Declaration of the Rights of Racing

By Paul Leyland, Founding Partner, Regulus Partners

“There are only two forces that unite men - fear and interest.” Napoleon Bonaparte 

During Wednesday’s Budget, the  Chancellor of the Exchequer announced that a Horserace Betting Right will replace the current Levy. After more than a decade of vacillation, the government has conducted three quick-fire consultations and (rather rapidly) made its decision. 

Matthew Hancock, MP for West Suffolk (Newmarket), former Chief of Staff to George Osborne, and a business minister, has been a leading champion of the Right (no pun intended). Clive Efford MP, Shadow Minister for Sport, has also given his backing to the change. The details remain unclear, but the course seems set for a Right whichever combination of parties wins power (or at least office) in May.

So far the response has been one of muted delight from racing and a mixture of incredulity, rage and fear from the bookmaking community.

First off, it is worth saying that I think the bookmakers deserved to lose this fight. As discussed elsewhere (http://regulusp.blogspot.co.uk/2014/09/the-horse-racing-betting-levy-what-is.html), racing is a sport designed (in the most part) for betting on (especially off-course), and as such betting should pay more to racing than to other sports, which are nowhere near so inter-dependent and symbiotically entwined (excepting dogs). The betting industry should also see this as an investment that will deliver a return: sustaining and influencing what remains a key product (c. 45% retail; c. 33% remote) rather than dressing up its neglect as (self-fulfilling) ‘inevitable decline’.

Despite this very real symbiosis, the last decade has been dominated by disengagement on product and belligerence on economics. With the growth of remote and now channel shift (retail to remote), we estimate that c.  33% of horseracing gross win is occurring over remote devices and this mix is growing. Bet365 pays the Levy despite now being offshore; Betfair pays the Levy on commission, which is much better than nothing; the big UK retail bookmakers have agreed a Levy top-up which I don’t believe comes close to covering their lost remote Levy (in total across the four); the rest – in a rapidly growing sector - quite glibly freeload (shrugging at ‘anachronism’ without engaging in alternatives). Moreover, racing’s economic comeback of Picture Rights is so geared to landbased betting that it merely accentuates the remote funding time-bomb. Something had to be done; and as the bookmakers were not collectively willing to play nicely (as well as gaining bad press on other issues), that something is overwhelmingly in racing’s favour.

However, the fact that the bookmakers deserve to lose the fight (or at least round one), does not make this situation positive.

A Horserace Betting Right is potentially a very bad thing in my view because it is so one-sided. The government consultations spoke of symbiosis, inter-dependence and balance. A Right does not conceptually reflect this: the government is arming one side of the fight and disarming the other.

This is dangerous and to demonstrate why, let’s consider a possible scenario playing out over the next few years (this is not a prediction, just an illustration):

-          Racing, understanding the difficult economics of the bookmakers, attempts to get an agreement on a material but not significant rise on current the Levy: somewhere in the region of the £100m of recent yore which has featured in consultations.

-          Some bookmakers, seeing the need for an accommodation, agree in principle but a large proportion of (remote-led) bookmakers, which have never paid, much less understood, the Levy, refuse to play.

-          A critical mass of bookmakers seek to challenge the Right legally; straining relations with racing, DCMS and Parliament, at a very sensitive time for gambling regulation generally.

-          Separately, retail bookmakers attempt to minimise downside risk by playing as hard as possible on Picture Rights, further straining commercial relations with racing.

-          A series of fudges are worked out while the legal position is settled (in my view the likelihood of a successful challenge is extremely low but the bookmakers could play for time / hope).

-          Racing wins its Right, but it now feels it has been given the run-around for several years; fraught commercial and legal battles have given more power to hawkish elements.

-          Separately, bookmakers are under pressure from machine and remote regulation; they need to ensure sports / racing revenue mix remains high from a business continuity and risk perspective almost whatever the short-term P&L cost.

-          Bookmakers are on the back foot legally, politically and commercially; the Impact Study gave a(economically unsustainable) value range for the Right of 30-50% - Racing thinks in these circumstances why not? It’s payback time after all…

And in such circumstances, there is very little the bookmakers could do but pay up – racing has the Right, not an independent body; a Tribunal may settle disputes but it cannot set the rate. Sure, in five years’ time racing may regret pillaging bookmaking to near extinction and return to moderation - but by then it may be too late for a beaten industry - and who gets bonused on taking a five-year view anyway?

This is a doomsday scenario and it probably won’t happen as the bookmakers will see sense and racing will show restraint. But looking at the last ten years should we be relying on a model which requires sense from bookmakers and restraint from racing?

The only way to ensure racing does not have the power to Terrorise betting, even if it chooses to be moderate, is to enshrine balance constitutionally. Not with a Right, which essentially allows one group to decide what is ‘best’ for all; but with a genuinely two-way transfer of value in which both sides have an equal say in a properly governed and independent process.

Bookmakers should not repeat the mistakes of the past by going on the offensive (and therefore appearing offensive to many stakeholders); they should use the hiatus of the election to reach out to racing and form a working long-term agreement which encompasses all betting revenue on GB racing, pays a fair share toward putting on the betting product, and stakes a reasonable claim to governing its investment. It may now need to be called a Right, but even one-sided rights tend to lead to sensible constitutions in the end (though usually only after a lot of bloodshed). I only hope that after such an emphatic  victory in round one, racing is still prepared to listen, before a really damaging fight begins in earnest which risks poisoning everything. Over the next few months and years one maxim should be at the forefront of the thinking of both sides: the only sustainable solution to betting and racing working together effectively is one built on interest, not fear.

Taken to the cleaners?

By Michael Ellen, Partner, Regulus Partners

Why the industry and regulators need to seek common cause to pursue shared objectives

"He who seeks to regulate everything by law is more likely to arouse vices than to reform them." Baruch Spinoza (a very influential 17C dutch philosopher)

Balancing acts are tricky - ask any regulator. Leave too much to market forces and sooner or later those forces will bite you on the bum; over-legislate and you may find yourself the proud owner of watertight regulations that operators seek to bend or avoid at every opportunity.

Generally, the public interest is best served by laws which provide proportionate protection against harm without stifling legitimate commerce.

So it goes with gambling - an industry which (in Britain) has, by and large, benefited from well-balanced regulation – so far.

However, the forthcoming application of the EU's Fourth Directive on Anti-Money Laundering (“4 AMLD") has prompted fears in the remote sector that the balance between protection and commerce may be moving out of kilter. If correct then the consequences for Britain's regulated market could be damaging.

This is not a question of the narrow parochial interests of gambling. Even the most blinkered industry executive would refrain from suggesting that the well-being of the industry should be placed above the state's need for protection against the toxic and destabilising effects of money-laundering. Instead, it's a question of whether the solution (i.e. its regulation) is proportionate to the problem. If not, the regulations may cause the migration of customers from regulated, responsible (and now tax-paying) businesses to unlicensed operators - and in doing so undermine the very objectives that the legislation is designed to achieve.

At the moment, the Danish Gambling Authority (DGA), which regulates one of the most liberal demand-side regimes in Europe, claims that 90% of play by Danish residents is on domestically licensed sites. Meanwhile, the Dutch government has set as a licensing objective for its new remote regulator a target of regulating 75% of Dutch resident player activity. By comparison, the French regulator (ARJEL) probably captures less than 50% of French players’ remote gambling spend, despite attempts to enforce. Italy and Spain lie somewhere in the middle, again shaped by their regulatory approach.

UK, Denmark, and now the Netherlands are aligned with the commercial ethos of attracting players, promulgating the merits of regulation and regulated sites and in this way effectively working to discourage players from straying toward low-to-no regulation offshore sites when seeking a flutter online.

It remains to be seen whether this approach wins out in Europe more broadly. The fact that legislation has generally moved in the opposite direction (with bureaucracy trumping pragmatism) for such a long time suggests not (though there is an encouraging liberalisation pipeline from both Italy and Spain).   Accurate analysis of the state of the industry is needed to support policy if we are to move into an informed and constructive era of political involvement in gambling: facts speak far louder than opinion and the industry has for too long been much longer on the latter than the former.

However, too often the key vested interest (and the strongest voice) in the room in any National or EU debate on remote gambling has been the protection of state monopolies – which has emerged as a key obstruction in the development of co-ordinated EC remote gambling standards.

Under its new Latvian presidency, Brussels has given priority in its legislative program to 4 AMLD, which represents seven years of Brussels’ thinking on money laundering. It builds on 3 AMLD, which is incorporated in the UK Money Laundering Regulations 2007.

Seven years has not been enough time to agree what should fall inside the central definition of remote gambling, so that sports betting – ironically seen by many informed onlookers as being at the top end of money-laundering risk within the sector (because of the possibilities around exchanges and off-market transactions) – may fall outside the general ambit of 4 AMLD as it is implemented in each Member State.

The Directive, as presently drafted (and now close to final approval), tightens the requirements around the remote casino operator’s ability to accept player deposits. It requires due diligence to be undertaken on the ownership credentials for every transaction (a term itself subject to interpretation, potentially causing a patch-work of requirements across states) over €2,000. This introduces very unwelcome interruption to play for many (crucial) higher-value players (potentially a fillip to black-market operators), unless the state regulator chooses to make, and subsequently justify, a risk-based exception for the relevant product. The underlying logic given for the change is that because the player is not present at a remote casino, its business falls into the highest risk category for money laundering.

Logical enough, you may say; the problem is that it is not supported by either practical experience or academic research. Over the last decade, the International Monetary Fund’s jurisdiction reviews of each of the major offshore centres for e-gambling operations have identified a consistent theme of low volume reporting of suspicious transactions, relative to other e-commerce activity.

The work of Professor Michael Levi of Cardiff University (one of our most respected experts on organised crime) explains why this is so. Quite simply, regulated online gambling does not present an attractive environment for money laundering due to three key factors:

1.    depositors are properly identified

2.    all transactions are recorded digitally and are subject to scrutiny, exception analysis and then retention

3.    money is returned to the same (identified) card/ account source as the deposit originated from i.e. the known, named, identity-verified player

Money laundering activity does occur in remote gambling; but the regulated sector is a very difficult place to do it successfully. Regulators already know this, yet the imminent implementation of 4 AMLD in Europe will cause major disruption to the industry, and according to informed commentators, “gambling and payment firms will need to lobby governments on a nation-by-nation basis when countries start to implement it”.

The onus is on the industry and regulator alike to ensure that the implementation of policy is based upon facts rather than myth and supposition. The regulators are unlikely to boast of their success in controlling money laundering while the ability of operators to inform the debate is hampered by political and media prejudice against the industry

The application of disproportionately restrictive pressures on regulated operators seems likely to improve market conditions for illegal operation, where money laundering is much more likely to prevail. By the same token it buries the regulator in work that would not otherwise rank so highly on a risk-adjusted scale.

And so the industry and regulators face yet more fragmented jurisdictional requirements on which to build their compliance systems, around a threat which on current evidence seems low; the clear evidence presented on the effects of the difference between ‘good’ and ‘bad’ regulation seemingly lost in translation.

So that is the problem – what is the solution?

Enlightened operators and enlightened governments have a shared interest in the development of healthy regulated remote gambling markets (and the successful suppression of unregulated companies). In order to achieve this (and to ward off the threats from ill-considered European legislation), companies need to do more to find common cause with those who regulate them - an antagonistic relationship serves the purposes of neither party. They also need to deploy facts to demonstrate the efficacy of their position.

An obvious initial step for both parties would be the commissioning of independent research into the extent of money-laundering within remote gambling and how this splits between regulated and unregulated sites. Only by first understanding the problem can we hope to apply effective remedies. Without such research, the interests of the operator and regulator will remain prey to the unintended consequences of Brussels bureaucracy.