Memorandum submitted by the National Lottery Commission
SUMMARY
1. The Commission believes that the Government's response to the report of the Gambling Review Body has addressed its main concerns over the potential for certain of the Review Body's proposals to have a damaging impact on net receipts for the National Lottery. We support the Government's intention to create a single gambling regulator, the Gambling Commission, for the whole of the gambling industry other than the National Lottery. We welcome the increased emphasis upon social responsibility and enforcement of age related provisions. We would encourage the Government within its future legislative plans to provide a statutory definition of a lottery to provide clearer guidance for regulators especially within the context of competition between operators. We have doubts about the potential for combining our functions within those of the Gambling Commission and we will contribute to that debate when consultation takes place.
INTRODUCTION
2. This memorandum has been prepared by the National Lottery Commission (the Commission) to assist the Culture, Media and Sport Select Committee (the Committee) in its inquiry into gambling and the Department for Culture, Media and Sport's (the Department) proposals for changes to the industry, and the impact of these on the National Lottery. This short memorandum is supplemented by:
(a) The Commission's November submission to the Secretary of State;
(b) NERA's two reports to the Commission, submitted to the Secretary of State in February; and
(c) Three information notes setting out consumer protection arrangements within the National Lottery.
BACKGROUND
3. The National Lottery Commission is the statutory regulator of the National Lottery. Its overriding duties are to exercise its functions in the manner it considers most likely to secure that the National Lottery is run with all due propriety, that the interests of every participant in the National Lottery are protected, and, subject to these, to do its best to secure that the net proceeds of the National Lottery (that is, the returns to the Good Causes) are as great as possible.
SCOPE OF THIS MEMORANDUM
4. Our responsibilities are centred upon the conduct of the National Lottery. Our objective in this memorandum and our previous submissions to the Secretary of State has been to provide the Committee and the Government with our best assessment of the likely broad impact of the proposals put forward by the Review Body on the National Lottery. This follows directly from our responsibilities and overriding duties. We do not comment on those issues that do not impact on the National Lottery.
5. We have no responsibility for the distribution of the proceeds of the National Lottery to the Good Causes. Nor do we have any responsibility for regulation outside the National Lottery. For this reason, we did not make a submission to the Gambling Review Body although we did provide evidence about under-age play, at its request. Equally, we recognise that decisions of policy are for the Government to make.
IMPACT OF THE GAMBLING REVIEW BODY'S RECOMMENDATIONS ON THE NATIONAL LOTTERY
6. The Commission responded to the Government's request for views on the proposals contained within the Gambling Review Body's report in two stages. Our initial submission to the Secretary of State, made in November 2001, is included with this memorandum and sets out our initial concerns, prior to the completion of further analytical work. These initial concerns, are outlined below. Our second submission, made early February 2002, included a study that we commissioned from National Economic Research Associates (NERA) of earlier analyses undertaken by Camelot. These papers are also included with this submission.
The Commission's first submission
7. The main concerns about the Gambling Review Body's proposals that we identified in our initial submission to the Secretary of State were as follows:
(a) Understanding the financial impact: The Gambling Review Body was asked, in its terms of reference, to "look at the impact on the Lottery of any proposed changes, including an assessment of the potential effect on the income to good causes." [1]review concluded that "We did not attempt to quantify any of these effects......it will be possible to undertake specific studies of the effects of these proposals." [2]The Commission considered that it was essential for further work to be undertaken to ensure that the likely impact of the Gambling Review Body's proposals on the National Lottery was fully understood.
(b) Society lotteries: We saw a likelihood that deregulation of society lotteries would have a significant impact on the National Lottery, and thereby on the Good Causes that it supports. Such deregulation would provide the opportunity for and external lottery manager to develop the critical mass necessary to support a national infrastructure in direct competition with the Lottery, and so to generate substantial jackpots. Such and operation would have a number of competitive advantages over the National Lottery, including a lesser requirement to generate returns for the Government (through lottery duty) and for the Good Causes, and the ability to select the most attractive of good causes to work with.
(c) Side betting: We considered that permitting betting on National Lottery numbers might well, in the longer term, have an impact on the Lottery. This impact is likely to arise in two ways. First, whilst such betting is not likely to compete directly with the potentially life-changing jackpots offered by the main draw, it may compete with other lottery products, especially Instants. Second, if betting becomes more commonly available through interactive media[3], the argument that National Lottery players are unlikely to start going into betting shops loses its force. We are concerned that such betting may appear to players to carry the endorsement and regulator oversight of the National Lottery when it in fact does not. It also seems perverse that the draw—an event integral to the National Lottery—should be opened up to the benefit of the Lottery's competitors to the disadvantage of the Lottery itself and of the Good Causes that depend on it.
(d) Bingo and pools: Deregulating bingo and football pools by allowing them to offer life-changing jackpots for a small stake, together with the other changes recommended by the Gambling Review Body, could also put Lottery revenues at risk.
(e) The lotteries market: The National Lottery will also face growing competition from products offered through interactive media. This is bound to impact on the returns to the Good Causes. Whilst the extent of the impact will depend to a degree on the National Lottery's ability to offer other types of games[4], it will depend on the ability of the Lottery's competitors to package games which look to the player like lotteries and which, as a result of the significantly lower "public levy," offer players and operators a better return at the cost of returns to the Good Causes.
(f) Legal definition of a lottery: The Gambling Review Report also makes reference to the legal definition of "lottery." It comments in passing that some US states adopt a wide definition of lottery[5], that the impact of gaming on the internet will depend on how far Camelot is permitted to offer other types of game[6] and that a statutory definition of lottery would clearly be helpful[7]. We share the view that it would be helpful to clarify what constitutes a lottery, but consider that the way in which the boundary is drawn must be given careful consideration, as it will have a direct impact on the ability of the National Lottery to develop new ways of playing, especially as interactive media develop, and could reduce the scope of the Lottery if drawn very narrowly.
The Commission's second submission
8. We provided a further submission to the Secretary of State in February 2002. This was based upon the three substantive pieces of work conducted for Camelot by reputable independent consultants. These consultants set out their views on the expected financial impact on the National Lottery of the full implementation of the proposals in the Gambling Review Body's report. In order to avoid duplication and unnecessary cost, we assessed the robustness of the methodology and conclusions drawn by these consultants, rather than replicating their work in full.
9. We undertook this assessment by commissioning two reports from NERA (National Economic Research Associates). We then carefully reviewed their work, which we concluded did not cast fundamental doubt on the methodologies adopted by Camelot's consultants.
NERA concluded that:
(a) Camelot's consultants' conclusions on allowing side betting are probably over-stated but that side betting is still likely to have a significant impact. NERA estimate this at a £66 million reduction in National Lottery net annual revenues (Net revenues represent total sales revenue less the value of prizes payable);
(b) The conclusions reached by Camelot's consultants on the impact of deregulation on Bingo are probably over-stated but that deregulation is still likely to have an impact. NERA estimates this at a £12 million reduction in National Lottery net annual revenues;
(c) Difficulties in arranging national distribution and marketing make it uncertain whether a deregulated society lottery could achieve the necessary size to compete. This leads NERA to the view that the impact of such a deregulation could pose a substantive threat to the National Lottery. NERA's central estimate is a potential reduction in National Lottery net annual revenues of £168 million.
(d) NERA's central estimate of the expected impact of these three reforms on National Lottery net revenues is £246 million per annum (compared with Camelot's consultants' estimates of between £492 and £871 million). This converts into an annual reduction in the returns to those good causes that are supported by the lottery of £135 million (compared with Camelot's consultants' estimates of between £272 and £540 million).
10. It is important to note that NERA's estimate is based on the view taken by the Commission (at the time of the decision on the next seven year licence—December 2000) that sales were likely to remain at around levels achieved in the first licence period—an average of around £5 billion per annum. Camelot's consultants' estimates appear to be based on considerably higher sales forecasts, which include significant growth. These may be derived from its principle bid forecast of sales of around £51 billion over the next licence period. The table summarising the effect of the different assumptions about likely sales levels (attached, annex a) is also shown in the table attached to our second submission to the Secretary of State.
11. The Commission, having reviewed NERA's analysis, concluded that:
(a) while NERA's estimates show a substantial reduction on the projections made by Camelot's consultants, they still represent a significant reduction in the amount generated for those Good Causes that are supported by the National Lottery.
(b) In the light of our knowledge of the sector, there is a real possibility that a joint initiative by a supermarket chain, a lottery manager and a major national charity could provide a credible and attractive alternative to the National Lottery for a significant number of players. We therefore considered the risk to the National Lottery from deregulation of Society lotteries to be greater than NERA identify and this led us to expect that the NERA estimate is more likely to be understated than overstated.
THE GOVERNMENT'S RESPONSE TO THE GAMBLING REVIEW BODY'S REPORT
12. In March 2002 the Government published "A Safe Bet for Success—Modernising Britain's Gambling" as its comprehensive blueprint for reform of gambling within the United Kingdom. In so far as these proposals relate to the Commission's described concerns, the Government has concluded that:
(a) It intends to double the current limits on prizes and proceeds for society lotteries, and abolish the limits on stakes. Commercial lotteries will continue to be prohibited.
(b) A variety of money controls on bingo games will be removed, and rollovers will be allowed.
(c) There will be further deregulation of pools competitions, including provision for unlimited rollovers.
(d) It will legalise the provision of the full range of on-line gambling services by operators based in the UK, including on-line gaming.
(e) The Review Body's recommendation that side betting should be permitted on the National Lottery results should not be adopted.
THE COMMISSION'S CURRENT POSITION IN RESPECT OF THE GOVERNMENT'S PROPOSALS
13. We consider that the Government's proposals take account of many of the concerns that we raised. In particular, we believe that the Government is correct:
(a) To reject the proposal to allow side betting on the National Lottery.
(b) Not to accept in full the proposal to remove prize and revenue restrictions on society lotteries, but to confine itself to doubling these limits, so limiting their potential impact on net lottery revenues.
(c) To conclude that the impact upon the National Lottery of the proposals to deregulate bingo and pools competitions is of a much lesser financial scale.
The Commission is comfortable that this proposal should not have a substantial adverse effect on net lottery revenues.
We therefore welcome these proposals.
14. Our remaining concern is that the new statutory framework should encompass a statutory definition of a lottery so as to provide greater clarity. This should assist both the proposed Gambling Commission and ourselves when considering whether to sanction specific proposals and in regulating the activities of different operators.
REGULATORY ISSUES
Problem gaming and social responsibility
15. We welcome the Gambling Review Report recommendations and the Government's stance on social responsibility, which provides for the strengthening of regulation of gambling in the United Kingdom, and its recognition that the gambling industry should do more in its support for researching, limiting and treating problem gambling.
16. The National Lottery had an active regime of player protection. This is enshrined in the overriding duties placed upon the Secretary of State and the Commission by the National Lottery etc Act 1993. Many of its key features are laid down in Directions and Regulations issued by the Secretary of State, delivered by an informed and systematic regulatory regime.
17. The National Lottery is a regulated private monopoly operated primarily for the national benefit. A very large proportion of the adult population takes part. This special status means that it must demonstrably operate to the highest standards of propriety and that it must not encourage excessive or under-age play. We believe that the National Lottery has performed well, particularly in the area of player protection where it is seen by many as a world-leader. We believe that the gambling industry should be encouraged, where appropriate, to achieve similar standards to those achieved by the National Lottery. For instance, efforts should be made to prevent the incidence of problem gambling as well as to cure it where it arises. In particular, we would be reluctant to see the standards presently expected of the National Lottery reduced.
18. We have conducted studies into participation and expenditure that provide information about the nature of participation and the extent to which players (classified by households) spend their money on lottery products. This also provides some information about households in terms of age and income. Alongside this, we have also continued detailed research into the number of young persons thought to be playing illegally (by buying tickets with their own money) or through adults purchasing tickets on their behalf. We have developed our approach by requiring increasing measures of vigilance and action of the part of the operator. These have been formally codified within strategies under the new licence, which also increases the number of checks to be performed by the operator at the premises of its contracted retailers.
19. Supplementary information about player protection, and in particular excessive play and controls against under-age play, are included with this submission.
20. We support the Government's proposal that the age for playing the National Lottery should remain at 16. this view was also taken by the Select Committee in its report of 7 March 2001 into "The Operation of the National Lottery." We have seen no evidence to date that leads us to believe that the present minimum age of 16 should be increased. We believe that the enforcement of the minimum age remains possible and practicable. We remain vigilant and active in our approach to this subject.
A single regulator
21. The Commission welcomes the Government's proposal to implement the Gambling Review Body's recommendation for the creation of a unified gambling regulator for the whole of the gambling industry other than the National Lottery. This should serve to produce consistency and combine relevant expertise and experience within activities that have many facets of their operation in common. We welcome the opportunity to work closely with the Gambling Commission and to develop contacts and understanding at different levels, so as to secure consistent and co-ordinated approach to regulation across the whole of the gambling sector.
22. The Gambling Review Body also proposed that, "if it were proposed that the regulatory role of the National Lottery Commission should be separated from its sponsoring and commercial roles," [8]then that regulatory role should be undertaken by the Gambling Commission. We agree that there could be substantial potential for conflicts of interest to arise were the Commission's regulatory responsibilities (which include the duty to maximise returns to good causes, subject to other overriding requirements) to be merged with those of a regulator predominantly charged with ensuring propriety and player protection within a competitive market. Further, given that the National Lottery is a regulated private monopoly operated primarily for the national benefit, it is difficult to see how our regulatory responsibilities could be separated effectively from our "sponsoring and commercial roles".
23. In its response to the Gambling Review, the Government stated that it intends to consider, in the context of its review of the arrangements for licensing and regulating the National Lottery, the scope for bringing the National Lottery Commission's regulatory responsibilities into the proposed Gambling Commission. We support the Government's intention to consult about this and we will respond once the consultation is published. Our response will include a detailed consideration of the issue whether to transfer our present regulatory responsibilities to the proposed Gambling Commission.
ANNEXES: [NOT PRINTED EXCEPT ANNEX A]
(A) Comparison of estimated impacts of the Gambling Review Body recommendations on the National Lottery
(B) The Commission's November submission to the Secretary of State;
(C) The Impact of Gambling Review Reforms ion the National Lottery: An Assessment—a report to the National Lottery Commission by NERA, December 2001.
(D) The Impact of Gambling Review Reforms ion the National Lottery: An Update—a report to the National Lottery Commission by NERA, January 2002.
(E) Information note 1: Consumer protection
(F) Information note 2 : Under-age play
(G) Information note 3: Excessive play
(H) Report on Participation and Expenditure (February 2002)
Annex A
COMPARISON OF ESTIMATED EXPECTED IMPACTS OF THE GAMBLING REVIEW BODY'S RECOMMENDATIONS ON THE NATIONAL LOTTERY
| |
PwC |
Henley
Centre |
NERA |
Henley Centre assumptions at "NLC" revenues |
NERA assumptions at Henley Centre revenues |
| |
£m |
£m |
£m |
£m |
£m |
|
Reduction in annual net lottery revenue |
|
|
|
|
|
|
Society lotteries |
526 |
303 |
168 |
182 |
281 |
|
Side betting |
302 |
146 |
66 |
80 |
120 |
|
Deregulation of bingo |
43 |
43 |
12 |
30 |
12 |
|
Total |
871 |
492 |
246 |
292 |
413 |
|
Reduction in annual returns to NLDF
|
|
|
|
|
|
|
Society lotteries |
326 |
168 |
92 |
100 |
154 |
|
Side betting |
187 |
80 |
36 |
44 |
66 |
|
Deregulation of bingo |
27 |
24 |
7 |
17 |
7 |
|
Total |
540 |
272 |
135 |
161 |
227 |
Notes:
1. Annual returns to the NLDF are calculated by NERA using the factor of 55 per cent of annual net lottery revenue, as used by Henley Centre;
2. Total are for the three main impacts as listed and do not include other impacts (such as deregulation of casinos) which all three studies consider less significant;
3. NERA based its quanifications on the Henley Centre figures as being the more conservative (see second bullet, supplementary report) and so the above table does not include PwC assumptions at "NLC" revenues or NERA assumptions at PwC revenues.
1 Gambling Review Report, paragraph 2.1. Back
2 Gambling Review Report, paragraph 35.15. Back
3 Our working definition of "interactive media" includes internet, interactive television, mobile telephony and machines which the player plays directly and which are linked to a central processor, such as betting machines and video lottery terminals. Back
4 Gambling Review Report at paragraph 35.14-it is unclear whether the reference envisages deregulation to allow Camelot to offer products outside the present legal definition of lotteries. Back
5 At paragraph 28.50. Back
6 At paragraph 35.14. Back
7 At paragraph 28.7. Back
8 Gambling Review report, 35.5.
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