Gambling

Supplementary Written evidence submitted by the Gambling Commission (GA 102)

The Health Lottery

Thank you for your letter of 26 January.

The Commission’s legal analysis in relation to the issues which the structure of the Health Lottery scheme presented developed over the period during which the applications for operating licences were made and the scheme as launched was developed, and in response to those developments. At each stage it was based on a combination of discussions, case conferences and responses to questions put by the Commission (Commissioners and staff) to its internal and external legal advisers (both solicitors and Counsel) and comments by them on Commission documents.

The attached note sets out that developing analysis which constituted the legal basis on which the Commission took its licensing and compliance decisions.

Jenny Williams

Commissioner and Chief Executive

10 February 2012

LEGAL ADVICE NOTE FOR CULTURE MEDIA & SPORT COMMITTEE

Re: The Health Lottery

Introduction

1. The intended structure of the Health Lottery scheme ("the Scheme") is that of multiple society lotteries promoted by an external lottery manager ("ELM") under a single brand, in this case "The Health Lottery". A lottery manager's operating licence is held by Health Lottery ELM Limited and separate society lottery operating licences are held by each of 51 community interest companies ("the CICs") each raising money for improved health equality in a discrete geographical area.

2. Each CIC has agreed to donate to The People's Health Trust ("PHT"), a registered charity, 20.34% of the proceeds of each of its lotteries. PHT's obligation to the CICs is to use these "good cause funds" for the purpose of advancing. "the promotion of health for the public benefit by increasing and supporting sustainable health equality in and for disadvantaged communities across England, Scotland and Wales" and to do so consistently with a strategy agreed with each CIC. When determining grant recipients PHT undertakes that the good cause funds received from each CIC will be restricted in their use to the geographical area represented by that CIC.

3. The principal legal issues which are specific to the Scheme arose first, in dealing with the licence applications and, secondly, monitoring the launch and subsequent operation of the Scheme. They concerned:

· Whether each CIC met the definition in section 19 of the Gambling Act 2005 ("the Act") of a "non-commercial society" such that, subject to the matters which section 70 of the Act requires the Commission to consider (essentially the licensing objectives and the suitability of the prospective licensee) licences could be granted to them.

· Whether, and if so at what point, the CICs risk compromising their status as non-commercial societies and /or contravene relevant provisions in Part 11 of the Act by knowingly enabling the ELM to profit from running their lotteries.

· Whether the Scheme, as operated, is in truth a series of distinct society lotteries or, conversely, a single lottery scheme. One (important) significance of this question is that if each Scheme draw were to be considered as a lottery promoted on behalf of a single licensed society the proceeds of each draw would fall to be aggregated when assessing whether there had been compliance with the section 99 mandatory conditions of that society's lottery operating licence and, in particular, the aggregate annual proceeds limit of £10,000,000. (And, of course, if such single lottery were being promoted on behalf of an unlicensed entity it would be unlawful.)

At the licensing stage

The Community Interest Companies

4. By section 98 of the Act a lottery operating licence may only be issued to a non- commercial society, a local authority or an external lottery manager ("ELM").

The definition of a non-commercial society at section 19 of the Act is:

"(1) For the purposes of this Act a society is non-commercial if it is established and conducted -

(a) for charitable purposes,

(b) for the purpose of enabling participation in, or of supporting, sport, athletics or a cultural activity, or

(c) for any other non-commercial purpose other than that of private gain."

And by section 353(1) of the Act a society "includes a branch or section of a society".

5. Each of the CICs is a separate legal entity registered at Companies House and regulated by the CIC Regulator under the Companies (Audit, Investigation and Community Enterprise) Act 2004. At the time of their applications for licences the objects of each CIC were stated in its Articles of Association to be:

"... to carry on activities which benefit the community and in particular (without limitation) to:

(a) raise, invest and grant money for improved health equality;

(b) to carry out any other activities consistent with the company's status as a community interest company."

In the form of declaration (CIC 36) which it had to file on formation of the company, each CIC had stated that its activities would provide benefits to people living in a particular, named, geographical area.

6. The fact that each CIC had the same directors, operated from the same premises and that the Memorandum and Articles of Association of each was in common form was not in itself a reason for considering them not to be independent entities or for refusing to licence them as separate non-commercial societies. The CICs had been accepted as separate by the CIC Regulator. Nor was the fact that a large number of "regional" CICs had been created so as to facilitate the possibility of generating proceeds from a series of draws during a year greater than the annual limit permitted by statute for lotteries promoted in reliance on a single society's lottery operating licence. The Commission's analysis was therefore that each CIC was a non-commercial society within the definition in the Act and thus eligible for licensing.

Proposed business model

7. When licensing a gambling operator (including a non-commercial society wishing to promote lotteries), the Commission is required to have regard to the licensing objectives enshrined in the Act and to form and have regard to an opinion as to the applicant's suitability to carry on licensed activities (for which purpose the Commission may in particular (and does) have regard to the integrity, competence and financial circumstances of the applicant and other persons relevant to the application). The Commission takes account of the applicant's proposed business model, and would not, for example, licence an operator planning to run lotteries (or offer any other gambling product) which it was obvious would be illegal. However, it is not legally necessary for the operator to have a fully worked out scheme at the point of licensing or for their outline proposals to be fully compliant so long as they are intended to be, and capable of being, compliant.

8. The Commission considered, and indicated to the applicants (both CICs and Health Lottery ELM Limited), a number of legal concerns over the outline scheme regarding:

· the need for the lottery draws to be on behalf of the separate CICs and not comprise a single lottery in reality promoted on behalf of some other (unlicensed) body,

· the need for a lottery participant to understand the nature of the separate lotteries in which they participated: to know which good cause they were supporting. (This would also be relevant to the fair and open licensing objective.) [1]

· the need for the CICs to be genuinely separate in the way they operated in practice;

· the financial arrangements between the CICs, PHT and Healthy Lottery ELM Limited, given the need to satisfy the requirements of the mandatory conditions imposed pursuant to section 99 of the Act limiting the level of proceeds and maximum prize and ensuring that at least 20% of each lottery's proceeds were applied to the purposes of the promoting CIC.

9. The Commission's legal analysis was that the proposed Scheme was capable of being run in a legally compliant way; the decision on whether it was when in operation would depend crucially on the way in which the CICs conducted themselves, their legal and financial relationship with their ELM and the way in which the lotteries were marketed. There were no hard and fast rules; the Scheme would need to be considered as a whole. Subject to complying with basic legal requirements (such as the minimum 20% return to good causes) and with little guidance in decided cases it would be a matter of fact and degree whether the Scheme was in the Commission's judgment, compliant.

10. It was clear that while the proposed business model and marketing scheme, if made compliant - as it was capable of being, would in effect circumvent the annual proceeds limits set out in section 99, there was nothing in the Act to prevent this or in the licensing objectives to justify the Commission in taking steps (for example by imposing licensing conditions - or even refusing to licence) to remove the scope for circumvention. It was, however, made clear in the licensing application process that although the Commission did not see itself as having any basis for closing what might be perceived as a loophole, it was open to the Department to take steps to reinforce the policy objective underlying the annual proceeds limit.

Post licensing and Scheme launch

11. In the period post licensing, and particularly after the change of ownership and control of Health Lottery ELM Limited (which necessitated an application to the Commission for continuance of the ELM's licence), the Commission reviewed and developed its legal analysis in response to the emerging shape of the planned scheme. More widely, the Commission was concerned that those wanting to take advantage of the apparent loophole should understand the constraints on marketing lotteries under a common brand and in light of its developing analysis and in response to questions raised by third parties developed the guidance referred to in paragraph 17 below.

Can bodies such as the CICs qualify as non-commercial societies?

12. A non-commercial society must not only be established for a purpose falling within section 19 of the Act but also must be so conducted. Thus, one significant issue is whether, in circumstances where (as is the case in respect of the Scheme) bodies such as the CICs have been established by or in collaboration with the ELM which intends to manage their lotteries, that ELM is a company which seeks to make a commercial profit, and the ELM receives a fee for managing each lottery, those bodies continue to qualify as non-commercial societies.

13. It is a mandatory condition of societies' lottery operating licences that at least 20% of the proceeds of any lottery promoted in reliance on the licence is applied to a purpose for which the promoting society is conducted. Further, section 260 of the Act creates an offence of misusing the profits of a lottery. If a lottery promoter states, on lottery tickets or in an advertisement for the lottery, a fundraising purpose and then uses any part of the profits of the lottery for any other purpose he commits an offence. Section 254 of the Act provides that profits of a lottery for this purpose are the proceeds of ticket sales less amounts deducted by the promoters of the lottery in respect of (i) the provision of prizes, (ii) sums to be made available for allocation in another lottery in accordance with a rollover, and (iii) "other costs reasonably incurred in organising the lottery". Thus, it is only monies appropriated for prizes or to pay costs reasonably incurred in organising a lottery that may lawfully be deducted in arriving at the sum which must go to the "good cause".

14. One argument the Commission considered was that in a structure such as the Scheme the CICs cannot meet the statutory definition of a non-commercial society because they are inevitably established and conducted (at least in part) for the purpose of generating profits for the ELM. The Commission's view, however, is that it follows from the fact that a non-commercial society is permitted by the Act to use a professional external lottery manager to make the arrangements for its lotteries that societies may contribute to the commercial success of an ELM as a by-product of paying to the ELM (in reimbursing its outlays and in meeting its fees) costs reasonably incurred in organising their lotteries. The statutory test (derived from sections 254 and 260 referred to above) - one might say the acid test - in any particular case is whether, in all the circumstances, the costs incurred are reasonable.

15. Thus, fees of a particular amount paid to an ELM by non-commercial societies whose lotteries are being managed as part of an arrangement such as the Scheme (in respect of which the ELM has provided a major marketing launch and sustained advertising at considerable financial risk to itself) might represent reasonable costs in the early years of the scheme but cease to do so when the ELM has recovered its initial investment costs and ongoing management expenses are more modest.

16. If a society were set up for the specific purpose of creating a commercial profit for investors in an ELM that would take it outside section 19; commercial success of an ELM as a by-product (even an inevitable one) of the operation of a successful lottery scheme on the other hand did not in and of itself make the CICs non-commercial. Nor, in the Commission’s view, would their creation on the initiative of the perspective ELM necessarily do so either.

One lottery or many?

17. In August 2011 the Commission published an Advice Note in order to provide guidance to society lottery promoters, ELMs and others about the factors the Commission would be likely to take into account when making decisions whether the requirements of the Gambling Act were satisfied in respect of a particular multiple-society lottery scheme. A copy is attached. It was based on the Commission's legal analysis of the factors that would determine whether multiple lotteries were being promoted under a single scheme or, in fact and law, a single lottery was being promoted. The Commission was clear that it was legally entitled, in fact required, to look at the substance of any such scheme and its marketing and not just at form [2] though at the same time it should not be over ready to find schemes artificial if they promoted the purposes of the licensed societies.

18. In drawing up the Advice Note and in considering whether the lotteries comprised in the Scheme are genuine separate lotteries the Commission's legal analysis drew on the only relevant case law on the consideration of possible sham society arrangements in order to benefit from lotteries, namely R-v-Royal Borough of Kensington & Chelsea ex parte Blennerhasset (unreported judgment of Hidden J delivered on 19th July 1996). That case was decided under previous legislation (the Lotteries and Amusements Act 1976) with a slightly different definition of "society". There were said to be 100 lotteries determined by a single draw and run by 100 separate branches of the National Hospital Trust. There is no legal objection to more than on lottery being determined by a single random event (eg: a draw) but in Blennerhasset the lotteries had a common entry form and the player could opt for which "branch" he wanted to benefit from his ticket price, unless it was over-subscribed. The judge held that the branches were not separate at all, they performed no function other than to act as a vehicle for the running of the lottery by the Trust; they were a paperwork façade.

19. Whilst each of the CICs has a contract with PHT which governs the distribution of the good cause funds, there are material differences between the Scheme and the arrangements in Blennerhasset. In Blennerhasset the proceeds of a single lottery draw were applied to 100 branches; in the Scheme each draw is associated with a different CIC (subject to a second, or possibly third, becoming involved because of a freeze on ticket sales for the first) and their involvement is on a rotational basis.

20. In considering whether or not an arrangement such as the Scheme involves one lottery or many the Commission bears in mind the licensing objectives in section 1 of the Act, in particular ensuring that gambling is conducted in a fair and open way. Therefore, in addition to being satisfied that any particular draw comprises (on technical legal and accounting analysis) the lottery of a separate society (or societies if more than one society's lottery is determined by the outcome of a particular week's draw) - and in the case of the Scheme tangible differences between the CICs such as different names, different geographical areas supported and separate financial arrangements helped substantiate the case for the separation being real - the Commission also, for reasons of fairness and openness, requires it to be clear to the consumer that there are separate society draws. Consumers need to be able readily to find out, if they wish, which particular society is participating in which draw.

21. If such an arrangement were to be regarded as a single lottery then it would be necessary to consider on whose behalf the lottery was being promoted and whether that person held an appropriate licence or whether they and/or those involved in marketing the lottery were committing an offence under section 258 or section 259 of the Act of promoting or facilitating a lottery.

Formal structure of scheme and agreements between parties

22. The Commission's analysis of the rules of the Scheme and the accounting arrangements between the CICs, the ELM and PHT is that they are consistent with a lawful scheme comprising multiple society lotteries. So far as the statutory maxima set out in the mandatory licence conditions are concerned, no one Health Lottery draw will result in either the maximum prize limit or the maximum single lottery proceeds limit being breached. If the lotteries are genuinely separate, and promoted for each of the 51 individual CICs in rotation, then neither will the aggregate annual proceeds limit be exceeded. On this analysis despite the fact that Scheme produces an arrangement that can be branded and marketed nationally in respect of draws which, over a year, may generate more than £10,000,000 it is permissible under current statute.

23. The Act provides both the Commission and the Secretary of State with powers to set licence conditions. One such power the Commission has is to attach a condition requiring all the arrangements for a particular society's lottery to be made by an ELM. In such a case the mandatory conditions which apply to a society's lottery licence would equally apply to the ELM's licence such that the annual proceeds limit would bite on all the lotteries promoted by that ELM compendiously. The Commission has considered whether it should impose such a condition in the case of arrangements such as those comprised in the Scheme in support of the National Lottery. However, it has concluded that given its section 22 duty to permit gambling insofar as it thinks it reasonably consistent with the licensing objectives, and its view that (subject to paragraphs 24 and 25 below) there is nothing in the Scheme to put at risk those objectives, it would not be appropriate to do so. Indeed, such a condition would be liable to successful legal challenge. The Commission's analysis suggested, however, that the Secretary of State's condition setting powers were not constrained in the same way as the Commission's by the licensing objectives in the Act.

Promotion requirements

24. As noted above, in deciding whether the Scheme is legally compliant, the Commission takes into account both the formal agreements and the underlying reality in the context of the licensing objectives. The most challenging legal issue for the Commission in considering schemes such as the Health Lottery has been to decide whether its arrangements are compliant with the promotion obligation flowing from the mandatory condition in section 95(5) that:

"Where a person purchases a lottery ticket in a lottery promoted by an. non commercial society in reliance on the licence he receives a document which -

(a) identifies the promoting society,

(b) states the name and address of a member of the society who is designated, by persons acting on behalf of the society, as having responsibility within the society for the promotion of the lottery, and

(c) either -

(i) states the date of the draw (or each draw) in the lottery, or

(ii) enables the date of the draw (or each draw) in the lottery to be determined".

25. On the face of it this condition might be thought to permit a lottery to be promoted in such a way that it was not until the participant had bought his ticket that he became aware of the identity of the society on whose behalf the lottery was being promoted. However, the Commission considers the better interpretation, given the indications in the Act, including the use of the present tense in section 99(5) itself, which suggest that the purchase and receipt of the document referred to are envisaged as happening at the same time is that it is a requirement of the promotion of a lottery that the potential participant knows (or at the very least has a genuine opportunity to discover) in whose lottery he will be participating before he purchases his chance. Furthermore, it would also be necessary in terms of the second licensing objective for the consumer to know that they were purchasing a ticket for a lottery draw on behalf of a society distinct from the marketing brand.

Conclusion

26. In conclusion, the Commission's legal analysis suggests that when faced with novel developments of this sort what it is required to do is to consider whether the way in which the parties involved are conducting their affairs is in reality as well as formally consistent with the legislation, including the licensing objectives. This is what the Commission has sought, and continues to seek, to do in relation to the Scheme. But, as outlined above, the Commission cannot properly go beyond the legislation, and specifically licensing objective imperatives, to secure objectives such as limiting the proceeds raised for a number of societies by means of a common marketing scheme. The Secretary of State does, however, have the power to impose conditions which go wider than the Act's licensing objectives.

February 2012


[1] Subsequently each CIC has changed its Articles such that (to take HealthEquality Community Interest Company as an example) the objects are stated as:

[1] “ ... to carry on activities which benefit the community in the London Boroughs of Kensington and Chelsea, Hammersmith and Fulham, Ealing, Hounslow, and Hillingdon areas of England ("the Community") and in particular (without limitation) to:

[1] (a) raise, invest and grant money for improved health equality in the Community, and

[1] (b) carry out any other activities consistent with the company's status as a community interest company. "

[2] See, for example, the House of Lords in Singette Ltd -v- Martin [1971] AC 407 where Lord Pearson said, at 423: " ... in deciding whether a competition is a lottery or not a realistic view should be taken and regard should be had to the way in which the competition is actually conducted ".

Prepared 22nd February 2012