House of Commons - Society Lotteries - Culture, Media and Sport

Society Lotteries - Culture, Media and Sport Contents

2 Background

Society Lotteries

7. The Gambling Act 2005 sets out three forms of gambling: gaming (games of chance), betting, and lotteries. In simple terms, a lottery is a kind of gambling that has three essential elements: one has to pay to take part; one or more prizes are awarded; and the prizes are awarded by chance.[9]

8. Non-commercial or 'society' lotteries are an established way to raise money for charities or other not-for-profit activities (good causes). A 'non-commercial' organisation is defined[10] as one established and conducted:

· for charitable purposes

· for the purpose of enabling participation in, or of supporting, sport, athletics or a cultural activity; or

· for any other non-commercial purpose other than that of private gain.

It is not permissible to establish a society whose sole purpose is to facilitate lotteries. Society lotteries have to be either licensed or registered, depending on the size of the operation (see paragraph 12 below). Some society lotteries are very focussed (for the benefit of a single local charity and/or with tickets sold in a small area), while others are sold nationally and/or may be run for the benefit of a broader range of beneficiaries. Society lotteries may take a number of forms including subscription-based draws, one off 'raffles', online instant wins and scratch cards, all of which meet the definition of a lottery set out above. They may be promoted and tickets may be sold through face-to-face sales, over the counter, or by post, and via remote means — online, over the phone, or by email.

9. The Gambling Act 2005 also permits a number of classes of exempt lottery (that is exempt from requiring a licence or registration). These are distinct from society lotteries and are not relevant to our inquiry. The main differences between these exempt lotteries and society lotteries are that society lotteries can sell tickets to the general public in advance and outside of specific venues, are subject to less restrictive limits on prizes and expenses and can in all cases be used to raise funds.

10. The National Lottery is not a society lottery governed by the Gambling Act 2005, but a distinct legal entity governed by its own legislation (the National Lottery etc Act 1993), and regulated by the National Lottery Commission, until recently a separate body from the Gambling Commission which regulates all other forms of gambling. While it is not the focus of our inquiry, the fact that it is a lottery and is in competition to some extent for the same type of leisure expenditure as society lotteries means that the legal and regulatory regime for society lotteries potentially affects the National Lottery. In its Call for Evidence on lotteries, the Government stated that, because the continuing success of the National Lottery was of vital importance to the arts, culture, heritage, sport and voluntary sectors and charities, "maintaining the health of the National Lottery is now an essential task of Government".[11] Both Ministers who gave evidence to us emphasised that this remained the Government's position.[12]

11. Although society lotteries have been legal for over 50 years, the Gambling Act 2005 introduced a new, more relaxed, regime for them.[13] Under this Act, society lotteries are exempt from lottery duty and must apply at least 20% of the proceeds of the lottery (ie the gross ticket receipts) to the purposes of the society. The amount given to the good causes is slightly confusingly known as the lottery's profit. The rest of the proceeds may be deducted for prizes, for allocation to another lottery as a 'rollover', and for "other costs reasonably incurred in organising the lottery". In addition, the 2005 Act allowed for the sale of tickets by an automated process and removed the maximum price for a lottery ticket.

12. However, in order to protect the position of the National Lottery, the 2005 Act also placed limitations on society lotteries. It created two broad classes of lottery: large society lotteries and lotteries run for the benefit of local authorities (licensed by the Gambling Commission); and small society lotteries, registered with local licensing authorities. Large and small society lotteries have limits placed on them in respect of: ticket receipts or proceeds from a single draw; the aggregated proceeds from all draws held within a (rolling) twelve month period; and the prizes that they may offer.[14] Taking into account subsequent reviews of the limits, currently:

A small society lottery:

· must not sell more than £20,000-worth of tickets for a single draw;

· in any one year, the aggregated proceeds from its lotteries must not exceed £250,000;

· is not permitted to offer a maximum prize of more than £25,000.

A large society lottery:

· has proceeds of more than £20,000 for a single draw. The maximum value of tickets that can be sold by a large single society lottery is £4 million;

· has aggregate ticket sales in excess of £250,000 in any one year. The maximum aggregate value of lottery tickets that can be sold in any calendar year is £10 million;

· the maximum prize in a single lottery is £25,000 or 10% of the proceeds, whichever is greater. Therefore, a society that sells the maximum number of tickets in a single large lottery (£4 million) could award a maximum top prize of £400,000.

13. As of September 2014 the Gambling Commission had licensed 481 society lotteries, mainly large national charities, hospices and sporting clubs and associations.[15]

'UMBRELLA' LOTTERIES

14. In recent years, societies have started working together to try to maximise the returns to the good causes. This has taken a number of forms, including charities and other good causes joining together to form a single society with multiple beneficiaries, but the most controversial has been the introduction of brand-led lotteries, where a number of societies run lotteries marketed under a single brand to obtain the economies of scale brought by a single marketing campaign. These are sometimes referred to as 'umbrella' schemes. This sort of scheme is not new, but the scale that more recent versions have been able to achieve (in terms of marketing, brand awareness and impact) is new.

15. Promoting multiple society lotteries under a single umbrella brand is not prohibited by the Gambling Act 2005. However, operators doing so must ensure that these schemes are promoted and run compliantly—ensuring amongst other things that:

· each lottery is organised and promoted in such a way as to ensure that the lotteries are not combined to form one single lottery. Each individual society must remain a separate, distinct entity;

· it is clear which society lottery is being promoted under that brand. Each individual society lottery that forms part of a branded scheme must be promoted separately, and it must be clear to a participant in the lottery which society lottery they are being asked to participate in;

· the scheme is structured to ensure that none of the other regulatory requirements, such as limits on proceeds and prizes for each draw and each society, is breached. Each draw must also return the statutory minimum of 20% of the proceeds to the purposes of the society;

· each society must be a genuine society meeting the requirements of a non-commercial society set out in section 19 of the 2005 Act and any publicly available criteria relied upon by the Gambling Commission in assessing compliance with those requirements;

· the proceeds from one society's lottery may not be used to fund any of the prizes or expenses in a different society's lottery promoted under the same brand.[16]

EXTERNAL LOTTERY MANAGERS

16. The National Lottery etc Act 1993 allowed a class of persons licensed by the then regulator, the Gaming Board of Great Britain, to manage society lotteries on their behalf. These 'External Lottery Managers' or ELMs were intended to help organisations with no experience of running a lottery, or those wishing to benefit from the economies of scale provided by belonging to a larger umbrella organisation.[17] ELMs may be commercial organisations. The Gambling Commission explains this exception to the principle that society lotteries must be non-commercial by analogy with other businesses that legitimately make a profit from providing services to the lottery societies, such as advertising and marketing businesses.[18] All ELMs must hold a lottery manager's operating licence issued by the Commission before they can promote a lottery on behalf of a society.

17. Before the Gambling Act 2005, the maximum that could be withdrawn from the proceeds of a lottery for expenses was 35%. The 2005 Act removed the cap, but instead fixed the minimum amount to be returned to good causes as 20%. As expenses are no longer capped and ELMs are paid a fee on terms which both parties decide, as long as it is reasonable under the terms of the Act, this has increased the potential for ELMs to make a profit from managing a society lottery. Members of the Charity Law Association said there were two types of ELM: one was purely a service company, where the charity determined which elements of the lottery it would contract out to the ELM on the basis of an agreed fee; the other was a company that put together a support package with a view to making a profit from this. They said it was not clear how much profit was made and how much, if at all, either type "distorted the market".[19]

18. One model of an umbrella lottery run by an ELM is provided by the People's Postcode Lottery (PPL). This manages multiple society lotteries on behalf of 13 charitable trusts. It is a subscription-based lottery and is part of Novamedia's group of fundraising lotteries which operate also in the Netherlands and Sweden.[20]

19. The most prominent of the umbrella lotteries is the Health Lottery, which—in its current, successful incarnation—was launched in the autumn of 2011 as a nationally promoted brand backed by the Northern and Shell group of companies. The Health Lottery is a collection of 51 Community Interest Companies (CICs) each of which holds a single lottery licence, with an extensive national retail distribution network through newsagents, supermarkets and post offices under the one brand. The operation of the lotteries is contracted out to an ELM, The Health Lottery Ltd, which is part of the Northern & Shell Group, and which provides marketing, the operation of the draw and the management of the retailer network. The Health Lottery Ltd is a commercial company and entitled to make a profit as an ELM. Each week, one CIC promotes "the Health Lottery" of that week and all the proceeds raised by sales for that week's Wednesday and Saturday draws belong to that CIC. There is rigid segregation of CIC accounts to ensure that, week upon week, there is no intermingling of funds between CICs but rather all the good cause's proceeds from that week go to a specific CIC. Each of the 51 Community Interest Companies gives 20.34% of its proceeds to the People's Health Trust (a registered charity) to fund charitable causes (20% to the good causes and 0.34% to cover the Trust's administration costs).[21]

Growth of the society lotteries sector

20. According to the Gambling Commission, the society lottery sector continues to grow, with more charities and good causes starting to run lotteries and more ELMs available to support them. The total proceeds from sales by large society lotteries[22] have increased each year since 2009; both expenses and the sums provided to good causes have risen during this period. As a proportion of the total proceeds, the proportion returned to good causes increased from 45% to 46%, while expenses decreased from 38% to 37%. Prizes peaked during April 2011-March 2012 and have subsequently fallen back slightly, decreasing from 18% to 17% between April 2012-March 2013 and October 2012-September 2013.

21. A number of our witnesses suggested that the large increase in sales over this period was due in part to greater public awareness of society lotteries owing to the heavy publicity when the Health Lottery was relaunched in 2011 (the Health Lottery said 45% of the increase in sales was due to this), and partly to the increase in maximum prizes that came into effect in 2008.[23] The Charity Law Association working group suggested a broader cause: the significant drop in donations to charities resulting from the 2008 economic crisis led charities to look for other sources of income, such as lotteries, while, at the same time, lotteries had become slightly easier to run as a result of the Gambling Act 2005. [24]

Figure 1: Large society lottery proceeds, expenses and prizes £m[25]

Figure 2 shows the contribution of ELM managed lotteries to this growth, with both the absolute amount and proportion of proceeds raised by ELMs peaking during 2012/13.

Figure 2: Large Society Lotteries - £m Proceeds (and %) Raised by ELM managed lotteries[26]

Table 1: Data on large society lotteries only[27]

Total lottery proceeds, expenses and prizes (includes ELM managed lotteries) (£m)

2008/09 2009/10 2010/11 2011/12 2012/13 Oct 12/
Sep 13

Prizes from proceeds 34.97 36.42 38.00 67.57 61.34 59.19

Expenses 49.54 57.98 66.51 101.18 130.19 132.54

Balance (to good causes) 94.15 100.57 103.61 132.02 153.71 163.33

Total proceeds 178.66 194.97 208.12 300.77 345.24 355.06

Proceeds of above raised by ELMs 36.05 56.10 89.56 185.64 221.13 205.23

% Proceeds from above raised by ELMs 20% 29% 43% 62% 64% 58%

Number of employees

at 31 Mar 2009 at 31 Mar
2010 at 31 Mar
2011 at 31 Mar
2012 at 31 Mar
2013 at 30 Sep
2013

Number of employees (ELM) n/a 678 754 857 826 909

This compares with the following information about the National Lottery in the same period. While the most recent figures show the turnover of society lotteries as £355 million, the turnover of the National Lottery was £6,736 million. Moreover, as the Lotteries Council and a number of our other witnesses pointed out, the growth in the income of society lotteries has not resulted in a fall in income for the National Lottery.[28]

Table 2: National Lottery Data[29]

£ millions 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14

Sales 5,149.1 5,476.5 5,824.7 6,503.3 6,977.1 6,736.3

NLDF*[30] 1,382.6 1,588.0 1,655.3 1,812.6 1,943.9 1,691.6

Prizes 2,627.6 2,797.3 2,984.5 3,379.4 3,697.6 3,636.5

Duty 617.9 657.2 699.3 780.5 837.2 808.4

Retailer Commission 247.7 257.4 270.0 296.3 315.6 304.6

*Including unclaimed prizes and adjustments

22. Whilst the money raised by society lotteries has increased year on year, this growth has slowed in recent years. Between October 2012 and September 2013 the sector generated £163 million for good causes, an increase of £10 million (around 6%) on the same period in 2011/12. However, this is down from the previous three years, over which time the sector saw growth of over 50% (from £100 million in 2009/10 to £153 million in 2011/12). The Lotteries Council, a group that represents society lotteries, is concerned that growth in the sector is currently not as strong as it could be due to the regulatory constraints within which its members currently operate.[31]

9 Gambling Act, section 14. The Act also defines two types of Lottery, simple (where prizes are allocated by a process relying wholly on chance) and complex (where prizes are allocated by a series of processes, the first of which relies wholly on chance). This distinction is not of relevance for this Report. Back

10 Under section 19 of the Gambling Act 2005 Back

11 DCMS Call for Evidence, December 2014, para 43 Back

12 Qq 168 and 174 Back

13 For a description of the previous, far more restrictive regime, see Gambling Commission (SOC0023), para 31 Back

14 The restrictions on large lotteries are set out in section 99 of, and those on small lotteries in Part 4 of Schedule 11 to, the 2005 Act. As indicated later in this Report, the exact sums specified in the Act have been reviewed and increased since 2005. Back

15 DCMS (SOC0034), para 2 Back

16 'Industry Statistics April 2009 to September 2013', Gambling Commission (June 2014), cited in Gambling Commission (SOC0023), para 27 Back

17 An ELM is defined in section 257 of the 2005 Act as someone that makes arrangements for a lottery on behalf of a society or local authority but is not a member, officer or employee of the society or local authority. A society or local authority and an ELM must be separate entities and be able to demonstrate that they are independent of each other. Back

18 Gambling Commission (SOC0023), para 20 Back

19 Q72 Back

20 PPL (SOC0007), paras 3.1 and 3.2 Back