Culture, Media and SportsWritten evidence submitted by the Gambling Commission and National Lottery Commission

Introduction

The following is a joint submission from Philip Graf, Chair of the Gambling Commission and Chair designate of the proposed merged body and Anne Wright, Chair of the National Lottery Commission, on behalf of the two Commissions in response to the Culture Media and Sport Select Committee’s request for written evidence to inform their inquiry into the merger of the Commissions. Both Commissions have been involved from an early stage in consideration about whether they should merge and helped the Department examine the merits of doing so. Both Commissions agreed the arguments set out in the impact assessment which underpinned the Government’s decision that they should proceed with the proposed merger and informed the consultation document that the Government issued in July 2012.

We would like to take this opportunity to comment upon the areas on which the Committee is seeking views and confirm that both Commissions have made the necessary preparations for a merger to take place this summer.

The Merits or otherwise of the Merger of these two Bodies

1. The Government’s Explanatory Document that accompanied the Order set out the benefits of the merger. In short these stem from synergies and economies of scale obtainable from a single regulator in understanding and regulating the whole gambling market with a common approach to protecting the consumer particularly as technological and online developments increase the convergence between different gambling products.

2. In particular, we think that the merger will create synergies in understanding game and technological developments and make evidence based regulation easier to achieve. This would particularly help with the important statutory roles that both Commissions now have in relation to consumer protection which the merged body will inherit, where there are common regulatory issues such as underage and excessive play.

3. The potential benefits are likely to increase with the development of internet gaming and lottery products which make the distinction between some aspects of lotteries and other types of gambling less clear cut. A single regulator would be better placed to delineate the boundary between the two, commission appropriate research across the sectors, and look at demarcation issues “in the round” when advising Ministers. The merger will ensure that resource, including research capacity, to understand and advise on common regulatory issues is most efficiently deployed.

4. There will also be organisational benefits through improved opportunities to develop wider and deeper skills across the staff of the merged organisation, allow better career development and encourage the cross-fertilization of ideas and best practices.

Any Potential Conflict of Interests which might arise as a Result of a Merger and the Governance Structures that might Overcome these

5. As part of due diligence activity we have undertaken in advance of any merger, the two Commissions have been working together to identify potential conflicts of interest or other governance issues that might be expected to arise in a merged organisation. In this context, the potential perceived “conflicts of interest” are those which are thought to arise between the statutory functions that stem from the legislation governing the National Lottery and the statutory functions that arise under the Gambling Act 2005. Those pieces of legislation define the parameters within which commercial gambling operators and the National Lottery operate and within which decisions are currently made by the two regulators.

6. More specifically both Commissions have primary licensing objectives that require them to ensure probity of those involved in providing gambling/lottery facilities and to protect the consumer. These take priority. The Gambling Commission is required to permit gambling subject to reasonable consistency with those licensing objectives and the National Lottery Commission to maximise the return to good causes subject again to the player protection and propriety requirements.

7. The conclusion of this work was that in so far as there is an issue, it is essentially one of perception which can be addressed by transparency and proper governance protocols, as the different statutory duties in the existing legislation apply only to specific functions of that legislation and this will not change post merger. So, for example, the duty in respect of maximising returns to good causes will only apply to decisions on National Lottery matters, and will continue to be an irrelevant consideration in the exercise of functions under the Gambling Act 2005.

8. In reaching this conclusion we looked at a range of potential regulatory decisions and satisfied ourselves that no conflict of interests would arise, provided such decisions are handled in line with normal good governance practice and within the appropriate legislative framework but that perceptions of potential conflict might arise from issues of commercial confidentiality in connection with the duty under the National Lottery Commission legislation to maximise revenues which would need to be addressed by clear and open data handling protocols.

9. In the case of decisions in respect of the commercial aspects of the National Lottery (“commercial decisions”) such as the likely commercial performance of a proposed new game, there is an issue of commercial confidentiality (rather than a conflict of interest) but, as we know from other organisations where this can arise, this can be managed by appropriate data security protocols and separation of staff working on those commercial proposals. Under current arrangements, Gambling Commission staff are not directly involved in commercial decisions taken by licensed gambling operators as those operators seek to maximise their returns. As such, it does not matter that certain staff will have sight of commercially sensitive information on investments being considered by independent businesses, nor that they may know about rival proposals being developed, provided of course that they retain such information confidentially and do not share information on one operator with another.

10. National Lottery Commission staff, on the other hand, are directly involved in considering commercial proposals related to the National Lottery. Allowing staff in a merged organisation considering such proposals to take advantage of information collected for another purpose from commercial rivals would breach the duty of confidentiality owed to licensees and deter such licensees from dealing openly with their regulator. Equally, though the merged organisation needs access to both streams of information (in aggregated forms) for wider purposes such as understanding trends in the gambling market, so there will need to be strict protocols in place to safeguard commercially confidential information and to ensure that those making recommendations on National Lottery commercial decisions do so without access to information held for other purposes and obtained from on commercial competitors.

11. The merged body will ensure that decisions are taken within the appropriate legislative framework and do not take into account considerations which are irrelevant in that context, being applicable only to the other regime. Both Commissions are used to applying and explaining the relevant statutory considerations governing their decisions and where necessary drawing the Department for Culture Media and Sport’s (DCMS) attention to potential issues. The Gambling Commission already has to take regulatory decisions and provide advice to DCMS on matters which affect different sectors of the gambling industry, including the wider lottery industry (for example, when providing advice on lottery limits). The Commissions have provided joint advice to DCMS on issues such as betting on the outcome of lotteries and lottery style games. The merged organisation, like the Commissions at present, will continue to give reasons for its decisions and to be subject to judicial oversight via judicial review1 or the Gambling Appeals Tribunal if it were thought to have taken into account irrelevant considerations.

The Readiness of the Gambling Commission to Integrate the National Lottery Commission into its own Structure

12. Following the co-location of both bodies in January 2012, the Commissions have been working ever more closely together at both Board and Executive level. We have historically held Board to Board meetings and over the last two years these have enabled greater sharing of best practice in dealing with common regulatory issues, and enabled us to manage our research capacity more efficiently, and to ensure systems were in place to effect a successful merger. Earlier this year DCMS Ministers selected two existing National Lottery Commissioners to provide continuity and experience of National Lottery regulation to the merged body which had been expected to be in place from the start of the financial year. To keep up the momentum and to provide the Gambling Commission, which had been holding vacancies at Board level in anticipation of merger, with additional capacity at Board level, these two Commissioners were appointed to the Gambling Commission Board from 1 April 2013.

13. We have also put considerable effort into transferring knowledge on the regulation of the National Lottery to existing Gambling Commission Board members and senior executives, with a dedicated Board to Board meeting and a series of presentations on key topics being held earlier this year. The Chair, Chief Executive and designated Gambling Commissioners have also attended NLC Board and Committee meetings as observers. The current National Lottery Commission chief executive has agreed to defer his redundancy until the spring of 2015 to provide assurance of continuity of expertise and knowledge of National Lottery Commission regulation and to help realise the synergies that should come from combining the two Commissions

14. The co-location allowed the introduction of shared services in the areas of finance, communications, legal, IT, HR and facilities. This way of working has enabled us to better understand each other’s existing systems, share best practice and prepare successfully for any merger. The Commissions had been working to an original potential merger date of April 2013 and we are therefore well advanced in our planning for any merger, with IT and other support systems substantially integrated already. Relatively minor changes would be needed on actual merger. We should say that a further period of uncertainty about when or how the merger will happen or extension to the transitional period in advance of any formal merger will be quite challenging for both Commissions to manage. National Lottery Commission Commissioners in particular had not planned on the basis of being needed well into 2013–14.

15. In short our organisations had worked together to ensure that common back office services and systems were in place and working effectively and that the risks from the inevitable loss of Board and staff experience had been addressed by transfer of knowledge, staff recruitment and the appointment of Commissioners from the National Lottery Commission to the Gambling Commission board in readiness for merger as early as April 2013.

The Accuracy of the Projected Savings which would Result following a Merger

16. The efficiency savings included in the final impact assessment remain our best estimate of the savings to be realised from the merger. The major savings shown in the Impact Assessment and the transitional costs incurred to achieve them are derived from the relocation of the National Lottery Commission from London to Birmingham. The substantial savings in accommodation costs and smaller but real savings in sharing back office services are partially off-set in the early years by redundancy payments and recruitment costs, but will achieve savings of over £1.2 million pa from 2015–16. The vast majority of the relocation costs were borne by the National Lottery Commission so an equivalent majority of the relocation savings over time will be used to reduce the costs of National Lottery regulation.

17. The £330,000 net present value of the net saving over 10 years from the merger principally relates to the reduction in the total number of board members from 15 to 10 and some modest savings in sharing top management. Our expectations remain in line with the Impact Assessment which estimated savings yielding approximately £170,000 pa (2009 prices) partially offset by transitional costs in 2013–14 to 2015–16. The transitional costs of co-location and move to common services have of course already been incurred so the additional transitional costs of merging the two regulators and securing the very modest financial benefits and the synergies noted above is correspondingly lower. However the transitional costs of merger are being increased by the need now to produce separate accounts with the associated audit and other overheads such as the continuing costs of two boards for the period from the start of the financial year until any formal merger.

May 2013