GC Assurance Statements: assuring better gambling businesses

By Paul Leyland, Founding Partner, Regulus Partners

“The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the local village watchman, who just puts down what he damn pleases. “
“It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” Josiah Stamp

The Gambling Commission is currently consulting on a new Annual Assurance Statement, which would require the larger operators (over £25m UK revenue, which the Commission estimates to be c. 40 operators with c. 90% combined UK market share) to inform the Commission as to how they are understanding, measuring and mitigating the key risks captured in the Commission’s licensing objectives, notably:

·         Keeping gambling crime free

·         Protecting the vulnerable

The consultation documents can be found here:

http://www.gamblingcommission.gov.uk/Publications-consultations/Consultations/Open-consultations/Supplementary-consultation-on-the-introduction-of-an-annual-assurance-statement.aspx

I believe that this process is an important addition to the UK licensing regime for three reasons:

• It puts operators’ social responsibility practises under clear and systematic scrutiny
•  It should encourage operators to further increase the internal and external priority of social responsibility measures
• It may start to resolve some the natural tensions between social responsibility best practice and (short term) profit maximisation

It will be tempting for some operators to see this as an unnecessary regulatory burden, or, worse, an attempt to gather (partial) information in order to justify increased regulation. If starting from that viewpoint, the resulting submissions are likely to be little more than desk exercises produced by ‘compliance people’. I think such a response would be both short-sighted and bad business.

Short-sighted because there will always be pressure from groups within society to curtail some or all forms of gambling activity; whether reasonable, well-meaning, protectionist or just plain atavistic. This pressure tends to get politicised when issues are denied or obfuscated, rather than tackled (convincingly) head on: if there is no problem then it is not unreasonable to demand evidence to demonstrate that fact, failure to do so raises concerns even from the previously indifferent.

Half-baked attempts to provide such evidence are at best unconvincing and at worst grist to the mill of tougher regulation. In order to escape current and future politico-regulatory issues the industry must be seen to be taking its social responsibility seriously: that is the reasonable expectation of large swathes of society; and now - election year after all - is the time to do it.

To see why it is bad business, let’s consider what the Commission is really asking for.

The Annual Assurance Statement essentially comprises six questions:

• What control systems and governance does the operator have, especially relating to crime (AML, criminal spend, integrity) and social responsibility (fair, protecting the vulnerable)
• What actions have been taken in the last 12 months to improve these
• What plans are there to improve systems and governance in the next 12 months
•  What is the operator’s narrative assessment of the extent to which its revenue potentially comes from harmful gambling
• What tools are being used to identify problem and at risk gambling
•  What actions have been taken and how is effectiveness and impact evaluated and improved

None of these questions are particularly onerous or dangerous and most operators should be doing some or all of the above already. Further, developed properly this can have significant positive impact on the business and the industry as a whole. We see five key business areas where this increased scrutiny and process should generate clear benefits.

Reputation is the most obvious starting point for a gambling industry which is regularly battered in Parliament and the press. A clear policy of focus and improvement is something forward thinking operators can use to demonstrate that they are on top of the problem, in a more sophisticated (and therefore convincing) way than before. The Gambling Commission and the industry can also reasonably argue that sufficient duty of care is being carried out. This could prove to be a key pillar in protecting the industry from further regulatory encroachment.

Risk management is another area which can prove to the benefit of the business. There have been several reported incidents where both remote and landbased operators have been caught inadvertently handling the proceeds of crime or assisting in money laundering. To state that this is bad business is to state the obvious (commercially, legally, reputationally) and systematically improved measures to prevent this bad business can only be a good thing.

Better customer understanding should come from enhanced problem gambling tools. Ladbrokes has flagged that it is rolling out its leading algorithm developed from its Odds On card. The temptation to believe that only card based or remote play is data rich is dangerously myopic, however – practically all forms of gambling are data rich and customer engagement is key. It has long been a valid criticsm of the gambling industry that it is not customer-centric enough (even in terms of customer service), a clear spotlight on customer behaviour should be used to accentuate the fun as well as reduce harm.

The Assurance Statement is clear that it is to be signed off by very senior executives (eg, CEO). This is important in ensuring that social responsibility is recognised as a key business driver right from the top (and when a CEO cares about something the organisation tends to). While all operators pay lip service to this, a pervasive culture of pushing problems the way of compliance is only just being overcome and any accelerant to this will make operators much stronger in being able to deal with issues of public concern, from both a cultural and operations management perspective (ie, minimise poor practice and mistakes, and handle the mistakes that do occur more effectively).

I am also encouraged that the Gambling Commission intends to take an active role in fostering and spreading best practice: this is an area where the industry will fail to gain from a lob-sided or patchy approach: even though some operators are already embracing this approach, they are in danger of being let down by the laggards. Effective coordination, and even leadership, is therefore vital.

In short, by fully embracing and embedding the purposes of the Annual Assurance Statement, the industry will not only justify the logic of relatively light touch regulation, it will also improve its reputation and produce more profitable and more sustainable businesses.

Time to think outside the box

By Dan Waugh, Principal Consultant Regulus Partners

“Creativity requires the courage to let go of certainties.” Erich Fromm

It may seem strange to suggest it now at a time when gambling is once again at the centre of a fairly major public policy debate – but there may come a time when even the Daily Mail recalls with misty eyes a time when gambling was part of the fabric of British high-street life.

Looking at data from the last five years suggests that – notwithstanding the current concerns around proliferation (principally betting shops) - we should be concerned about the future of land-based gambling.

Everyone knows that bingo clubs and arcades have been under pressure for some time. According to the latest Gambling Commission data, revenue from these sectors has shrunk by 4% and 19% respectively since 2009. These are the show-ers.

What is less widely reported is the state of the supposed growers. The betting shop sector has experienced solid growth this decade delivering a c. 40% gross win increase since 2004 – but decline in its core product (horse-racing and greyhounds) has been masked by stunning (and relatively easy) growth from machines. Over and above the political risk on machines, there is something unsettling for the industry about this situation.

It’s all a little reminiscent of Robert Putnam’s 1999 work ‘Bowling Alone’, in which the Harvard Professor of Public Policy described the decline in community participation in the USA during the second half of the twentieth century as age cohort by age cohort people gradually disengaged from traditional methods of interaction.

Meanwhile, the casinos sector exceeded £1bn in table revenue for the first time last year and has generated an impressive 7% compound growth rate over the last five years. However, the lion’s share of this growth has come from London (where Mayfair has benefited from a buoyant international market and the mainstream has been bolstered by about £90m of capital investment split between the Hippodrome in Leicester Square and Aspers at Stratford).Taking London out of the reckoning, casinos start to look a little anaemic with CAGR of just 2% over the last five years. Meanwhile, annual participation rates (for playing casino games in a casino) were stuck at just 3% according to the most recent health surveys – hardly the boom we were led to believe would follow the Gambling Act 2005.

On the other hand, remote gambling – now in its 21^st year – keeps growing, with mobile putting a new spring in the step of the sector. Indeed at over £3bn in revenue, remote is now bigger than any single sector of land-based gambling (other than the National Lottery)

One of the problems facing the land-based element of our gambling industry is that the unit classifications have not really changed in the last 40 or 50 years. We have on-course betting, betting shops, bingo clubs, casinos and amusement arcades – concepts defined in the 1960s. There have been product ‘innovations’ (but these have largely been limited to EGMs) as well as some significant regulatory gains. Bingo clubs and casinos are typically larger now than back then and betting shops are permitted to admit natural light and even to offer toilets (as well as four B2/3 machines per shop) – but the core nature of the units themselves has remained largely unchanged. We have had supply-side and regulatory modifications on a theme but nothing more fundamental.

In land-based gaming (unlike in the remote sector) the licence – rather than customer needs - still largely determines the product and experience: casinos are distribution points for roulette and card games; bingo clubs for bingo games; arcades for slots. Betting shops may now generate the majority of their revenue from machines but betting on horses is still the draw for most customers.

Britain is a remarkably accommodating market for gambling. Just about all products are available, gambling taxes are generally on the low side, advertising is (controversially) prevalent, and regulation is designed to be of the light-touch variety. Yet while we have all types of gambling, we don’t have all formats – and attempts to add new formats have been limited.

In Connecticut right now, a British company, Sportech is developing sports and sports wagering bars under the Bobby Vs brand – yet the idea that it might transplant the concept to its home market is almost unthinkable because the necessary regulations are not in place.

Taking a global look at each of the key gambling product categories – betting, casino, bingo and slots – it is apparent that our solutions are not the only ones available. The obvious example is casinos where Britain’s limited amenity locals market format looks increasingly out of step with the global development of destination-style venues. However, there are also international alternatives to the British model of bingo club (community gaming centres in Canada for instance or the new style venues emerging in parts of Spain), betting shops (casino-based sportsbooks in Nevada, PMU bars in France, TAB outlets in Australia) and slots arcades (the Station Casinos Wildfire concept in Nevada, arcades as mini-casinos in parts of Spain and in the Netherlands).

The common strand to most of these examples is that they tend to be larger and more complex outlets than their British counterparts – and typically incorporate a wider range of non-gambling amenities, including licensed bars.

Over the course of the last 50 years, Britain has developed as a convenience gambling market (the Gambling Commission regulates more than 10,000 licensed venues, not including pubs with slot machines). This is in contrast to the situation in a number of culturally similar jurisdictions where governments have favoured concentration and control rather than dispersal.

The problem with the UK situation (from a commercial standpoint) is that convenience is now the trump card of the remote sector. This presents a structural issue for ‘purely transactional’ gambling in traditional outlets. In order to compete effectively, venues may need to enhance the experience of gambling – and that is likely to require a much more sophisticated approach to concept development (including a willingness to embrace the risk of failure in order to learn and innovate). The alternative is to give up gradually on land-based gambling and seek to shift one’s business over time from venues to remote channels – but this is not without its risks.

Gambling often blames DCMS and the Gambling Commission for impeding innovation. However, it seems likely that the real culprit is a lack of industry imagination. Instead of trying to excite government about the possibilities of new gambling formats, or testing new concepts on customers, operators more commonly engage in trying to find loopholes through which to sneak in more products (generally slots) without offering much in the way of economic or social value or compensating customer protections. Unsurprisingly, this finds few supporters in government and tends to spark in-fighting with neighbouring sectors.

Remote gambling is now an important and valuable part of our gambling industry – especially in terms of consumer choice - but it would be a shame on many levels if it came in time to be our gambling industry.

Contrary to the current direction of travel, I believe that there is a ‘win-win’ solution in the gradual replacement of our existing formats with more sophisticated and more powerful land-based units – something that would arguably be easier to regulate, better able to offer social protections, of greater economic value and better suited to changing market conditions.  If so, it would seem that now is the time for the industry to start thinking ‘outside the box’.   

How I Learned to Stop Worrying and Love Taxes

By Paul Leyland, Founding Partner, Regulus Partners

 “Thinking is the one thing no-one has ever been able to tax” Charles F. Kettering

2015 was always going to be a difficult year for gambling operators from a fiscal perspective:

• UK remote Point of Consumption taxes (15% revenue from December 2014)
• UK B2 Machine Games Duty increase (5ppt increase from March 2015 to 25% revenue)
• EU Point of Consumption changes to VAT (especially impacting Germany-facing operators
• Italian machine tax increases (VLTs from 5% to 9% of turnover; AWPs from 13% to 17%
• Austrian enforcement of its 40% casino tax on non-domestic licensed operators
• Ireland’s 1% turnover tax on remote betting likely (finally) to come into force in 2015

It would be wrong to suggest that this is a one-way street: for example the UK bingo industry had its duty halved to 10% last summer (after some effective socially-focussed lobbying). However, the tide across Europe is very much in the direction of tax increases – in many jurisdictions and across many products and channels. We probably haven’t seen the last of it this year either.

This is hardly news, and I have written before (Sin Tax Error, October 2014; below) that I see some (most) industry attempts to halt the encroachment of the tax man as likely to be counter-productive on many levels.

Tax is on my mind again now for two reasons:

First, governments are generally persuaded that increasing the taxes which obviously impact ‘ordinary’ people (sales and income) is deeply unpopular and can be economically damaging; conversely the trend in business taxes and treatment of the super-rich is, if anything, increasingly liberal. And yet growth is proving elusive and deficits remain stubbornly high. So the temptation is to look for ‘specialist’ taxes to levy, which cause minimal economic and political (popularity) collateral damage. The only thing that stops gambling from being the perfect victim of this trend is its small size and fiddly complexity. Nevertheless, we are likely to be hearing a lot more about gambling tax increases this year.

Second, all other things being equal, there tends to be a correlation between a low tax footprint and growth. This is unsurprising - high levels of tax and regulation tend to inhibit growth in all sectors, and gambling is no different. Whereas business has largely won the debate since the Reagan-Thatcher era, gambling is not always seen as the sort of business governments want to encourage, even when those governments are supposedly ‘pro-business’. Consequently, the principle ‘economic benefit’ of many forms of gambling is seen by government as tax yield and an ‘optimised’ tax rate is the one that provides the highest yield (rather than promotes growth). More tax and regulation can therefore be handed down lightly by our political masters if it gets them out of a political or fiscal hole, with the risk of hitting growth not really bothering them.

So, with fiscal pressure building and gambling likely to be further squeezed (NB, there is likely to be two Budgets in the UK this year), am I bearish on growth in gambling? Well actually no. Quite the opposite, in fact (and for those of you who remember me as an analyst, not being bearish now might come as a surprise).

I am very bullish on medium / long-term gambling sector growth precisely because of the developing fiscal squeeze. One of the biggest problems with the sector over the last decade has been the relative ease with which many operators generated comfortable double-digit operating margins (often due to low-to-nil tax footprints). This led to big marketing budgets, big dividends, and big senior pay packages. But did it encourage innovation? No. Did it drive an even defensive focus on the customer? Quite the opposite.  Did it foster a strategic and responsible approach to stakeholders and suppliers? Again, painfully, belligerently and often counter-productively, emphatically not.

As with Tesco – once a doyen and now being dragged over the coals – success rarely breeds anything other than arrogance and complacency, which can lead to bad decisions and loss of control. Thanks to mounting fiscal and regulatory pressure, I believe this attitude is now leaving the sector - and its departure will leave it much stronger (when the humility stops – stop).

A leaner, more humble, gambling sector will have to fight to retain its customers, not just pay to obtain (and re-obtain) them. It will have to get every last ounce of innovation from its supply-chain, not just every last ounce of saving from a contract. And it will have to treat its key stakeholders with responsibility and respect in order to avoid further encroachments on its capacity to do business. All of this points to a more intelligent, more productive, more customer-focussed, and more strategic gambling sector. Each of those traits drives growth far more surely than big cash flow returns.

There are bound to be losers as well as winners because of this change – not all will manage it effectively (or even try). The process of change is also likely to be painful and difficult even for the winners. However, my prediction is that 2015 will mark the beginning of a new culture in gambling – a culture fit for driving growth which has been largely absent for nearly a decade.  Existing ‘big’ businesses need to play by these new rules to adapt to a less forgiving environment – otherwise they will see themselves replaced by more dynamic newcomers though some (much needed) “creative destruction”.