Written evidence submitted by Wiggin LLP (GA 43)

1. Summary

· Core Objectives. We believe that the licensing objectives of the 2005 Act are being largely achieved in the UK but that this is not wholly or even primarily due to the 2005 Act. It is very largely attributable to good quality historic regulation initiated by the Gaming Board and in the online sphere it is also due to the social responsibility efforts of many of the online gambling operators who offer online gambling to UK customers.

· Update of Legislative Framework. The 2005 Act was a welcome replacement of the previous laws dating from the 1960s. However the pace of change in technology is such that some aspects of the 2005 Act are already looking outdated and difficult to apply.

· Financial Impact of 2005 Act. The 2005 Act has resulted in the UK losing out on significant gambling revenue since September 2007. The much-vaunted new casinos have not been built and almost all online gambling is located and taxed offshore, not in the UK. The UK-based growth in both online and physical gambling that motivated the passage of the 2005 Act has also failed to materialise, as have the collateral technological and social regeneration benefits.

· Offshore Online Gambling. The combination of high UK gaming duty, irrecoverable VAT, the horseracing levy and the "white list" strongly incentivises operators to access the UK market from offshore andthereby giving up any trading presence in the UK. A UK-based electronic gambling sector will not happen without radical change to this set of circumstances.

· Gambling Commission. The Gambling Commission has had a difficult start and there were voices to say that expertise had been lost from the old Gaming Board. However, in our dealings with the Gambling Commission they have been responsive and helpful.

· ‘Bricks and Mortar’ Casinos. Our view of this is that there has been a lack of political will to see these projects completed. This has not been helped by unfavourable and unfair attacks on gambling from some sections of the press, which refuse to acknowledge the quality of customer care undertaken by responsible and well regulated gambling operators.

2. Detailed Responses

2.1 How effective has the Act been in its core objectives?

2.1.1 Our view is that in overall terms, remote gambling offered by operators based in the UK and in the DCMS’ approved ‘white list’ territories is generally conducted to a high standard of probity. For example: the global online poker operator ‘PokerStars’ is an entity listed in the Isle of Man, a jurisdiction whose licensees are approved by the DCMS to offer their services to UK customers. The Committee will note that recently PokerStars paid back large amounts of customer deposits to American customers after encountering some regulatory issues in the US. The ability of this operator to make these substantial refunds with the speed and efficiency it did indicates a very high standard of probity and regulation.

2.1.2 In particular, online gambling operators dealing with UK customers and who are located in these DCMS-approved offshore territories invariably have extensive programs of social responsibility that include detailed multi-level age and identity verification programs, programs to identify repetitive or ‘problem’ gambling patterns and detailed policies and processes designed to avoid money laundering and fraud. So although the UK 2005 Act does not itself directly bind the offshore operators who dominate the UK’s remote gambling market, the mechanism of approval whereby the DCMS approves the licensees of selected, audited jurisdictions has produced a high standard of customer care for the UK customers who use the services of those licencees.

2.1.3 So although this standard of care has been procured not so much by the 2005 Act as by the various regulatory regimes of the offshore ‘white-listed’ jurisdictions such as Alderney, Gibraltar, the Isle of Man and elsewhere, they are approved by the DCMS on the basis that their regulatory systems replicate the effects of the 2005 Act. The 2005 Act therefore acts as a ‘yardstick’ or litmus test for the quality of offshore regulation applicable to UK Customers. That said, the Committee should be aware that the gambling regulators of some jurisdictions (and we have in mind the Alderney AGCC) have introduced flexible licensing regimes one of the effects of which is to allow operators to locate personnel and servers in jurisdictions other than the licensing jurisdiction. Although this is a business-friendly move by a high-quality regime, taken in response to industry needs, we have wondered in the past whether the essence of gambling regulation should not be that the regulator has the people and the servers of its licensees physically close by, in order to take them over or shut them down should malfeasance occur. It is an interesting question for the Committee, the Gambling Commission and the DCMS as to how far a jurisdiction ‘white listed’ by the UK may allow its own licensees to spread their businesses across jurisdictions that may not have been approved by the UK, pursuant to its flexible licensing model. Our understanding – by contrast – is that the Isle of Man requires the businesses of its licensees to be present on the Island.

2.1.4 The Committee may also want to consider whether more should be done to obstruct, block or prevent gambling operators who accept UK customers and who are not based in an approved, ‘white labelled’ jurisdiction. Although the ‘advertising’ of gambling from these non-approved foreign jurisdictions is illegal under the Act, we are not aware (?) that this has translated into any attempt to block UK customers from accessing these sites. So in order to sell online gambling to UK customers, not only need one not be in the UK, one need not even locate in a ‘white-list’ (or EU) jurisdiction. This ‘black’ market represents an environment where the UK consumer may be subject to variable standards of probity and regulation.

2.1.5 This issue will become considerably more important if, as is suspected, the UK decides to abandon the EU-wide licensing approach of the Act and instead adopts a national licensing regime like that of France, Spain or Italy. We think it almost inevitable that the UK will proceed to this sort of model. If the UK Government insists, in future, on licensing and taxing online gambling operators who wish to access the UK market, online operators who toe the line and obtain a UK licence and pay UK tax will have a legitimate expectation that those who use the universality of the internet to avoid doing either of those things will face UK regulatory action. We have already seen efforts by ARJEL in France to block or prevent sites without a French licence accessing French customers and the Gambling Commission will need to have the regulatory will to undertake proper enforcement of its regime.

2.1.6 In terms of online operations, we do not see any need for greater or heavier regulation in terms of the licensing objectives than already exists. Our view is that it is more important going forward for UK regulation to protect reputable operators by crediting them for the regimes that they currently work under and not requiring them to make separate or different regulatory or administrative arrangements in the UK to achieve the same effect as their existing regulatory regime. So, for example, we would expect to see operators already licenced in jurisdictions such as Alderney, Gibraltar, the Isle of Man, Malta and EU jurisdictions to receive a ‘light touch’ approach from the Commission, something that the Commission seems wisely to support.

2.1.7 Lastly, there are some areas of the 2005 Act which would benefit from some clarity. The core definition of the Act (the definition that governs whether you need a gambling licence and need to pay duty) is the definition of ‘facilities for gambling’. Modern online gambling platforms extend across national boundaries and include a whole variety of software and hardware designed to do different things. Very often there is confusion as to which bits of these complex infrastructures actually constitute the ‘facilities’ for gambling. The Commission has produced some useful guidance on this but clarity in law would be welcome, for example by adopting the Commission’s own concept of the ‘core system’. Another area that is prematurely obsolescent is the concept of ‘gambling software’. ‘Gambling software’ in the modern world can often be a collaborative and complex product produced by a number of entities. Once again, it would be helpful if the Act were to make clear that only the entity with de facto control over the actual gambling functionality (and hence the gambling experience of the customer) needs hold the licence. The aim of the 2005 Act going forward should be to produce regulatory certainty in a developing and sophisticated multi-jurisdictional electronic environment.

2.2 The financial impact of the Act on the UK gambling industry

2.2.1 We do not see that the 2005 Act has helped the UK gambling industry financially. The promised casinos and super-casinos that were meant to regenerate their host locations have not materialised and the process around the competition for those operations has not reflected creditably on the regulation.

2.2.2 In the online sphere, the ability of gambling operators to run their UK businesses from offshore means that no native, UK-based remote gambling industry has developed in the UK, meaning in turn that the major gambling businesses that benefit from UK customers pay tax offshore and make investments in personnel and connectivity offshore. Many operators maintain related businesses in the UK for the purposes of marketing and providing non-gambling services to the offshore gambling entities, but it is fair to say that the original vision of the Budd Report and the 2005 Act, that of turning the UK into a blue-chip, gold-standard regulatory jurisdiction with a thriving gambling industry, socially responsible and paying tax to HM Treasury, has singularly failed to materialise. All of this potential has been wasted.

2.2.3 The reason that the anticipated thriving online gambling industry has failed to materialise in the UK is tax. When HM Treasury announced that remote gambling conducted in the UK was to be chargeable to gaming duty at 15% of gross profits, the ability of operators to move offshore and continue to access UK customers under the Act created a powerful motivation for operators to either remain, or relocate, offshore, an incentive increased by subsequent VAT rises, causing operators to suffer further tax by way of irrecoverable VAT. However as the individual member states of the EU have gradually opened their internal markets to private entities, many of these operators have been forced to obtain French, Italian, Danish, Spanish or other licences which require them not only to have a presence in those countries, but to pay tax at rates that now makes the UK’s 15% GPT look almost attractive.

2.2.4 Lastly, onshore bookmakers pay the horseracing levy but those who have moved offshore do not and, as we mention above, problems in relation to irrecoverable VAT can be mitigated by a move offshore.

2.2.5 There is a certain amount of cost and inconvenience involved in relocating out of the UK to an offshore jurisdiction, and there may be issues with the availability of personnel and services, but there does come a ‘tipping point’ whereby the UK becomes sufficiently business-unfriendly that companies are forced to reconsider their UK presence. William Hill and Ladbrokes both moved to more business friendly jurisdictions in 2009 and it is rumoured in the gambling press that Betfair, currently based in Hammersmith, may be contemplating a similar move. All of this denudes the UK of a thriving gambling sector as well as causing job losses and the loss of high-tech profitable businesses. It is also a retrograde step for the digital economy as a whole.

2.3 The effectiveness of the Gambling Commission since its establishment and whether it represents good value for money

2.3.1 Regulatory activity is not the majority component of our work for our gambling operator clients but to the extent that we have interacted with the Gambling Commission, our dealings with them have been positive. The Commission shows itself very willing to engage with us on behalf of our various clients in the sector and are capable of responding in a constructive way to problems and queries in relation to licensing and regulation. We are aware that the Commission suffered continuity issues in its early days and we are aware that there have been issues raised in some quarters in relation to increases in staff and costs at the Commission.

2.3.2 In relation to value for money, our view is that the Commission could become greater value to the taxpayer if it had something to regulate. The 2005 Act envisaged a UK-based onshore remote gambling industry and a number of larger and smaller ‘bricks and mortar’ casinos. None of this has materialised. Had these two areas of business materialised to anything like the extent envisaged, it may be that the Commission could have financed itself more easily.

2.4 The impact of the proliferation of offshore online gambling operators on the UK gambling sector and what effect the Act has had on this.

2.4.1 The Act has opened the door to a thriving online sector targeting the UK but based outside the UK. This is the diametrically opposite effect to that intended. The intended effect of the 2005 Act was to provide a world-class, consumer-protecting yet business-friendly system of regulation that would attract online gambling operators to the UK. The ‘kitemark’ of UK regulation would be a worldwide mark of integrity and responsibility and the UK would attract wealthy digital businesses which would boost the UK’s foreign earnings and contribute to the UK’s digital economy.

2.4.2 All of this excellent aspiration died instantly when HMRC announced that the level of tax on the gross profits of online gambling companies operating in the UK was to be 15%. By way of contrast, in Alderney there is no gaming duty, in Gibraltar the rate is 1%, in the Isle of Man it is 2.5% falling to 0.5%. Corporation taxes are also lower in these jurisdictions: in some cases it is zero. Licensees from all these jurisdictions have free access to the UK markets.

2.4.2 The 2005 Act and the tax situation has encouraged companies offshore.

2.5 What impact has the Act had on levels of problem gambling?

2.5.1 We do not think that the Act has had any impact on the levels of problem gambling.

2.5.2 Studies generally show that levels of problem gambling in relation to remote gambling have remained consistent (and low) from the late 1990s to date. We find this to be extraordinary because in the late 1990s there was no broadband internet and hence limited ability to gamble online. It is remarkable that as internet and mobile connectivity exploded through the 2000s and more and more online gambling operators commenced business, there was no increase in problem gambling.

2.5.3 The reason for this is twofold. Firstly there is within the industry a strong historical commitment to protecting children, young persons and the vulnerable from gambling. Secondly, the various gambling care associations such as GamCare and the various trade bodies such as the RGA, have constantly worked to promote a high standard of consumer care in the industry.

2.5.4 Our experience is that most reputable operators take considerable pains to ensure the welfare of their customers. Unwise or addictive gambling patterns are spotted and customers offered the opportunity to self-exclude or limit their gambling. Some operators even go so far as to engage with the families of customers who experience gambling issues.

2.5.5 Customers are more at risk from unlicensed gambling sites in less well regulated jurisdictions. There are jurisdictions that do not appear on the DCMS’ ‘white list’ of approved jurisdictions and in these jurisdictions, care of the consumer is perceived to be less than the mandatory UK levels. In our experience it is not the case that the prohibition or vilification of gambling protects the consumer: like most prohibitions, it merely drives consumers away from regulated and responsible outlets to unregulated and less responsible outlets.  

June 2011

Prepared 1st August 2011