamoto on the Japanese ‘victory’ of Pearl Harbour

The UK Gambling (Licensing and Advertising) Act, 2014 has been postponed for one month to allow Lord Justice Green time to consider the arguments put forward in the Judicial Review. Contrary to some observations, nothing can be read into this delay other than the rather predictable conclusion that the issues are too complex to make a snap judgement.

The case focused principally on legal arguments, as one might expect, which are rather pointless to repeat and in any event are now in the hands of the judge. However, it is important to make two broader points from a policy perspective which could prove far more significant in the long-run than whatever the judgement turns out to be:

1.       Licensing at Point of Consumption (as well as tax) is a growing trend and here to stay

2.       Resistance to sensible regulation from gambling operators, associations and supply-side regulators is counter-productive and substantially increases risks to the sector

First, why is Point of Consumption (PoC) licensing is an irresistible force? Simply because customers are a much more effective source of power, governance and legitimacy than businesses. Ignoring for a moment the natural tendency to want an outcome that best suits immediate economic concerns or fits an existing structure, consider the following:

·         A regulator which gains its authority from a government of consumers is essentially answerable to those consumers: probity is the key reason for existence

·         A regulator which gains its authority from an offshore jurisdiction is principally concerned about jobs and economic impact: business is the key reason for existence

·         A regulator in a supply-side jurisdiction is in a competitive landscape; it must make its regulations attractive, light and fit for multiple markets to attract and keep business

·         A regulator in a demand-side jurisdiction is tasked solely with getting regulation right for its particular market-place; it has a clear mandate to adequately resource and intervene

·         A supply-side regulator is unlikely to respond to the domestic political, integrity or social responsibility concerns of a given country (will, resources, mandate, self-interest); a demand-side regulator is essentially tasked with managing these

You will notice that tax isn’t mentioned there once: PoC stacks up without it.

If you are an operator you probably like the sound of a business-friendly, competitive and light touch regulator. It probably has the added benefit of coming with a very low ‘business-friendly’ tax regime, since the (small) jurisdiction in question gains more from lots of supply-side jobs than it ever could from taxing its (small) population on their remote gambling spend. You’d probably want to defend that status quo. The jurisdiction probably would too – and not unreasonably - in its own economic interests.

However, if you are a politician in a country that has even a middling domestic market, you would be very hard pressed to see anything good about supply-side regulation, other than that not raising the question keeps gambling off the political agenda. Nevertheless, gambling has a nasty habit of getting itself onto the political agenda, despite the best efforts of more sensible operators (or even because of the reckless mischief of others).

Politicians make laws; not businesses, and not even regulators. Politicians, when faced with having to make a choice between PoC or PoS, will overwhelmingly choose PoC, for fairly obvious reasons when comparing the points above (the neo-liberal Gambling Act 2005 being something of an anomaly, which the UK government is now trying to correct). Further, there is nothing in the EU treaties to prevent this choice, only to control the manner and nature of its operation. PoC is therefore here to stay and likely to grow its reach significantly over time.

Significantly, and especially in light of Bet365’s news that they are relocating to Gibraltar, PoC licensing does not necessarily reduce the attractiveness of PoS jurisdictions. From a UK perspective, Gibraltar (and other locations) offers a concentrated pool of industry veterans, attractive personal tax rates, a solution to the VAT problem (gambling companies in the EU have to pay VAT on services but cannot recover it since they do not charge it), low corporation tax, and comparatively limited additional licensing requirements. There is, on the whole, very little to fight about. 

Given all of this, why is an act of folly for offshore operators and other stakeholders to resist PoC licensing? Again, the answer is really very simple and here the UK provides the best example. Since 2007, the Gambling Commission has regulated with a measured, consultative and evidence-based approach. Political pressure has meant that this has been partially derailed in the context of gaming machines, which I shall come back to. However, for the remote sector, the new licensing regime is not insisting on a wholesale transfer of equipment or personnel, it is not enforcing any material product restrictions, its advertising requirements are relatively benign and no ‘special treatment’ is being given to domestic incumbents. Separately (and it is separately, in law and in intent), there is also a tax rate being introduced which is among the lowest and most consistently applied of any PoC regimes (GBD vs. RGD treatment of bonuses probably being the only big issue). The industry, in theory at least, should have much to welcome in what is one of the most liberal and sensible PoC regimes (not) yet promulgated.

The regime and the regulator have been eminently sensible because there has been no political will to be tougher, eg, through: higher taxes, product restrictions, tighter advertising, more interventionist social responsibility measures (eg, pre-commitments). A regulator which is broadly supportive of the industry has largely been allowed to get on with it. Further, the idea that EU law is somehow pro remote gambling (rather than just anti blatant protectionism or trickily Byzantine) is a myth being pedalled long after the facts speak for themselves (eg, variously tough and restrictive PoC regimes in France, Italy, Spain, Belgium). The irony here is that a tougher approach to licensing requirements would actually make the passage of an Act easier from a European perspective since it would be going far further in terms of protections than anything seen in supply-led regulatory jurisdictions – an irony that may yet bite.

There is a General Election coming up. Two out of three (or four) major political parties are already on the record to be tougher on gambling (or at least some of its forms). There has also been the recent politicisation of gaming machines in betting shops, which still has some way to run (taxes are going up, tougher regulations have yet to be introduced, research is pending). The public, on the whole, are at best dispassionate about most forms of gambling (unless bad practice or ‘tax dodging’ is the issue), but a small constituency are mildly suspicious or worse; the press is probably less keen than the public. There are therefore no votes in being nice to gambling operators (not unless they do the kind of bridge-building work the bingo sector has done, little of which is in evidence elsewhere). On the flip side, there are some points to be scored by being tough: vide B2s (the contentious gaming machines in betting shops). At least in the case of the LBO sector, the operators’ principal crime was probably arrogance and/or complacency, rather than outright belligerence. The Gibraltar (GBGA) challenge, with some (sometimes too-late muted) cheerleading from operators, looks a lot more like an outright attack.

Perhaps if Gibraltar ‘wins’ its JR we will see what a properly annoyed and politically-mandated government is capable of, especially (but not only) if the principal party in Government is Labour rather Conservative: the offshore sector’s sense of victory may not last long…

Discourses on Levy: what is the Horse Racing Betting Levy for?

By Paul Leyland, Principal Consultant, Regulus Partners

“To ensure long existence to religious sects or republics [or even racing levies], it is necessary frequently to bring them back to their original principles” Nicolo Machiavelli [mostly], Discourses on Livy

The Horse Racing Betting Levy has been criticised from pretty much all quarters for the fourteen years since I have been following the subject. It has survived this long, with some minor tweaks (and a major positive change in moving to gross profit), for one simple reason: nobody can agree on what a suitable (and legal) replacement should look like. In order to solve this, the government (DCMS) is now consulting on whether to reform or replace a mechanism which dates back to the early 1960s.

The government’s consultation (https://www.gov.uk/government/consultations/modernising-the-horserace-betting-levy-a-consultation-on-reform-or-replacement) invites all stakeholders and interested parties to answer 33 questions to ascertain the future. We at Regulus shall be doing so.

Significantly, one question remains unasked, a question I believe it is dangerous and unproductive to leave unanswered: what should a modern Horseracing Levy be for?

Back in 1961, the purpose of a Levy was clear: to compensate racing for the loss of on-course and Tote betting revenue caused by the legalisation of betting shops. At that time, racing was the key betting product and a well-connected lobby, so an economic transfer of value from betting to racing was taken for granted. Subsequently, it seems to have been taken for granted in the other sense of the term, to the detriment of both sides. In the twenty-first century, ‘compensation’ for a product which is now c. 38% of land-based betting revenue and c. 27% of remote (both percentages GB racing in the UK) seems to be an anachronism, and the offshore remote operators mostly treat it as such. Conversely, the cost of racing has increased significantly for land-based bookmakers (due to media costs) even as gross win generated from the product has declined.

Indeed, the Levy is no longer racing’s principle source of funding from bookmakers – commercial media rights are. Further, while the Levy is still an important source of prize money, it is by no means the only source, representing only c.30-45% depending on the yield. In terms of total racing revenue, the Levy represents only c. 7% (according to Deloitte), with the total revenue from bookmakers at c. 35-40% (Levy, media rights, sponsorship). Much of this bookmaker-derived revenue now finds its way back into prize money independently of the Levy (in FY2011-12 the courses provided £28m of prize money vs. the Levy’s £36m for a total of £97m, though the total and the Levy’s proportionate contribution has been rising again from this level).

The Levy has therefore become increasingly marginalised as a source of revenue, while fewer bookmakers (offshore) pay less and less of it (mix). Ironically (and impressively) in a period of (supposedly) declining betting gross win from racing, racing has effectively rebalanced its economic position with bookmakers both in terms of overall revenue and prize money contributions. However, this has occurred outside the Levy, and at the expense of both governance and multi-channel security, which I believe is storing up significant problems for both industries.

Rather than laboriously trawl through the current complexities and debate their resolution piecemeal (as both industries are naturally inclined to do), it might be more productive to do as Machiavelli advised and go back to first principles: what should a modern Horseracing Levy be for?

Since the Levy is a statutory transfer of value from betting to racing, which is unique to that sport, it must follow that the betting industry as a whole requires specific things from the sport of racing which would not exist if the sport were left to its own devices and could not be brought about through business agreements between companies. Otherwise, a solution could (and should) be commercially arrived at.

In my view, the requirements of the bookmaking industry from racing boil down to two very simple things, the combination of which is what makes racing so different to other sports (excepting dogs):

1. A programme of fixtures designed to deliver regular and attractive opportunities to bet

2. An infrastructure which provides integrity, probity and trust to the highest possible standard

Does the current Levy achieve these things? A long way from perfectly, so consider each in turn.

This is not the place to debate the optimisation of the fixture list. The question more germane to the future of the Levy is: does the money taken from bookmakers get effectively spent on ensuring that racing provides attractive betting opportunities as well as quality sporting ones? The short answer to this question is no, on two levels.

First, it is curious from a philosophical perspective that racing largely pays to organise itself, largely for the benefit of betting, through BHA fees (c. £30m), whereas betting only helps to pay for the winners (c. £56m prize money) and some integrity costs (£16m – see below). It is overwhelming a betting need that races are put on circa every 10 minutes every day of the week and do not clash (unlike nearly every other sport) – which drives pretty much all other organisational decisions within racing: bookmakers should therefore logically pay for it.

Second, is the Levy spent to ensure the sort of things punters like (large field sizes, racing at accessible times, festivals) rather than  what ’racing’ likes (much smaller field sizes, a largely effort-free chance to get a run, access to big prize money)? This is not an unequivocal no but it is closer to no than yes, in my view. Again, it is illogical that betting’s transfer of value to racing is not effectively and transparently being spent on reinforcing betting-friendly content (the bookmakers are also at fault here for imperfectly understanding what ‘betting friendly content’ is and how it is evolving).

From an integrity perspective, UK racing does a good job; a few high-profile failures being inevitable. However, similar to organisation, for integrity racing in large part funds itself, notwithstanding betting being the most obvious and significant reason to throw a race, while trust in the result is of at least as great a value to the betting public and bookmakers as to racing’s direct participants. The Levy currently contributes to this, but much is left to courses and the regulator.

Given these issues, how do we see a modern Levy being justified, legal and fit for purpose on the basis of first principles?

In my view, a modern Horseracing Levy should do five things:

1.       Fund the organisation, regulation and integrity costs of the racing industry

2.       Provide a ‘base level’ of prize money for all fixtures to underpin fixture volume (with KPIs)

3.       Provide a range of incentives to attract larger field sizes wherever appropriate (including, but explicitly not limited to, prize money, again KPI-driven)

4.       Provide R&D into product improvement from a betting perspective (properly governed)

5.       Give bookmakers a seat at the table in organising and planning racing

Equally, I see little logic in the Levy continuing to:

1. Fund equine and veterinary research (this is a racing, not a bookmaker issue)

2. Fund large prize money pots (this can and should be achieved commercially rather than through what is ultimately a highly regressive tax)

It should do these things with an independent executive steered by a board equally balanced by both racing and bookmakers, with an independent Chair. From a funding perspective (not fully covered in the consultation, in part perhaps because the Levy’s unclear purpose and objectives go unchallenged), I believe the Levy should be calculated on a bottom-up (and independently audited) needs basis, driven by points 1-4 above, with the costs shared among all bookmakers (including offshore), on the basis of gross win generated on the product across all channels. This would be far more transparent, sustainable and efficient than annually attempting to plan on an outcome driven by unknown variables, unduly (and dangerously) biased toward a single channel.

In this way, the Levy will be clearly spent on the things, and only on the things, that the betting industry as a whole needs, wants and/or should pay for. The sport can then spend its time, effort and commercially generated money on providing a better sport.

Why should racing support this? Simple, its core funding is built around need, and therefore effectively underpinned, for ‘keeping the show on the road’ as a betting product. If it wishes to put on a bigger or different show it must do so on commercial merits, like any other sport (almost certainly with bookmaker support and investment). Perhaps less palatably, but critical to governance, fairness and long-term success, bookmakers’ money comes with a greater say in how the show is put on.

Why should bookmakers support this? Perhaps this is less simple since a greater share of the cost of racing is borne by the bookmakers on a statutory basis. However, this system would provide a seat at the table on product, with clear KPIs and funding for improving the product from a betting perspective, transparent use of funds, and a far less adversarial negotiating position. A larger statutory element of betting’s value transfer to racing would also help to defuse the economic time-bomb facing both industries of unsustainable retail racing costs (trending toward structural problems for both sides), structurally limited remote media revenues (vs. current LBO picture values), and an acute lack of product innovation. Finally, it could undoubtedly be a catalyst to negotiate efficiencies elsewhere.

Many stakeholders may not agree with my answer, and I do not pretend that it is much more than a first attempt to look at the question from a different perspective, after years of industry failure to achieve change. However, for all stakeholders, in order to successfully reform or replace the current Levy, by far the most important question is yet to be answered is: what is it for?