Memorandum submitted by the National Lottery
Commission
INTRODUCTION
1. We are grateful for the opportunity to
submit evidence to the Committee. We have no direct remit regarding
the distribution of Lottery funds to Good Causes and therefore
do not comment upon this aspect of the Committee's inquiry.
2. We made a response to the consultation
undertaken by the Department of Culture, Media and Sport in respect
of lottery licensing and regulation. Much of that is relevant
to the Committee's inquiry and we attach a copy for the Committee's
information.
3. In this submission, we first set out
as background a summary of the statutory framework within which
the National Lottery is presently regulated. We then address the
questions posed by the Committee as they relate to licensing and
regulation. These are as follows:
— Should the responsibilities for awarding
licences, on the one hand, and regulating their implementation,
on the other, be divided between different bodies?
— Is the Lottery Commission the right
body to regulate the National Lottery?
— What advantages, disadvantages or
risks, are there in a system of multiple licences for different
aspects of the lottery operation potentially run by different
companies?
— Will multiple licences increase competition?
Should, and/or could, any tender arrangements include a mechanism
to prevent one company winning all available licences?
— Will the proposed changes ultimately
lead to more resources for good causes?
4. We also comment briefly upon the impact
on the existing good causes of the Olympic funding stream being
created to provide resources in the event that London wins the
2012 bid, as this is an issue upon which we were asked for a view
by the Government.
BACKGROUND
5. The National Lottery etc Act 1993 created
a dedicated regulator for the National Lottery. The regulator
was given powers to grant a single licence to operate the National
Lottery; to grant separately licences in respect of each lottery
which forms part of the National Lottery; to enforce the conditions
in those licences; and to take action where it considers the licensee
or a key supplier not to be fit and proper.
6. The Act also gave the regulator three
overriding duties. These are to exercise its functions in the
manner that it considers most likely to secure:
— that the National Lottery, and every
lottery that forms part of it, is promoted with all due propriety;
— that the interests of every participant
in a lottery that forms part of the National Lottery are protected;
and
— subject to both the above, to do
its best in exercising its functions to secure that the net proceeds
of the National Lottery are as great as possible ("the duty
to maximise returns to good causes").
7. We take it as common ground that the
National Lottery has a special position within the wider gambling
market. This was recognised by the Committee in its report The
Operation of the National Lottery[1]
and the Government has since confirmed this in A Safe Bet for
Success and the National Lottery Licensing and Regulation Decision
Document.
SHOULD THE
RESPONSIBILITIES FOR
AWARDING LICENCES,
ON THE
ONE HAND,
AND REGULATING
THEIR IMPLEMENTATION,
ON THE
OTHER, BE
DIVIDED BETWEEN
DIFFERENT BODIES?
Principles
8. The special position of the National
Lottery as a public institution has two consequences that impact
on its model of regulation.
9. First, players have a right to expect
that the National Lottery, as a public institution, will be conducted
to the highest standards. Such standards may, on occasion, differ
from or exceed those expected of purely commercial operations.
This is reflected in the first two of our overriding duties.
10. Second, we have always taken the view
that the third of our overriding duties is not tied to the immediate
effect of proposals by the operator, but rather requires us to
take a long term view. As a consequence, the regulator undertakes
a wider "ownership" role in respect of the operation
of the National Lottery. This addresses the fact that a private
operator is being granted a licensed monopoly for a limited period
in order to achieve a public benefit. The wider responsibilities
of the regulator are necessary to protect the continuing, longer-term
public interest and to provide continuity between licence periods.
This is somewhat similar to the role undertaken by the society
in the case of society lotteries. It is not a role that can be
left to the operator of the National Lottery.
11. We do not perceive a conflict of interest
between the different elements of our overriding duties[2]
(propriety and protecting the interests of players on the one
hand and maximising returns to good causes on the other). The
1993 Act makes clear that the first two of our overriding duties
take priority over the third.
The work we undertake
12. Our overriding duties apply both to
the selection of a new operator and to the day-to-day regulation
of the lottery. There are, broadly speaking, three elements to
our present regulatory responsibilities. These are:
— Conduct of periodic competitions:
we are responsible for the design and conduct of the competition,
the decision to award the licence and the finalisation of the
conditions on which the licence is awarded;
— Day-to-day licensing functions:
there are two aspects of these. The first involves the grant
of licences for games forming part of the National Lottery. At
present, there are eight licences in force in respect of draw
based games, eight licences (including a class-licence under which
20 scratchcard games are available) in respect of scratchcards
and one class licence in respect of instant win games. The second
aspect involves the updating of all licences (including game rules,
codes of practice and player information) where potential improvements
are identified, or where new circumstances arise or where developments
in technology require changes to be made;
— Regulation of licences: this
includes compliance work to ensure licence conditions are complied
with, monitoring the payment of funds by the operator to the NLDF,
vetting of individuals and companies involved in the lottery,
handling player protection issues and player queries and monitoring
the performance of the operator.
The importance of the duty to maximise returns
to good causes
13. The National Lottery is a regulated
private monopoly operated primarily for the public benefit. It
was created as an enduring institution that will continue to deliver
benefits beyond the period of an operator's licence.
14. The lottery operator has an incentive
to focus on the current licence period, as it has no certainty
of being the incumbent for the next licence period. It also has
a legal responsibility to its shareholders (or investors) which
may conflict with the wider interests of the National Lottery.
These factors could lead the operator to take decisions in areas
such as game introduction, game design and investment that favour
short-term rather than long-term considerations. It may also seek
to retain assets created over the life of the lottery, such as
intellectual property, which are important in delivering continuity
between licence periods. These risks will increase towards the
end of the licence period, especially if the operator believes
there is a real risk that it may not retain its licence.
15. In addition, as there is not a direct
source of competition during the licence period, the regulator
has an important role to play in monitoring the operator's performance
independently and, where appropriate, pressing for improvement.
16. It is essential, therefore, that the
regulator ensures that the wider interests of the National Lottery
are paramount by taking a longer term view in licensing new games,
by securing assets (especially intellectual property) for the
use of future operators and by monitoring the operator's performance.
Potential for separating the selection of a new
operator from day-to-day licensing
17. As the operator identifies new games
which it wishes to introduce, a wide range of regulatory issues
may arise. The regulator will need to ensure that propriety considerations
(including whether the proposal falls within the legal definition
of a lottery) are met; that players' interests are protected;
that the game will not attract under-age or excessive play; that
introduction is likely to maximise returns to good causes and
that the game can continue to be available beyond the end of the
current licence period. The planned introduction of EuroMillions
is an example. In such cases, the longer-term interests of the
National Lottery may not always be the same as those of the operator.
18. As the Lottery matures, technology develops
and the market changes, opportunities will increasingly arise
which are outside the scope of existing licences. These require
the negotiation of amendments to the operator's licences. We have,
for example, undertaken a major review of licence provisions to
accommodate the sale of tickets over the internet. We have also
agreed changes to the mix of main and scratchcard-only lottery
terminals, the minimum numbers of which are laid down in the operator's
licence.
19. This day-to-day licensing work is based
upon the three overriding duties in the same way as the selection
of a new operator is. We see significant benefits in the same
regulator undertaking the selection of operator(s) and day-to-day
licensing. The regulatory knowledge built up in the continuing
process of licensing new games and maintenance of existing licences
is highly relevant to the structuring of the invitation to tender
and then the judging of bids for a new licence. Once that licence
has been awarded, day-to-day regulation can draw on the experience
gained in the new licence award and ensure it is effectively implemented.
This makes the most of relevant expertise, ensures consistency
of judgement and develops wider market knowledge. It should help
deliver the best outcome from the competition process. It should
also ensure that the resulting licences can be enforced effectively.
20. The continuing licensing responsibility
will become yet more significant if the regulator is given the
ability to grant multiple licences of different durations. Transfer
of our day-to-day licensing functions to a single gambling regulator
would be likely to result in conflicts of interests, so long as
those functions were associated with a duty to maximise returns
to good causes. In addition, we believe that, given the close
relationship between selection of a new operator and the day-to-day
licensing functions, it would be counter-productive and inefficient
to place these in different organisations.
21. During the selection of a new operator,
the regulator's skills can be added to through the appointment
of expert advisors and through the proposed changes to the arrangements
for the Commission's constitution, which are referred to further
at paragraph 29 below.
Separation of all licensing functions from other
regulatory functions
22. In our view, the licensing function
needs to be informed by the outcomes of other regulatory functions.
Issues identified by compliance or player protection work highlight,
from time to time, the need for licence amendments. The introduction
of a new code of practice on the availability of top prizes for
scratchcards is an example. Protection of the interests of players
(including avoidance of under-age or excessive play) is a prime
consideration in the licensing process. Similarly, licensing concerns
may lead to compliance work taking a particular focus. Placing
these functions in different organisations is likely to make these
processes less effective and less well informed.
23. The National Lottery is a public institution,
available on the high street and advertised widely. Players and
the public have the right to expect high standards of player protection.
On occasion, it may be appropriate for the National Lottery to
apply different or higher standards of player protection than
those applicable to commercial operators. This is reflected in
the directions we have been given by the Secretary of State not
to license games where we believe the price is unreasonably high
or where the game is likely to encourage excessive or under-age
play. As a consequence, we indicated in the last competition that
we considered it unlikely that we would license fast-draw keno
or video lottery terminals. We also required the operator to undertake
an increased test-purchase programme to detect retailers who sell
tickets to under-age players. It is likely to be more difficult
to apply such standards to the National Lottery if these functions
were contained in a separate regulator, especially if that regulator
were also responsible for the rest of the gambling industry.
24. The operator(s) would also face difficulties
in dealing with two regulators, one dealing solely with licensing,
the other responsible for other regulatory functions. For example,
there would be risks of the regulators taking different views
on the scope and meaning of particular licence provisions. No
single body would be responsible for taking a definitive view
and there is a risk that their views would be played off one against
the other. The operator would also need to maintain two sets of
relationships.
25. For these reasons, we see merit in retaining
the existing range of functions within a single regulator for
the National Lottery.
Working with the Gambling Commission
26. We would expect the regulator of the
National Lottery to work closely with the Gambling Commission.
Close liaison and discussion on matters of common interest will
be essential to ensure that decisions about the regulation of
the National Lottery, society lotteries and other forms of gambling
are properly informed. We would expect the regulators to work
closely together on player protection issues to ensure consistency
of approach. The work of the Gambling Industry Trust will be relevant
to general issues of player protection within the National Lottery.
It is important that the National Lottery learns from the work
of the Trust and does not duplicate its efforts. We can also see
benefits in joint working arrangements with the Gambling Commission,
for instance in the area of vetting procedures.
IS THE
LOTTERY COMMISSION
THE RIGHT
BODY TO
REGULATE THE
NATIONAL LOTTERY?
27. The duty to maximise returns to good
causes gives the regulator a clear interest in the financial success
of the National Lottery. We believe that it is important that
this duty is retained (see paragraphs 13 to 16 above). If a single
gambling regulator was also responsible for the day-to-day regulation
of the National Lottery, then this duty to maximise returns to
good causes could give rise to conflicts with the duty to treat
other, purely commercial, operators even-handedly. However such
conflicts were managed, the risk of perceived unfairness would
remain.
28. We have indicated that we presently
have a wider role in protecting the continuing interests of the
lottery, both to provide a counterbalance to an operator's other
interests and to provide continuity between licence periods. This
might prove more difficult for a single gambling regulator. For
example:
— we have taken the view that the single
operator that has run the lottery up to now should be a single
purpose entity so that it does not pursue other business opportunities
which might either distract it from the operation of the lottery
or, at worst, lead it into areas which conflict with the interests
of the lottery. A single gambling regulator might have problems
taking such a stance, given that it would not have a similar interest
in the corporate structures of the other entities that it regulates;
and
— lottery assets (in particular intellectual
property) need to be owned by an organisation other than the operator
to provide continuity between licence periods. We are at times
required to take action, through the operator, to protect our
ownership of trademarks and intellectual property. Challenges
and disputes are, perhaps, most likely to arise with competitors
to the lottery, typically the organisations that a single gambling
regulator will be regulating. Whilst this might be avoided by
transferring our responsibilities elsewhere, such as to the Secretary
of State, this would further complicate the framework of regulation.
Constitution of the National Lottery Commission
29. We believe that the arguments set out
above make a strong case for a single regulator for all aspects
of the National Lottery. However, we consider that improvements
can be made to our own constitution to make us a more effective
regulator. These are to:
— end the present legislative requirement
that the Chairman changes at least annually and is selected by
the Commissioners themselves. This should be replaced with appointment
of the Chairman by the Secretary of State for a term of years,
with the possibility of reappointment;
— provide greater flexibility in the
number of Commissioners, with a view, for example, to introducing
additional expertise in connection with the competition for and
award of new licence(s); and
— allow the appointment of up to two
executives as Commissioners.
WHAT ADVANTAGES,
DISADVANTAGES OR
RISKS, ARE
THERE IN
A SYSTEM
OF MULTIPLE
LICENCES FOR
DIFFERENT ASPECTS
OF THE
LOTTERY OPERATION
POTENTIALLY RUN
BY DIFFERENT
COMPANIES?
The risks associated with the current arrangements
30. It is widely recognised that periodic
competition to operate all or part of the National Lottery is
an important factor in maximising returns to good causes. Competition
also encourages innovation. It provides an important challenge
to the incumbent operator and allows others to come forward with
alternative proposals.
31. Following the competition for the second
licence, we reviewed the structure of that competition to identify
what steps we might take within the existing framework to increase
the likelihood of effective competition (such as making a contribution
towards bidders' costs and the possibility of a two-stage process).
The National Audit Office listed many of them in its report, Awarding
the New Licence to Run the National Lottery. They could help strengthen
a future competition of the kind we have had up to now.
32. We are also looking at the possibility
of being able to offer bidders in a future competition the option
of acquiring the operating assets of the incumbent company and,
in the short term, of using its existing key contractors. Such
an arrangement was endorsed by the Government in its decision
document, but depends on negotiation with Camelot and its key
contractors. If achieved, it should facilitate handover arrangements
and allow some increase in flexibility in the design of the competition.
33. We do not believe that these steps,
of themselves, will necessarily be sufficient to deliver an effective
third competition. Your Committee stated, in The Operation of
the National Lottery, that "We consider it very likely that,
unless further legislative action is taken, the National Lottery
will become a perpetual private monopoly for the licensee."[3]
The Public Accounts Committee, in its report Awarding the New
Licence to Run the National Lottery, raised similar concerns.
We share those concerns and believe that significant changes to
the current framework are required.
Proposed changes
34. We believe that the regulator should
be able to decide when preparing for the next competition whether
to offer one or more operating licences. It should take a strategic
view on how the lottery should develop, including the timing of
major developments, the market position and any significant developments
in the technology, before deciding on the shape and length of
licences. We would expect the regulator to:
— publish for consultation a draft
scheme setting out how it proposed to run the competition and
to take account of views expressed by interested parties before
the scheme is finalised; and
— undertake extensive research and
consultation prior to commencement of the competition to ensure
that the structure of licences competed for reflected market conditions
and technological development, in order to generate as effective
a competition as possible.
35. If it decided to grant more than one
licence, we would expect the regulator to:
— group types of lotteries together,
linking them with the associated technologies as far as possible;
— recognise that the main jackpot game
is a natural monopoly;
— decide whether to offer a number
of licences together, so making composite bids possible, or at
different times after an initial licensing round, in order to
ease handover problems. In either case the same bidder might,
on merit, win more than one licence;
— have only a small number of licences
running at the same time; and
— require bidders for particular licences,
where appropriate, to provide services to other licensees (eg
over use of the infrastructure) should the other licensees so
wish, in return for appropriate remuneration. The regulator would
set levels of remuneration and standards of service and take responsibility
for establishing relevant design standards and obtaining assurances
on security.
Advantages
36. We see these changes as making the licensing
process more flexible and contestable, and as encouraging innovation
in a more controlled way than the present process allows. At present,
the Commission can only award game licences to independent promoters
("independent Section 6 licences") if they have first
reached a agreement with the holder of the main licence to run
the National Lottery (the Section 5 licensee). We have no power
to require the main licensee to reach such an agreement. To date,
there has only been one, and the game in question was not a success.
37. The increased flexibility that is proposed
would allow the regulator to encourage bidders who may be well
qualified to run particular parts of the National Lottery, but
who would not want to offer the whole portfolio. They may well
be able to offer innovative proposals that capitalise on developments
in technology and respond to the changing competitive environment.
The more limited scope of individual licences compared to the
current section 5 licence should reduce the cost of bidding for
those that do not wish, or lack capacity, to bid to operate the
whole lottery.
Risks
38. Whilst there will undoubtedly be risks
associated with a framework which allows more than one lottery
operator, we consider that these risks can be mitigated by careful
design of the framework to reflect market and technological conditions
at the time of the competition, and to provide for joint working
between operators. Whilst multiple licences are likely to create
a healthy competitive tension between operators, their purpose
is not to encourage operators to compete vigorously amongst themselves
for the "lottery pound". Rather, their purpose is to
obtain the best return from each discrete element of the lottery
market.
39. Key risk areas are likely to include
issues such as access to other operators' distribution and retailer
infrastructures, common branding, co-ordination of marketing efforts,
and avoidance of excessive competition between operators. In our
view, these can be addressed through careful and well informed
licence design and by effective regulation post licence award.
Wide consultation and detailed analysis of the market and technological
development should inform the number and scope of licences offered
(see paragraph 34 above), and the provisions they contain to ensure
co-operation between licensees. We also consider that the risks
identified are outweighed by the risk of a failure to secure an
effective competition inherent in the present structure of a single
licence awarded to a single operator.
WILL MULTIPLE
LICENCES INCREASE
COMPETITION? SHOULD,
AND/OR
COULD, ANY
TENDER ARRANGEMENTS
INCLUDE A
MECHANISM TO
PREVENT ONE
COMPANY WINNING
ALL AVAILABLE
LICENCES?
40. The facility to award multiple licences
brings much greater flexibility in the design of future competitions,
by allowing organisations which would not wish to bid for a single
licence the opportunity to bid for specific elements of the National
Lottery. We have recognised that this facility will need to be
used carefully, following extensive consultation and analysis
of the market and technology. But without it, the likelihood of
little or no effective competition would be increased.
41. Unless there were a change to our present
overriding duties, we believe that an arrangement whereby a mechanism
were included to prevent one company winning all available licences
even if it produced the best bid on merit for all the available
licences would be inconsistent with the duty to maximise returns
to good causes.
WILL THE
PROPOSED CHANGES
ULTIMATELY LEAD
TO MORE
RESOURCES FOR
GOOD CAUSES?
42. We believe that the changes proposed
by the Government in respect of the licensing and regulation of
the National Lottery will enable the stimulation of greater competition
for licences to operate the National Lottery. This greater competition
should deliver better returns for good causes than would be generated
by retaining the present arrangements.
WHAT WILL
BE THE
IMPACT ON
THE EXISTING
GOOD CAUSES
OF THE
OLYMPIC FUNDING
STREAM BEING
CREATED TO
PROVIDE RESOURCES
IN THE
EVENT THAT
LONDON WINS
THE 2012 BID?
HOW REALISTIC
ARE THE
GOVERNMENT'S
ESTIMATES?
43. The estimates adopted by the Government
are based on detailed work undertaken by Camelot. We were asked
by the Government to comment on Camelot's work. Whilst there are
inevitably uncertainties associated with forecasts made for such
a long forward period, and when the state of the market in that
period is uncertain, we concluded that the operator's forecast
returns to the Olympic Lottery Distribution Fund of £750
million are achievable and provide a reasonable basis for forward
planning. We also concluded that, on the basis of information
presently available, the operator's forecast that roughly 59%
of Olympic lottery sales will be diverted from existing National
Lottery games over the same period is reasonable and provides
a prudent basis for forward planning.
January 2004
1 At paragraph 123. Back
2
See CMS Committee report The Operation of the National Lottery
at paragraph 19. Back
3
At paragraph 115. Back
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