3 The industry, tax
and regulation |
97. Given the importance of a competitive environment
to maintaining consumer protection as well as a healthy industry,
we were concerned to be told by several industry contributors
that the 2005 Act had added to some of the financial pressures
which, arguably, have begun to distort competition within the
Factors external to the Act
98. Evidence from the land-based gambling industry
suggested that it had been significantly affected by the general
economic downturn as well as by the 2007 smoking ban.
Gala Coral Group told us that it had experienced a "30% impact
on profitability", losing £120 million per annum in
profit as a result of the combined effects of the smoking ban,
increased tax and the removal of certain types of machines under
the Act. The availability
of more online gambling opportunities, with unlimited stakes and
prizes and the ability to smoke at home, has had a negative impact
on the industry, and possibly the bingo sector in particular.
99. Throughout the consideration of the Gambling
Bill, it was acknowledged that the type and level of taxation
to be imposed on the industry was critical to the success of any
future regulatory regime.
However, the 2003/4 Joint Committee on the draft Gambling Bill
was unable to examine this key issue as the Treasury had decided
not to make any proposals for a new tax regime to operate alongside
the new regulatory system until after the passage of the Gambling
Bill. The Joint Committee was told by the then Economic Secretary
to the Treasury, John Healey, that the new system of regulation
would have to be in place before the tax regime for gambling could
Despite the Joint Committee having concluded that tax was a "critical
factor" in future inward investment in the gambling industry,
and that HM Treasury and the DCMS should work together closely
to ensure a robust policy, the final Gambling Bill had no accompanying
proposals for a new tax regime which would follow from the Act.
100. It is unsurprising, then, that many concerns
about the operation of the Act stem from a taxation policy which
seems disconnected from gambling policy. There are two separate
issues that apply to the whole industry. The first is whether
the level of duty charged on each sector is appropriate to achieve
the aim of maximising tax take, while not unduly inhibiting the
gambling industry. The second is the failurein relation
to online gamblingto establish a tax regime which would
allow the UK-based online industry to compete with the offshore
industry. Such a tax regime would, it is argued, bring operators
into the UK, benefiting the economy, creating jobs and increasing
customer protection. This last effect would arguably come about
because UK-based companies are regulated by the Gambling Commission
as well as being physically accessible for inspection and, if
necessary, enforcement measures.
101. Various changes in tax rates for gambling
made in successive budgets have been cited as damaging to parts
of the industry.
In 2006, changes affected B2 machines; in 2007, casinos; and in
2008, bingo. Ladbrokes told us that profitability had "severely
declined" since the Act, and that "far from encouraging
economic progress, all indications suggest that the high levels
of taxation and regulation have impeded growth".
We heard evidence from the casino industry that tax increases
have also made 2005 Act Casinos unattractive to investors, thus
stifling growth. Recent consultations on tax proposals have also
caused some concern in parts of the gambling industry that investment
would become harder in the future.
102. Prior to the 2005 Act, the bingo industry
paid a bingo duty based on turnover, and calculated as a percentage
of staked money and winnings, and it also paid VAT on participation
fees, from which other sectors of the gambling industry were exempt.
This "double taxation" left the bingo sector highly
taxed compared to the rest of the industry. In 2003, bingo taxation
was reformed in order to bring it in line with the wider industry:
turnover tax was abolished and bingo was subject to a gross profits
tax (GPT), charged at 15%. VAT charges were removed later. In
2009, the Government increased bingo GPT from 15% to 22%.
In 2010 this rate was reduced to 20% because of industry complaints
that 22% was too high.
103. Bingo operators still hold that they are
charged an unfair level of tax compared to the rest of the gambling
industry. The UK online industry paid Gaming duty at 15%, whilst
casinos paid between 15 and 50%, depending on their gross gaming
yield. Gala Coral Group stated that "it is patently unfair
that the 'softest' of all forms of gambling (bingo) is charged
the very highest base rate of Gross Profits Tax (20%)".
Paul Talboys of the Bingo Association blamed the current tax situation
for creating a "hostile" investment environment.
Chloe Smith, the Economic Secretary to the Treasury, argued that
the bingo tax rate was within the same "effective tax rates
as the National Lottery and casinos".
The National Lottery pays lottery duty at the rate of 15%. She
also told us that "a reduction in bingo duty to, for example,
15%, would cost the Government around £25 million to £30
million per annum". However, an Ernst and Young policy paper
argued that a reduction in tax for bingo to 15% would actually
lead to an increase in the overall tax take from the sector, resulting
in a net benefit to the Treasury "of over £65 million
over the period 2011 to 2014".
104. We recognise that the Bingo
sector remains highly taxed in comparison with other sectors despite
its status as one of the softest forms of gambling. In principle
we believe that bingo should be taxed in line with other forms
of gambling at 15%. Moreover, we recommend that the Treasury make
an assessment, within the next financial year, of the likelihood
that a reduction in bingo duty, to 15%, would result in increased
investment in the bingo sector and a rise in net tax take.
105. The tax regime for casinos is extremely
complex and it is very difficult to make an accurate comparison
of rates between countries because of the number of different
tax regimes for gambling products and the different market environments
which exist in otherwise comparable jurisdictions. The National
Casino Industry Forum argued that the UK casino sector was disadvantaged
compared with those in other markets because of the UK's high
tax rate and increasing competition with online gambling operators,
which are less regulated and pay little or no tax.
Moreover, the Rank Group suggested that the tax regime which followed
the 2005 Act had actually set back the goal of protecting the
vulnerable, including children, from problem gambling. It suggested
that it had penalisedwith higher gambling duty ratesthose
parts of the industry which provided the "highest degree
of supervision and player protection in favour of those providing
106. The Chancellor of the Exchequer, George
Osborne, made several announcements regarding gambling tax in
his Budget Statement on 21 March 2012. In one of the changes he
introduced a new machine gaming duty (MGD) replacing both Amusement
Machine Licence Duty (AMLD) and VAT. This new MGD tax would be
set at 20%, with a lower rate of 5% for some category D machinesthose
with a maximum 10 pence stake and £8 prize. Only Machines
offering only non-cash prizes would remain subject to VAT instead
of the new machine games duty. The Chancellor explained the change
The VAT treatment of gaming machines is being repeatedly
challenged by operators in the courts, so I will introduce a new
machine games duty, with a standard rate of 20%, and a lower rate
for low stakes and prize machines of 5%, of net takings.
107. The Association of British Bookmakers reacted
to these changes saying that:
Despite assurances made during your Committee's Inquiry
into the Gambling Act that the new rate would be fiscally neutral
for the industry, the rate that was introduced was 20%. This is
significantly higher than the rate we had calculated as being
fiscally neutral for the industry and has an extra bottom line
cost on our business sector of over £300 million over the
next five years.
108. Before the Budget, the Gala Coral Group
had argued that the move away from charging VAT on gambling "means
that VAT on capital investment is less and less recoverable thus
destroying the case for investment in long term growth and job
creation". It suggested that Gross Profits Tax should be
off-settable against VAT on capital investment.
This would mean that the cost of new machines would be recoverable
against the GPT paid on machine profits. The Government stated,
in its consultation response document on machine games duty, that
such measuresto limit the impact of the removal of VATcould
not currently be implemented as they were "either not permissible
under EU law, would be highly complex to introduce, or would lead
to significant avoidance risks".
109. We are not convinced by
arguments from the Treasury that measures to allow the offsetting
of Gross Profits Tax against VAT on capital investment for gambling
machines cannot currently be implemented. The Treasury should
carry out further work in this area and identify a means by which
such offsetting could be achieved. We also recommend that the
Treasury make judicious use of industry analysis of the likely
impacts of its proposed taxation measures. As it is in the public
interest to maximise the tax take from the gambling industry,
the Treasury should set tax at a level which allows investment
in the industry and does not stifle growth. We recommend that
the Treasury also take into account the likely impact on investment
by the gambling industry in future tax-rate calculations. We recommend
that any changes to machine gaming duty should be revenue neutral
as the Economic Secretary to the Treasury assured us that they
would be. If the rate of machine gaming duty raises more than
a revenue neutral figure, the Chancellor should reduce the new
rate to ensure that revenue neutrality is achieved.
110. The current taxation system for online gambling
is levied on a point-of-supply basis, meaning that only those
companies based in the UK are taxed here. Ladbrokes told us that
whilst "operators in the UK pay 15% tax on their Gross Profits,
10.75% horseracing levy on British horseracing bets and VAT on
their input costs [...] the vast majority of offshore operators
would pay a capped rate of tax, representing a significant tax
It said that this "uneven playing field" had caused
it to close its call centre in Aintree, which affected 263 jobs.
William Hill and Ladbrokes argued, prior to the 2012 budget, that
a level playing field should be created by extending UK regulation
and Gross Profits Tax (GPT) to offshore operators and betting
exchanges, and by providing relief to UK retail and online operators
through a lower rate of GPT.
The Gala Coral Group argued that, to prevent an illegal market
developing, a single rate of gross profits tax, set at 10%, should
be applied across all gambling products and delivery formats.
111. As a consequence of the anomalies produced
by the current tax system for online companies based in the UK,
only one major such companybet365remains based here.
Martin Cruddace of Betfair told us that that company had relocated
its licence to Gibraltar in March 2010 "basically for competitive
bet365 has remained in the UK because of the company's and the
founding Coates family's ties to the local community.
bet365's Sports products are licensed in the
UK and run from Stoke-on-Trent where over the last decade it has
become the largest private sector employer, with over 1,900 local
staff, although its gaming products have always been licensed
offshore "due to historic restrictions within the UK".
Unlike its major online competitors, who are based in minimal
tax jurisdictions such as Gibraltar and Malta, bet365 told us
that it pays "approximately £130m in annual taxes in
the UKincluding corporation tax and none-recoverable VATof
which betting duty comprises broadly 50%".
John Coates, Chief Executive of bet365, told us that remaining
licensed in the UK "doesn't make economic sense and if we
were a public company we wouldn't be able to make that decision"
adding "for the continued viability of bet365 remaining UK-based,
the introduction of 'Point of Consumption' based taxation measures
in the UK will be essential".
112. Following from the Government's announcement
that it was going to move gambling regulation to a point of consumption
basis, the Chancellor announcedin his Budget Statement
on 21 March 2012that a point of consumption tax would be
applied to online gambling, meaning that all operators offering
online gambling products in the UK would be subject to UK tax.
He also said that double taxation relief would be introduced for
remote gambling from April 2012. This would allow online gambling
companies to base themselves within the UK, and market products
in other jurisdictions without being subject to each jurisdiction's
full burden of tax. It is also important, for operators such as
bet365, to have removed 'double taxation' as it is a further threat
to the economic viability of locating in the UK, as more overseas
countries develop their own gambling regulations, including point-of-consumption
113. The Chancellor set out his reasons for the
changes as follows:
Ninety per cent of online gambling consumed by our
citizens is now supplied from outside the UK, and the remaining
UK operations are under pressure to leave. This is clearly not
fairand not a sensible way to support jobs in Britain.
So we intend to introduce a tax regime based on the place of consumptionwhere
the customer is based, not the companyand, from this April,
we will also introduce double taxation relief for remote gambling.
These changes will create a more level playing field, and protect
114. In a 2011 report, produced for William Hill,
Deloitte found that "the imposition of a POC [point-of-consumption]
tax had the potential to prompt significant growth in the size
of the grey market".
The report stated that a 10% POC tax rate would lead to 27% of
the industry (primarily smaller operators) being at risk of leaving
the market. At 15%, the tax could lead to 40% of the industry
leaving the market. It suggested that, were the offshore market
to be effectively regulated, the impact of a POC tax could be
mitigated as illegal operatorspaying less or no taxwould
be less able to infiltrate the market. 
115. William Hill's online operations are currently
based offshore and the Deloitte report was not echoed in other
evidence to this inquiry. In its written submission, for example,
bet365 did not call for a cut in the 15% rate of Gross Profits
Tax in order to remain competitive, and was unequivocal in its
support for the general change of policy. "The Point of Consumption
basis, coupled with sensible regulation," it said, "would
result in the major operators taking up a licence in the UK, with
consequential increases for UK tax revenues, and would also encourage
companies to base themselves in the UK".
116. Since the Budget, the Government has issued
an in-depth consultation paper seeking the industry's views on
a specific framework for the effective introduction and enforcement
of a POC tax on online gambling. The consultation closed on 28
June 2012, following which the Government intends to bring forward
final proposals for implementation of the policy by December,
2014. The time delay reflects the Government's wish for tax changes
to be implemented in tandem with regulatory changes, which are
within the remit of DCMS, and include preparing the Gambling Commission
for its expanded remit in handling the new licensing regime.
117. The failure of the Department
for Culture, Media and Sport to work with the Treasury to set
remote gambling taxation at a level at which online operators
could remain within the UK and regulated by the Gambling Commission
has led to almost every online gambling operator moving offshore
whilst most are still able to advertise and operate into the UK.
We therefore welcome the announcement, made in the 2012 Budget
Statement, that the online industry will be taxed on a point-of-consumption
rather than a point-of-supply basis. We also welcome the detailed
consultation with the industry since the Budget over the design
of the policy framework and look forward to the Government's response.
To give certainty to online operators, and their investment plans,
we urge the Government to adhere to its timetable for implementation
by December, 2014 and to make plans to deal with any challenges
to the proposed new system. However, the Treasury still needs
to work with industry stakeholders to establish the correct level
for online gambling taxation, taking into account the need to
encourage companies to accept UK regulation and taxation and to
discourage the formation of a grey market.
Regulation and the impact of
118. Even though it was not the purpose of the
2005 Act to increase the profitability of the gambling industry,
some provisions have had a positive financial impact on particular
sectors, including the abolition of the demand test and the waiting
period for obtaining membership of a casino, and the introduction
of new machine numbers and types in certain venues. The use of
credit cards in gambling premises was also permitted under the
Act; previously it had been possible to use credit only for online
119. Bingo industry representatives told us that
they thought their sector had broadly benefited from the introduction
of the 2005 Act.
The removal of the demand test by the Act required local authorities
to permit the opening of new bingo clubs unless they were likely
to have an impact counter to the three primary regulatory objectives
of the Act; and the Act also removed advertising restrictions
and permitted extended opening hours.
120. Nonetheless, parts of the industry argued
that the benefits of the changes set out above were small and
did not outweigh the negative consequences they attributed to
the Act. Business in Sport and Leisure, for example, told us that:
Despite costs increasing and other factors affecting
the industry, few liberalisation measures have emerged to offset
these changes. Those developments which could have made a demonstrative
impactfor example the availability of FOBTs and uplift
in online customwere happening anyway irrespective of the
Gambling Act. Any new changes as a result of the Act [have] only
made a limited difference to the bottom line of operators.
The key areas where it was argued that the 2005 Act
had had a negative financial impact on the land-based UK industry,
including the bingo sector, were machine allowances, regulation,
and licensing costs. We discuss the last of these in our chapter
on the new Gambling Commission.
121. Prior to the implementation of the Gambling
Act 2005, the Gaming Board had established a system of routine
reviews of stakes and prizes, conducted every three yearsthe
Triennial Review. This ensured that monetary limits were adjusted
to reflect inflation and took into account contemporary spending
habits, and it had the advantage of maintaining a balance within
the industry by covering all the sectors' allowances simultaneously.
The three year cycle also drove the gaming machine manufacturing
industry, as there would always be a need for new machines offering
the newest level of stakes and prizes.
122. Since the 2005 Act, the Gambling Commission
has conducted two reviews in response to calls from industry stakeholders
to increase stakes and prizes or machine numbers. A number of
industry stakeholders argued for the reinstatement of some form
of regular review procedure, arguing that sporadic reviews had
a detrimental effect on the machines industry and had further
skewed balance between sectors within the industry.
Gala Coral suggested that, as an alternative to the Triennial
Review, the Gambling Commission should report annually to the
Government with evidence-based recommendations for changes to
machine allowances, technical standards and stake and prize limits.
It argued that this would "depoliticise" the review
123. Whilst industry members argued for a liberalisation
of machine numbers and stakes and prizes, stakeholders from outside
the gambling industry held that the current system of reviews
had been driven by industry pressure and was not evidence based.
The Evangelical Alliance said that the recent stake and prize
reviews by DCMS had concentrated on industry demands and excluded
concerns over consumer protection against problem gambling.
The Heritage and Tourism Minister, John Penrose, told us that,
in response to calls from various stakeholders, DCMS was launching
a new system of triennial reviews of stake and prize limits for
124. We welcome the reinstatement
of the Triennial Review system for gambling machine stakes and
prizes. These reviews should be designed to maintain the value
in real terms of stakes and prizes, as is the case with other
industries where prices are controlled by the Government, rather
than as a means of increasing industry profitability. A Triennial
Review system has the potential to lead to significant calls from
all sectors of the industry that they should have their machine
allowances and/or stakes and prizes increased on a regular basis.
It is important therefore that these reviews are carried out on
the basis of evidence, are as open and depoliticised as possible.
125. Online gambling was available in the UK
prior to the introduction of the 2005 Act, but only from outside
the UK. British-based
companies were prohibited from offering or advertising online
gaming in the UK. This had the perverse effect that those companies
least likely to meet UK standards for open, fair and crime-free
gambling were the only ones allowed to offer online gambling.
Online providers can offer the full range of gambling products:
casino games, bingo and gaming with no limits on stakes and prizes,
benefiting from 24 hour operation, extreme convenience and the
ability of customers to smoke at home.
126. One of the key motivations behind the Gambling
Act 2005 was the wish to impose regulation and order on the online
sector, partly to protect UK customers from unregulated, possibly
unscrupulous, operators and partly to make Britain a base for
the expanding online industry. The remote gambling sector has
been the most significant area of growth in the gambling industry
over the past decade, and continues to be the fastest growing
area. This has been fuelled primarily by online betting, which
is particularly attractive to customers because they can easily
compare odds across a number of sites and pick the most favourable;
and online poker, which is attractive because customers can find
a wider pool of players online than in a casino. Moreover, the
availability of online gaming is increasing as a result of rapidly
changing technology. Bets can now be placed and games of chance
played on a myriad of desktop and handheld devices and can be
made 'in-play' in sports betting, fuelling further growth in the
sector. Betfair told us that the online sector in the UK currently
had a gross gaming yield of around £1.7 billion, about a
fifth of the size of the offline UK gambling market. It estimated
that over the next four years the European online industry would
grow by 34%, compared to 7.2% for the offline industry.
127. The implications for problem gambling levels
of this rapid increase in the availability of online gambling
opportunities are, however, largely unquantified. The 2001 Gambling
Review Report noted particular concerns arising from online
gambling such as: its availability 24 hours a day; the lack of
breaks compared with those between games in traditional casinos;
and a negligible entry requirement. Furthermore, unlimited stakes
and prizes are available over the internet. The 2010 BGPS figures
showed that 14% of adults used the internet to gamble in the previous
year (including lottery tickets, betting, casino games, bingo,
slot machine style games and football pools).
128. The regulatory system set up under the 2005
Act works on a point-of-supply basis, meaning that only those
companies that locate key equipment in the UK are regulated by
the Gambling Commission. However, in addition to allowing British
online companies registered by the Gambling Commission to advertise,
the 2005 Act also allowed online companies based in the EU and
EEA States, including Gibraltar, to advertise in the UK. It extended
the same permissions to a number of other "White-Listed"
countries, specified by the Secretary of State. The White List
identified jurisdictions that were deemed suitably stringent in
their online gambling regulations so that UK customers would be
safe to use gambling sites regulated by them. The White List includes
places such as the Isle of Man, Alderney and Tasmania.
129. Antigua was controversially allowed to join
the White List in 2008. Doubts were expressed in Parliament as
to the state of Antigua's regulatory regime, and whether the Gambling
Commission was in a position to test its regulatory rigour. This
led the then Minister, Gerry Sutcliffe, to conduct an inquiry
into the White List, and all applications to it closed in April
2009, which barred later developers such as Jersey from inclusion.
130. Before the Act, most online companies moved
their operations to jurisdictions such as Malta or White Listed
countries. They are not regulated by the Gambling Commission,
although other regulators argue that regulations in these countries
are equally stringent when addressing, for example, under-age
and problem gambling.
The limited effectiveness of the 2005 Act at providing a regulatory
framework for online gambling has been acknowledged by the Gambling
Commission and DCMS.
131. Arguably, current arrangements for online
regulation put UK customers at greater risk of problem gambling
and gambling-related harm. This is because overseas sites, whether
regulated or unregulated, may not have in place as strong safeguards
to protect UK customers. Indeed, several faith groups voiced their
concern that gaming sites which were not regulated by the Gambling
Commission could be accessed by UK residents. However, the Remote
Gambling Association agreed with William Hill that "there
is little or no evidence that the offshore operators based primarily
in Malta and Gibraltar pose any public protection risk to UK Citizens".
Solicitors Wiggin LLP argued that the majority of sites accessed
by UK customers are based in DCMS-approved, White-Listed jurisdictions
and that they "invariably have extensive programs of social
responsibility that include detailed multi-level age and identity
verification programs" and "programs to identify repetitive
or 'problem' gambling patterns".
Regulators from some White-Listed jurisdictions told us that they
implemented regulatory processes that were in some instances more
stringent than those in the UK. The Jersey Gambling Commission
pointed to the fact that Jersey's legislation and its regulatory
principles were closely based on the British Gambling Act 2005,
although Jersey was not allowed entry into the White-List because
of the moratorium placed on new applicants in 2009. The Alderney
gambling regulator (AGCC) told us that its licensees were required
to contribute to research, education and treatment programmes
in the UK. It said that UK-facing licensees had contributed more
than £1 million to the GREaT Foundation in the previous year.
132. The Gambling Commission currently conducts
an intermittent mystery shopping programme which covers both UK-regulated
and non-UK-regulated online gambling providers. The Commission
found that, of Commission-regulated sites tested, over 99% of
active customer accounts were registered with operators which
had easily accessible problem gambling information, self-exclusion
measures and financial limits. It concluded from this 2009 research
that "the vast majority of the largest operators and those
with the greatest UK-facing business have sufficient social responsibility
measures in place" and that those with identified weaknesses
only accounted for a "small percentage of the customer base".
133. We have seen no evidence
to suggest that the existing White Listed jurisdictions pose a
greater threat of problem gambling than UK or EU-based operators.
However, the possible link between online gambling and problem
gambling must be addressed alongside any future regulatory and
licensing regime for online gambling. Online gaming has been identified
as having certain characteristics which may be associated with
problem gambling, including high speed of play, frequency of play
and ease of availability. We consider that a vital aspect of gambling
regulation is controlling the significant, and growing, online
sector with its unlimited stakes and prizes, and its potential
to cause problem gambling. The Commission's plans for licensing
online operators will rely heavily on other regulators which the
Commission has very limited means of monitoring. The Commission
should aim to improve its links with overseas regulators for the
purpose of spreading best-practice in terms of customer protection
and problem gambling prevention.
An uneven playing field
134. An actual consequence of regulating and
taxing only UK-based operators is the creation of a "grey
market" comprising companies operating in less regulated
or unregulated jurisdictions. Offshore companies such as these
are able to attract customers from regulatedUK or White-Listedjurisdictions
because their lower costs allow them to offer better odds. Those
customers could then be at risk from unscrupulous operators. Regulating
only UK-based operators also means that the Commission has access
to very limited information about online gambling, as only 20%
of the market (principally one operator, bet365) is now obligedas
a licensing conditionto provide the Commission with information.
135. Wiggin LLP was concerned that not enough
was being done to block UK customers from accessing non-White-Listed,
offshore gambling sites.
It argued that those operators that were not regulated by the
UK, or in a White-Listed jurisdiction, should be subject to "regulatory
In her evidence to us, Tessa Jowell acknowledged the difficulty
of preventing customers from using unregulated online gambling
sites, saying that it was important to communicate with "the
gambling public [so] that they understand the risks that people
take if they are using unregulated sites in jurisdictions that
we have absolutely no relationship with".
136. The Northern Ireland Horse Racing Group
expressed concern that the land-based industry was being harmed
by the current situation, saying that "loopholes in current
gambling regulation are being exploited by unlicensed operators.
They have a severe impact upon the betting sector and damage important
industries that rely on commercial arrangements with licensed
Betfair argued for a requirement for operators targeting the UK
to hold a UK licence, prohibiting non-licensed operators from
marketing into the UK, and making it an offence for non-licensed
operators to transact with UK consumers.
Bwin.party, however, expressed a different view, stating that
current regulation was delivering an excellent framework for consumers,
who had "access to a wide choice of operators at competitive
prices" and low problem gambling levels. It argued that the
UK already had "a mature, well-established and well-regulated
gambling market, one that represents an attractive model for other
137. There has been one particularly high-profile
case where a licensed operator has been accused of failing to
protect its customersand specifically their funds: Full
Tilt Poker. This company was registered in a number of jurisdictions,
including the White-Listed Alderney Gambling Control Commission.
Despite this, when it was closed down for breaking US law, it
did not have the resources to repay players their deposits. We
questioned the Minister about this, and he responded that the
Gambling Commission considered it would be too burdensome and
would render the industry too uncompetitive to require operators
to hold a separate players' winning account, or appropriate insurance,
or to provide a guarantee that repayment to players could be made
at all times. However, the Minister also acknowledged that players
gambling online often took no account of whether their funds were
protected, and he said that the Commission was considering ways
to raise awareness of the potential risk to their funds. A full
account of the case, which caused us considerable anxiety, is
given in Annex 3 to this Report.
138. We welcome the assurances
we have received from the Department of Culture, Media and Sport
that it will take into account the lessons learned from the Full
Tilt case, including the conclusions of the Report by Peter Dean
to the Alderney Gambling Control Commission published in March
2012. We recommend that the Gambling Commission should consider,
as a part of efforts to communicate to online gamblers the potential
risks to their funds, introducing a kite-marking system for gambling
websites, indicating which sites are regulated in the UK. This
could protect consumers by encouraging them to use UK-regulated
sites and by incentivising suppliers to choose to be regulated
139. We recognise the concerns
of well-managed, existing operators about the potential costs
and burdens of legally separating players' funds. In the light
of the Full Tilt case, however, the Gambling Commission should
consult the industry as to what form of 'ring fencing' or protection
of player accounts, by all UK-regulated online gambling operators,
would be a proportionate response to the worries arising from
this unfortunate episode.
Online regulation: European proposals
140. As pointed out by Jenny Williams, Chief
Executive of the Gambling Commission, the problem which inevitably
arises from allowing an influx of companies to operate into the
UK which are subject to regulation in other jurisdictions is the
"variation in standards and capability".
In setting out her solution, she told us that:
The holy grail, the answer, is for us all to agree
on common standards and a common way of compliance and enforcement.
That is something that I have been pushing for, but we are a long
way off it at the moment.
141. This has been the common theme of both the
evidence we have taken and during our discussions on our visit
to Brussels. There is broad agreement from national regulators
and governments that what is needed is a system of agreed minimum
standards for customer protection first within Europe but ideally
to be extended globally. Indeed, the Green Paper produced by the
European Commission Committee on the Internal Market and Consumer
Protection sets out the "possible need for enhanced administrative
co-operation between competent national authorities".
142. Despite this apparent consensus, the differences
which exist between many European countries in culture and attitudes
to gambling has meant that it has proved impossible to agree on
a system for developing common standards or on what those standards
143. In its response to the Commission's Green
Paper, the UK Government stated that the existence of multiple
regulators and jurisdictions confused consumers and that there
were also practical difficulties for the Gambling Commission in
accessing information from operators not regulated by them.
144. Another possible option for regulating online
gambling on a broader, European basis, is to introduce a Pan-European
Licence which would be recognised by all or multiple national
regulators. This idea has, however, met with extremely limited
support. In May 2011, the Hungarian Presidency Report on online
gambling concluded that only one country promoted the idea of
a single Pan-European licence. The Report found that most member
states were not in favour of mutual recognition or harmonisation
and believed that they could not be obliged to accept results
of procedures of another member state.
145. In response to a European Commission Green
Paper on gambling in the internal market, the European Parliament's
Committee on the Internal Market and Consumer Protection made
numerous recommendations about the way national regulators and
the European Commission should approach the regulation of online
gambling. In addition
to the broad principles already embodied in the Gambling Commission's
core regulatory aims, the report proposed that advertising of
gambling should be restricted to a level "strictly necessary
in order to direct potential gamblers to the legal provision of
services". It rejected, in accordance with the subsidiarity
principle, any European legislative act uniformly regulating the
entire gambling sector.
However, it did take the view that, "in some areas there
would be clear added value from a coordinated European approach,
in addition to national regulation".
The paper called for a "coherent system of lawful gambling
services across Europe, especially in terms of tax treatment,
and which applies common minimum standards of accountability and
integrity" and for the European Commission to investigate
how such a system could operate.
Online regulation: Government proposals
146. In 2010, DCMS ran a consultation on remote
gambling regulation which identified several reasons for changing
the online regulatory structure. These included overseas jurisdictions
having different regulatory standards, leading to customers experiencing
varying levels of protection; not being compelled to report certain
information e.g. suspicious betting activity; and not being obliged
to contribute towards research, education and treatment of problem
147. The Department proposed regulating the industry
on a point of consumption basis in 2010, meaning that all operators
targeting the UK would have to hold a UK Gambling Commission licence.
It argued that this would increase consumer protection, "address
concerns" about problem gambling; support enforcement activity
(for example on sports betting integrity); "plug a regulatory
gap"; and "remove market distortions".
148. There are two issues which will be vital
to the success of the Government's proposed change to regulating
online gambling at the point of consumption. First, tax must be
set at a level where the development of a grey market is not encouraged
(we discuss this below) and secondly, effective enforcement measures
must be put in place to tackle such a market, thus protecting
the legitimate industry and the UK customer. The 2011 Deloitte
report, produced for William Hill, argued that more effective
enforcement measures against illegal or unregulated operators
would have a significant impact on the health of the UK-based
online industry and consequently on the tax revenue it would generate.
It forecast that "ineffective enforcement could lead to 22-43%
of current [tax] revenues migrating to the grey market at POC
tax rates of 10-20%".
149. There are numerous difficulties in effectively
enforcing regulation on an online market where a large number
of suppliers are based in other jurisdictions.
We heard from regulators in Europe and Australia that preventing
unlicensed illegal operators from accessing their markets was
extremely challenging. In Australia, the Interactive Gambling
Act 2001 was introduced to update the law on online gambling.
Enforcement measures included in the 2001 Act included warning
letters to Internet Service Providers (ISPs) and search engines
but not action against financial intermediaries or customers.
Industry representatives told us that these limited enforcement
methods had led to an uneven playing field between offshore and
Australian online companies.
150. The Alderney Gambling Control Commission
argued that there was no need to introduce a point-of-consumption
regulatory system. It argued instead for an expansion of the current
White-Listing system. The AGCC told us that it had "responded
to the UK Government's proposition, pointing out that the White-List
arrangement lacks only a proper verification process requiring
overseas jurisdictions applying for White-Listing to properly
demonstrate or substantiate their representations. With that addition,
the White-List arrangement provides a no-cost means of effective
regulation. In its absence there is significant risk of misrepresentation,
reputational risk, reduced standards and a significant resource
requirement to police overseas operations accessing UK players".
151. The current regulatory
framework for online gambling has failed to create a level playing
field between operators based in the UK and those based overseas.
This is because, whilst companies based in the UK are subject
to strict regulation and high taxation, those based overseas can
be lightly or unregulated whilst paying little or no tax. This
situation could allow unregulated'grey'markets to
emerge, able to attract UK customers because they can offer better
odds as the result of their lower cost bases. It is therefore
important that effective enforcement methods are put in place
to prevent unlicensed companies from operating into the UK and
that the Department for Culture, Media and Sport and other agencies
also work to encourage international co-operation and a common
Impact of regulatory changes on the Gambling Commission
152. Any change to the way the online market
is regulated will have an impact on the way the resources of the
Gambling Commission are used. The Commission has undertaken some
limited monitoring activity of non-UK providers, conducting mystery
shopping programmes on gambling websites, including those regulated
overseas that advertise to the UK market.
However, requiring all operators targeting the UK to hold a UK
licence would require substantial levels of regulatory and enforcement
activity both to ensure that regulators in other jurisdictions
apply and maintain appropriate regulatory standards and to block
unlicensed operators from operating in the UK. The Alderney Regulator
warned that "depending on the manner in which the UK Government
introduces a full licensing scheme which will require all foreign
based operators to be licensed by the UK Gambling Commission,
it could result in duplication, increased cost to the industry
and ultimately less protection for the UK consumer".
153. When we asked Jenny Williams whether there
were currently any jurisdictions whose licensing practices she
would not, at the moment, consider to be up to Gambling Commission
standards, she responded:
It is a problem of a lack of knowledge, isn't it?
We do not know enough about the way they do things. We do not
know enough about the competence of their staff. We do not know
enough about their approach, and it would be very time-consuming
to find out. It is not proven, if you like. We just do not know.
We could not provide the assurance to the consumer.
154. It is vital for the Government
to recognise that the success of any new regulatory regime for
online gambling will rest on the development and implementation
of effective enforcement mechanisms for regulation. The Government's
proposals for the regulation of remote gambling remain very unclear
particularly with regard to how the Gambling Commission intends
either to approve and monitor regulators in other jurisdictions
or to directly regulate and licence all the individual companies
which operate in the UK. It is not currently clear whether the
Gambling Commission intends to carry out licensing checks on all
companies that apply to operate in the UK. We recognise that it
would be unrealistic for the Commission to inspect directly individual
regulators across all other jurisdictions. We recommend that the
Commission should approve certain overseas regulators and continue
to monitor their performance where they meet its requirements.
The Commission should undertake test purchasing exercises to ensure
that these national regulators continue to carry out sufficient
licensing checks. Such an approach would have the merit of encouraging
international co-operation leading, in due course, to a more harmonised,
consistent and less bureaucratic regulatory system across the
27 member states. For the sake of confidence and market knowledge,
the Gambling Commission should also test whether regulators it
has not yet approved carry out sufficient licensing checks.
155. Even if the Gambling Commission
does not directly assess individual operators for their suitability
to hold a UK licence, it will therefore have to make an assessment
of which regulators it will allow to act as its agentsregulating
online gambling sites targeting the UK on its behalf. The Department
for Culture, Media and Sport should make clear how the Gambling
Commission will assess the effectiveness of other national regulators
and what the Commission will require of its agents. Any additional
regulatory activities will have resource implications which the
Gambling Commission will have to address within its existing budget.
156. Given that most UK operators
have located their online operations offshore, this inquiry has
heard concerns regarding the expertise of the Gambling Commission
to monitor effectively a much larger number of online licence
holders under the proposed changes to the regulatory regime. The
Commission will, therefore, need to bolster its capability to
do so, from within existing resources, as supplemented by licence
income from the online operators it approves.
124 Ev 152, Ev W 32 Back
Ev W 32 and Ev 152 Back
Ev 152 Back
See, for example, Ev 227 Back
Joint Committee on the Draft Gambling Bill, Session 2003-4, HC
139-I, HL Paper 63-I, para. 653-4 Back
Ibid., para. 656-657 Back
Ev 152 Back
Ev 231 Back
At the same time AMLD (amusement machine licence duty) rose by
Ev 152 Back
Q 205 Back
Q 773 Back
Q 773 and Ernst & Young, Impact assessment of bingo duty
change: policy paper, January 2011, p22 Back
Ev 288 Back
Ev 180 Back
HC Deb, 21 March 2012, Col 803 Back
Ev 303 Back
Ev 152 Back
Design of Machine Games Duty: Government consultation response,
HM Treasury, December 2011, p5 Back
Ev 231 Back
Ev 231 Back
Ev 231, see also Ev 180, Ev W 32 Back
Ev 152 Back
Q 356 Back
Ev 299 Back
Ev 300 Back
Q 369 Back
Ev 104 Back
HC Deb, 21 March 2012, Col 803 Back
Deloitte, The impact of a point of consumption tax on the remote
gambling industry: a report for William Hill PLC Back
Ibid., p35 Back
Ev 300 Back
HM Treasury and HMRC paper, Taxing remote gambling on a point
of consumption basis: consultation on policy design, April
Q 202 Back
Ev W 32 Back
Ev W 6, 58, 32, Ev 180, 217, 234, 247 and 265 Back
Ev 152 Back
Ev 255 Back
Q 766 Back
Internet betting was legal from UK-based providers. Back
Ev 161 Back
Mr Gerry Sutcliffe MP is currently a member of the Committee,
but he was not a member at the time of the launch of its Inquiry
into gambling. Back
Ev 150, Q 629, Ev 273 Back
Post-Legislative Assessment of the 2005 Gambling Act, DCMS,
October 2011, p10 Back
Ev 167 Back
Ev W 52 Back
Ev 185 Back
Ev 150 Back
Gambling Commission Online Mystery Shopping Programme, Information
Note, July 2009, para 1.3-4.13 Back
Ev W 113 Back
Ev W 52 Back
Ev W 52 Back
Q 617 Back
Ev 242 Back
Ev 161, see also Ev 152 Back
Ev 242 Back
Q 735 Back
European Commission Green Paper on online gambling in the internal
market, COM(2011) 321, 24 March 2011, p3 (hereafter 'European
Commission Green Paper') Back
European Commission Hungarian Presidency Report: Framework for
Gambling and Betting - Regulatory cooperation between Member States,
30 May 2011 Back
European Commission Green Paper and European Parliament, Committee
on the Internal Market and Consumer Protection, Report on on-line
gambling and the internal market, Rapporteur, Jurgen Creutzmann Back
The subsidiarity principle, in this context, means that national
Governments retain the power to regulate their gambling industry
as they see fit within the European Union Internal Market rules. Back
European Parliament, Committee on the Internal Market and Consumer
Protection, Report on on-line gambling and the internal market,
Rapporteur, Jurgen Creutzmann Back
The regulatory Future of Remote Gambling in Great Britain,
DCMS, March 2010 http://www.culture.gov.uk/images/consultations/remotegambling_consultation.pdf Back
Ev 261 Back
Deloitte, The impact of a point of consumption tax on the remote
gambling industry: a report for William Hill PLC, p35 Back
Ev 152 Back
Ev 150 Back
Gambling Commission: Online Mystery Shopping Programme, information
note July 2009, para 1.1 Back
Ev 150 Back
Q 737 Back