Gambling

Written evidence submitted by Federation of Racecourse Bookmakers

(FRB) (GA 37)

EXECUTIVE SUMMARY AND INTRODUCTION

1. The framing of the Gambling Act 2005’s objectives was designed to protect vulnerable gambling consumers and prevent corruption. However, by introducing loopholes into the system, the Act has led – where on-course bookmakers [1] are concerned – to the business side of gambling being conducted in a far less fair and open way, and to small family on-course bookmakers being rendered vulnerable to commercial harm and exploitation. The FRB asks the Committee to keep this injustice under review and urge the Government to take determined corrective action.

2. The 2005 Act radically changed the terms and conditions under which on-course bookmakers enter racecourses and conduct their businesses. The Act removed, from 1st September 2012, the statutory limit on the amount racecourses could charge bookmakers to enter their premises, which since 1963 had been five times the public admission for the relevant enclosure.

3. The Act also transferred regulation from the Horserace Betting Levy Board (the Levy Board) to the Gambling Commission and local licensing authorities. However, it did not make the Levy Board’s rules concerning racecourse recognition of pitch allocation based on list positions a part of the new regulatory arrangements. List positions are racecourse bookmakers’ most valuable assets because they confer a right to select a particular betting pitch on any given race day, and between 1998 and 2007, around £90 million had been spent.

4. On 14th March 2007 the Racecourse Association (RCA) announced that from 1st September 2012 racecourses would not recognise list positions.

5. In its 2008 report, On-course Horserace Betting, the Culture, Media and Sport Committee recognised that bookmakers had been encouraged to believe they bought list positions in perpetuity, and that it was reasonable to expect the RCA accepted this given its representation on the National Joint Pitch Council (NJPC) Board. [2] The Committee expressed disappointment in the RCA’s confrontational approach to moving towards commercial arrangements. [3]

6. The Committee also stated that, "We believe that the Government was naïve if it assumed that a list position system would continue in the absence of an enforcement mechanism, given the historically difficult relationship between racecourses and bookmakers." [4]

7. The impact of these changes is exacerbated by the regulatory regime the Act and the Gambling Commission apply to betting exchanges. In contrast to the relatively high fees expected from on-course bookmakers, there appear to be unlicensed operators using betting exchanges who act in the course of business (sometimes even using mobile technology to trade from within the betting ring) without being subjected to equivalent regulatory and taxation burdens.

THE ACT’S CORE OBJECTIVES

The five times rule

8. As governed by the Levy Board’s Certificate of Approval, racecourses could charge bookmakers no more than five times the public admission for the relevant enclosure. [5] The five times rule had been put in place to give both punters and bookmakers security: by limiting the access charges they faced, bookmakers would not be compelled to pass on high charges to punters; the limit encouraged a balanced betting ring as smaller bookmakers would not be priced out; and in turn, this balance helped ensure the continued integrity of the Starting Price and thereby promoted a fair deal for on- and off-course punters.

9. A Statutory Instrument of the 2005 Act ends the five times rule on 1st September 2012. [6] This change was made to put access charges on a market-based footing. [7] However, the reasons for the existence of the five times rule had not changed, and so neither had its ongoing validity. As significantly, the rule was revoked in a vacuum, with the principles behind the removal not taking account of the concurrent pitch allocation system.

Bookmakers’ list positions

10. After the RCA terminated the Fergusson Agreement [8] in 1998, the Levy Board made it a further condition of being granted a Certificate of Approval that racecourses had to use list positions to allocate and transfer list positions as per the revised National Pitch Rules. [9] The market for list positions was opened at the same time.

11. In contributing to the various gambling reviews that took place prior to the Act, the Government was informed on a number of occasions of the importance of the list position system, the investments made by bookmakers, and the need for legislation to protect and uphold this system. [10]

12. DCMS told the FRB that, "Without prejudice to the discretion of the Gaming Board in operating this certification process, we would not envisage this [transfer of responsibility from the Levy Board] causing the disruption to the current regime that is suggested in the [FRB] paper". [11] It is clear that the Department advocated a move to commercial arrangements, but only with regard to access changes (that is, the five times rule), and to not the assets (that is, list positions). [12]

13. However, in altering the regulatory arrangements, the 2005 Act did not give any body jurisdiction over list positions. As the then Minister for Sport, Gerry Sutcliffe MP, acknowledged in his letter to the Committee, "the Racecourse Association has taken advantage of the abolition of certification to announce that existing Pitch Lists will not be recognised beyond 2012". [13]

Ensuring that gambling is conducted in an open and fair manner

14. The five times rule was removed without proper reference either to the logic which had justified it or the context in which it had operated. That is, the rule existed in an environment where:

a. racecourses were bound to recognise list positions (and by association the investments bookmakers had made in their list positions); and

b. new betting areas, even though they were administered slightly differently from existing areas, were part of the Certificate of Approval system.

15. By removing the five times rule without positively protecting list positions, the bargaining power in the commercial negotiations was further weighted towards the racecourses. This combination of changes gave racecourses the incentive to:

a. ignore bookmakers’ considerable investments in list positions, as well as the associated potential growth in value;

b. deny bookmakers the likely level of revenue achievable given the list position acquired;

c. re-offer pitches for sale or hire to the highest bidder at their discretion;

d. set commercial access arrangements with little reference to bookmakers’ reduced ability to pay given their earlier investment in list positions;

e. price out smaller bookmakers who could not afford to both lose their list position investment and pay increased access changes;

f. skew the market towards large bookmakers who had not previously invested in list positions;

g. treat new and existing betting areas further differently by limiting bookmakers’ movement between them and setting higher access charges for new areas;

h. design new fees which allocate a stake of bookmakers’ businesses directly to racecourses (for example, through turnover commission); and

i. control the management of pitches so that betting profitability was in their hands rather than in the hands of bookmakers or an independent betting ring manager.

16. DCMS had acknowledged the sense of vulnerability felt by the on-course bookmakers and the need to enable them to realise the heavy investments they made in list positions. [14] Yet the incentives the Act created will undermine other positive provisions of the Act, namely that after 1st September 2012, "The licence holder shall provide a place on the premises where betting operators and betting operators’ assistants, including small-scale operators, may carry on business in connection with providing facilities for betting and to which the public may resort for the purpose of betting". [15] The changes made by the Act will have had the opposite effect of that intended: the market will have been distorted not liberalised and, if list positions are not recognised, many of the bookmakers currently trading will have been priced out of the market.

FINANCIAL IMPACT

17. Between 1998 and 2007, 4,430 list positions were sold privately for a total of £33.3 million and NJPC auctioned 8,164 lots for a total of £56.3 million. On 1st January 2007 there were 667 on-course bookmakers in business, all of whom had invested heavily in their involvement in the industry, with list positions then valued at £70 million. [16]

18. On 14th March 2007, the RCA announced that it "wishes it to be very clear that if lists do continue beyond 31 August 2007, from 1 September 2012 racecourses will not recognise lists or transfers of picks as between betting operators. The allocation of positions in betting rings will be for commercial negotiation between racecourses and betting operators". Contrary to the intentions of DCMS in reviewing gambling, in setting out this position the RCA conflated the changes to the five times rule with a denial of the list position system, and acted to ignore the system which previously racecourses had both accepted and supported.

19. The RCA’s announcement caused an immediate fall in the value of list positions of between 33% and 40%. [17] If no system is in place to recognise list positions on 1st September 2012, they will be rendered worthless.

20. Many on-course bookmakers are small family businesses, with the potential loss of list positions having encompassing livelihoods, investments, retirement security and inheritable assets, as well as the wider employment that bookmakers generate. [18] In turn, the SP mechanism would be undermined, with a significant potential impact on the off-course industry and the Levy yield. The RCA’s intention to start with a "clean sheet of paper" is manifestly unfair, as the Culture, Media and Sport Committee recognised when it stated that "…considerable amounts have been invested by those who have bought list positions under the existing system in good faith and this cannot simply be ignored..." [19]

Events since the Committee’s 2008 inquiry

21. Following the Culture, Media and Sport Committee’s inquiry, a series of Working Party meetings between the RCA and FRB was held between January and April 2008, supported by the then Minister for Sport. [20] However, no substantive progress was made, and the RCA did not withdraw from the subsequent trial discussions between the FRB and three individual racecourses, so preventing productive negotiations.

22. In May 2009, the Minister for Sport stated that, "I shall reconvene the working group in the near future to have one last crack at it. If we do not get a solution that meets the requirements of all sides, I will consider legislation, because this can and should be resolved. I will not allow discussions to take place until we reach the deadline with nothing happening. That would be the wrong thing to do. I give assurances to my hon Friends that we will deal with the matter." [21]

23. In October 2009, the FRB reached an agreement with Towcester Racecourse, the only non-RCA UK course, which recognised list positions in perpetuity.

24. In November 2009, the Minister reconvened the Working Party, following which the RCA and its members agreed to recognise list positions until 31st August 2052, subject to commercial agreements, and to allocate positions in new betting areas, in general, according to the list. The RCA also agreed to let the FRB negotiate with racecourses without interference. In the expectation that the RCA and racecourses would then act in good faith, the then Minister set the challenge for resolving the issue within six months. However, given that the RCA had made tenure contingent on agreement commercial terms, creating the incentive for racecourses to avoid agreements, the Minister also committed to appointing an independent arbitrator if negotiations broke down.

25. Nearly a year later, in October 2010, an agreement was reached with Northern Racing, an RCA member, covering nine racecourses.

26. To date, and with little over a year until the RCA’s deadline, no other agreements with the remaining 50 UK racecourses have been signed, and the racecourse bookmaking industry remains under threat because of the changes made by the 2005 Act. This is a gross injustice and the Government must help the industry to resolve the matter fairly and quickly.

THE GAMBLING COMMISSION, AND OFF-SHORE ONLINE GAMBLING OPERATORS

27. Prior to the introduction of Gambling Commission fees, on-course bookmakers paid £20 for three years via application to Magistrates. The most basic annual licence for an on-course bookmaker now costs £200.

28. This is a substantial and disproportionate increase, given the low-risk nature of on-course bookmaking. The licensing conditions set down by the Commission notwithstanding, on-course bookmaking does not involve instant gratification and is self-regulated through terms and conditions of entry which are monitored and enforced by Administration of Gambling on Tracks (AGT). [22] The compliance effort and issues arising are minimal, and regulation should be adjusted accordingly.

29. In contrast to the relatively high fees expected from on-course bookmakers, there appear to be unlicensed operators using betting exchanges to turn over hundreds of thousands of pounds per week, some on a full-time basis, who act in competition with licensed operators but without being subjected to the same regulatory and tax burdens.

30. Those using betting exchanges in the course of business are required to have a betting operating licence. However, a working definition of "in the course of business" has not been set out by HM Treasury, DCMS or the Gambling Commission. Instead, a case-by-case approach is used in respect of both licensing and taxation. The exception to this is the treatment of already licensed bookmakers. Therein, the tautologous argument persists that licensed bookmakers are acting "in the course of business" on the exchange simply by virtue of the fact that they have a licence because they are obliged to do so for their activities elsewhere. At present, working bookmakers cannot be identified, regulated, licensed and taxed other than through their off-exchange work.

31. The Joint Committee on the Draft Gambling Bill recommended that "the best way of achieving a balance between these points [of avoiding betting exchanges moving offshore and ensuring that exchanges are regulated properly] is to ensure that those using the exchanges to lay bets professionally are identified, regulated, made subject to the appropriate levy arrangements, and have their status checked". [23] It estimated that, based on Betfair’s evidence of 0.71% of its 200,000 accounts having customers making £15,000 in 2003, this could amount to around 1,400 individual concerns. [24]

32. The Government responded that "People who are betting in the course of a business require an operating licence from the Commission for their activities…we do not believe there is then a further category of user who can be identified clearly who needs separate regulation." [25]

33. Consequently, the situation persists where two groups of operators using the betting exchanges in the same way are treated differently. Licensed bookmakers (both on- and off-course) who lay on betting exchanges are charged General Betting Duty (GBD) of 15% and, under the 50th Levy Scheme, Horserace Betting Levy (HBL) of 10.75% on their profits in respect of bets laid on horseracing. In contrast, those who lay on betting exchanges who are not licensed bookmakers are liable to pay neither GBD nor HBL directly. The winning party on the betting exchange pays the exchange a commission of, on average, 3% on winnings. GBD and HBL are levied on that commission at rates of 15% and 10.75% respectively. Unlicensed layers on betting exchanges are therefore indirectly charged GBD at 0.45% and HBL at 0.32% on their winnings in respect of bets laid on horseracing.

34. This imbalance is exacerbated by the use of bots and the unlicensed use of betting exchanges on-course:

a. Betting bots are software programs which scan gambling websites. Some bots scan for predefined odds and market conditions, others also back and lay bets. This cycle is continuous and significant profits build. These automated transactions are not taxed at commercial rates, presenting both another loophole and a market distortion.

b. Unlicensed individuals use racecourse facilities to ensure that they have the best view of the races, using betting exchanges to arrange in-running betting and capitalise on their first-hand information as well as take advantage of the time delay in transmitting 'live' pictures to those viewing from an off-course location. This has a number of ethical issues which threaten the conduct of gambling in a fair and open manner, primarily the possibility that a horse is injured (sometimes fatally) but betting on that horse continues, when such bets should be voided – and would be by licensed bookmakers.

35. A valid and regulated definition of "in the course of business" is critically important. The Joint Committee stated that Lord McIntosh of Haringey, as the relevant Minister, had "acknowledged that there was a difference between recreational and non-recreational layers on the exchanges and challenged the Committee to come up with a suitable definition.  The Committee has concluded that the transparent audit trail of exchanges makes it entirely feasible to identify these users by reference to the volume and frequency of the bets they lay on exchanges. We refer to this group as Non-Recreational Layers (NRLs)." [26] To this, the FRB would add that such exchange users could also be classified by reference to a basket of criteria including organised on-track in-running betting, on-track arbing, exchange trading shops, use of "bots", the proportion of horses laid in any event, the size of bets laid, total turnover and exchanges being the only source of income.

CONCLUSION

36. The on-course bookmaking industry has been critically undermined and distorted because of the changes made and the existing structures neglected by the Gambling Act 2005. A valuable and viable market has been undermined by a combination of Government omission and commercial opportunism. This is compounded by under-regulation of the betting exchanges market, which has further straitened on-course bookmakers’ circumstances.

37. As Chris Bryant MP stated during a Westminster Hall debate in July 2007, "there are two elements of failure in the system. First, I believe that the Racecourse Association, through an element of legislative jiggery-pokery, has in effect engaged in a process not of petty larceny, but of grand theft. That is, to be honest, what will be happening in 2012 if the abandoning of pitches is allowed to go forward. Secondly, Parliament has not fully done its job". [27]

38. The FRB asks the Committee to keep this injustice under review and urge the Government to take determined corrective action.

June 2011


[1] As represented by the Federation of Racecourse Bookmakers (FRB). The FRB was formed in 2003 to provide an umbrella organisation to cover three on-course bookmaker associations: the Association of Racecourse Bookmakers, the National Association of Bookmakers and the Rails Bookmakers Association.

[2] On-course Horserace Betting; Fifth Report of Session 2007-08 , Culture, Media and Sport Select Committee , p ara 43 . The NJPC was established to enforce the Levy Board’s rules and administer the betting ring.

[3] On-course Horserace Betting , p ara 33.

[4] On-course Horserace Betting , p ara 29.

[5] The Betting, Gaming and Lotteries Act 1963 was amended by the Horserace Totalisator and Betting Levy Boards Act 1972 (c. 69) s.5(1), so that t he functions of granting and revoking Certificates of Approval of horse racecourses were transferred to the Levy Board. O ne of the Levy Board’s functions as industry regulator was to issue the Certificates of Approval to racecourses which allowed them to carry out their business and made betting lawful on racecourses.

[6] Gambling Act 2005 (Mandatory and Default Conditions) (England and Wales) Regulations 2007 .

[7] A five-year transition period from 2007 until 2012 was put in place to, (a) give sufficient time for racecourses and bookmakers to agree commercial arrangements ( On-course Horserace Betting , Ev65), and (b) avoid threatening the viability of those bookmakers who would have to add potentially increased access charges to the sums already paid to secure list positions ( Position Paper: Licensing Of Betting Premises , by DCMS: Betting and Racing Team, May 2003).

[8] T he 1958 Fergus s on Agreement had formalised the process by which betting pitches on racecourses were allocated according to the seniority list.

[9] The Levy Board’s decision to introduce this new scheme was upheld by Mr Justice Owen in the September 1998 Judicial Review Case. Case number CO-2310-98 . Mr Justice Owen stated that ‘I am bound to find that they [ the Levy Board ] have power now, not only to revoke the existing certificates, but also to include the conditions which they wish to have included’ (p.36).

[10] On-course Horserace Betting , Ev 8.

[11] In response to the FRB’s March 2004 paper, The impact of licensing changes on racecourse bookmakers .

[12] See for example chapter 26 of the Gambling Review Recommendations in 2001 , and section 2.6 of the DCMS position paper in 2003 .

[13] On-course Horserace Betting , Ev63.

[14] Position Paper: Licensing Of Betting Premises .

[15] Mandatory and Default Conditions, Part 2, s2.1 . Emphasis added.

[16] On-course Horserace Betting , p ara 14 .

[17] On-course Horserace Betting , p ara 56.

[18] In addition, on-course bookmakers are suffering considerably due to the economic climate, punters betting less money and unlicensed operators using betting exchanges in the course of business. Both on-course turnover and the number of on-course bookmakers have decreased significantly in recent years: DCMS and Gambling Commission have assumed that “in each year there will be a further average net decline in the number of smaller operators [of shops and on-course bookmakers] of 9%” (Gambling Act 2005: Proposals for Gambling Commission Fees from 1 August 2009, section 2.48).

[19] On-course Horserace Betting , p ara 61.

[20] The terms of reference for these meetings included (a) recognition of list positions and the term of that recognition; (b) a dispute resolution mechanism; and (c) commercial terms. The further issue of whether list positions would be recognised within new betting areas also arose.

[21] Sports Betting Westminster Hall debate , 13 th May 2009 .

[22] AGT performs this function on behalf of the premises licence-holders , the racecourses. Moreover, betting on-course usually involves studying the form and making rational judgements based on the information available whilst enjoying the atmosphere of the day’s racing. There are significant delays between results and a limited number of races available on which to bet. It does not involve instant gratification and poses far less risk to the vulnerable than other forms of gambling.

[23] Joint Committee on the Draft Gambling Bill, Session 2003–04, para 511.

[24] Joint Committee on the Draft Gambling Bill, p ara 537.

[25] Government Response to the First Report of the Joint Committee on the Draft Gambling Bill; Session 2003-2004, recommendation 109.

[26] Joint Committee on the Draft Gambling Bill, p ara 534.

[27] Gambling Act (On-course Bookmakers) Westminster Hall debate, 4 th July 2007.

Prepared 1st August 2011