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Monday, 29 September 2014

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…

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