Memorandum from the British Horseracing
Board (DGB 89)
INTRODUCTION
1. The British Horseracing Board (BHB) is
the Governing Authority for British Racing, a major sport and
industry which, together with the Betting Industry, employs 100,000
people directly and indirectly; generates £400 million annually
for the Exchequer through betting duty and other taxes; and is
a major contributor to the rural economy, primarily via the breeding
industry.
2. British Racing is heavily reliant for
its financial health and stability on revenue from the betting
industry, whose use of the high quality racing product and the
pre-race data associated therewith, is paid for, currently, through
the statutory horserace betting levy and, in future, following
the abolition of the Horserace Betting Levy Board, through commercial
licensing arrangements. In 2003-04 the horserace betting levy
(including contributions from the Tote) is expected to generate
over £90 million.
3. British Racing has therefore a strong
interest in legislation which could have a significant impact
on its future integrity and funding. It is BHB's view that without
appropriate legislation, betting exchanges represent a significant
threat to both.
OVERVIEW
4. BHB has welcomed the thrust of the Report
of the Gambling Review Body (GRB) and the Government's response,
"Safe Bet for Success". In particular it welcomed the
emphasis on consumer protection, keeping gambling crime-free and
protection of the vulnerable, as reflected in the intention to
establish a Gambling Commission with wide ranging powers of licensing,
enforcement and prosecution.
5. However, when responding to Government
on the GRB Report in October 2001, BHB stated: "BHB is deeply
concerned about the recommended significant deregulation of all
aspects of gambling. While not afraid of competition in the overall
gambling market, Racing opposes deregulation on the scale recommended
without commensurate measures and opportunities of direct benefit
to horserace betting, notably the widening of the distribution
of the product betting, under properly controlled conditions,
in pubs and clubs".
6. This general concern remains. Indeed,
already over the last two years, competition with Racing for punters'
interest in licenced outlets has greatly increased, both in terms
of intensively promoted higher margin products and also low margin
casino games, made practicable by the change in the tax regime.
Whilst the move to gross profits benefited bookmakers, who are
now enjoying exceptional levels of profitability, which are beyond
expectations, the change produced income for Racing which was
more than 20 per cent below expectations.
7. It is BHB's view that the principal cause
of this shortfall is the impact of Betting Exchanges, made more
acute by the impact of the favourable tax treatment they and their
users receive when compared to traditional bookmakers.
SCOPE OF
WRITTEN EVIDENCE
TO THE
COMMITTEE
8. In submitting this short Memorandum,
BHB focuses on two key areas to which the Committee have indicated
that they propose to direct particular attention together with
necessary transitional arrangements:
(a) the regulation of betting exchanges
in the light of the Committee's indication that it will address
the ability to regulate them effectively and their impact on the
rest of the Betting Industry, particularly bookmakers; and
(b) the taxation of betting exchanges
in the light of the Committee's indication that it will address
"how the proposed deregulation will fit with the existing
tax regime for different aspects of gambling".
Comments on other aspects of the Draft Bill
will be made direct to DCMS in the context of that Department's
own consultation exercise which concludes at the end of February
2004. The narrow scope of this Memorandum should not be taken
to imply that BHB does not believe that the Committee should take
the opportunity to consider the horserace betting market, and
in particular issues relating to integrity, more generally, in
its review. BHB believes that it would be inappropriate for the
Committee to consider issues relating to integrity only in the
context of betting exchanges without considering the market as
a whole.
TRANSITIONAL ARRANGEMENTS
9. BHB recognises that the changes associated
with the Draft Gambling Bill will not be fully implemented until
that Bill passes into law. This means that, while the precise
timetable is unknown, there will be no formal action for at least
a further year and probably longer.
10. In these circumstances BHB welcomes
the proposal to designate the current Gaming Board as the Shadow
Commission and urges the Committee to encourage the Government
to move ahead as swiftly as possible with the introduction and
passage of the legislation, and in the meantime to invite the
Gaming Board to make as much progress towards implementation of
the proposals as circumstances will allow.
11. It is BHB's view that the threat to
the integrity of the sport from betting exchanges and their abuse
means that the Shadow Commission must be as robust as it can be
in requiring that betting operations observe the intent of the
legislation on a voluntary basis prior to its formal introduction.
SUMMARY OF
CONCLUSIONS
12. Betting exchanges, fuelled by the change
to gross profits tax, have grown at a phenomenal rate over the
last two years to the point where BHB estimate that they will
soon match £6 billion of stakes (matched stakes) on an annualised
basis, operating on an international stage.
13. Betting exchanges create the possibility
that any unlicensed person can make substantial profits by the
laying of a horse to lose and that an unlicensed bookmaker can
make substantial profits without paying the appropriate amount
of tax or levy or to Racing.
14. The scale and international nature of
betting exchanges represent an unprecedented and substantial threat
to the integrity of Racing, which lies at the heart of the racing
product, as the number of reports of alleged irregular betting
patterns, focussed on losing horses, accelerate on an almost daily
basis.
15. The regulator of the Sport, the Jockey
Club, can, to a degree limited by voluntary behaviour, monitor
the use and abuse of betting exchanges but is powerless unless
adequate sanction is created by statute in the hands of the Gambling
Commission.
16. The taxation of betting exchanges creates
an unlevel playing field which distorts the market, gives betting
exchanges an unfair advantage and results in less money flowing
to Government and to Racing.
17. The use of betting exchanges by bookmakers
to arbitrage market prices results in lower margins for the betting
market overall which results in less money flowing to Government
and to Racing.
SUMMARY OF
RECOMMENDATIONS
18. Recreational layers on a Betting Exchange
should be distinguished from non recreational layers by the volume
of their laying over a specified time period whereby non recreational
layers would be deemed to be in the business of betting and would
require an appropriate licence, awarded on the basis of a "fit
and proper" test.
19. The Gambling Commission should be given
powers of investigation and audit to uncover abuse.
20. The Gambling Commission should be given
sufficient powers of sanction to deter wrong-doing including,
but not necessarily limited to, the withdrawal of licences from
non recreational users.
21. The scope of taxation of betting exchanges
should be widened to include the taxation of individual layer's
profits to ensure a level playing field, eliminate market distortions
and that betting exchanges and their users make an appropriate
revenue return to Government.
REGULATION OF
BETTING EXCHANGES
Gambling Review Body Report and the growth of
Betting Exchanges
22. The Committee's particular scrutiny
of the regulation of betting exchanges is not only welcome but
necessary given that, as betting exchanges were only in their
infancy when the GRB was sitting in 2000-01, the GRB did not subject
Exchanges to the same rigorous independent scrutiny as it applied
to all other aspects of gambling. Betting exchanges ("Betting
Brokers") were addressed in two short paragraphs in the GRB's
Report (19.41 and 19.42) which recommended only that "betting
brokers should be licensed and regulated in the same way as bookmakers".
23. The growth in betting exchanges and
their use since the GRB reported has been unprecedented and could
not have been forecasted. On their own measure of turnover (matched
stakes) and corroborated by our own estimation, it is likely that
the turnover of betting exchanges will soon exceed £6 billion
per annum.
The Threat to Racing's Integrity
24. BHB is very concerned about the threat
which betting exchanges pose to the integrity of Racing. This
threat principally arises from the fact that, for the first time
ever, unlicensed individuals have ready access to operations which
allow them not only to back horses but also, crucially, to lay
them. This means that countless, anonymous individuals, both in
this country and overseas, can readily lay horses to lose. In
the past this has been a facility effectively restricted to bookmakers
themselves and professional gamblers and their broad equivalents.
25. This incentive to win money on a losing
horse represents an unprecedented threat both to the integrity
of racing and even more particularly to its reputation, as the
regular coverage of races which are regarded as suspect, in some
way, well demonstrates. In the absence of a rigorous scheme of
regulation both by the Jockey Club and, more importantly, by statute,
the continued suspicion generated by these stories is, and will
continue to have, a debilitating effect on the good name of British
horseracing, carefully built up over many years, particularly
as punters now have many alternative betting opportunities. In
the BHB's view this calls for particularly rigorous scrutiny,
regulation and policing of this very real threat.
26. The challenges of policing worldwide
operations of this scope and complexity should not be underestimated.
Nor should the difficulties of securing convictions in the event
of malpractice. Sports regulators, with inevitably limited resources,
cannot reasonably be expected to have the ability to deal with
this very significant integrity threat, even with the enhanced
regulatory arrangements which the Gambling Commission will introduce.
The threat can only be adequately dealt with by statutory powers
and sanctions.
27. As further reinforcement of the view
that rigorous policing is required, the Committee should be aware
that Racefax, an independent monitoring service, identified over
170 instances of irregular betting patterns on betting exchanges
in the year to October 2003. Racefax employ a filtering system
to reduce the very much greater number of races where there is
a substantial drift in price, which incorporates the degree of
underperformance by a horse against its BHB rating and unusual
riding tactics. Details can be made available to the Committee
in confidence on request. The fact that many horses whose price
drifts do go on to win, as has always been the case, does not
mitigate the main concern, namely an apparent sharp increase in
the volume of otherwise fancied horses which drift in price and
lose and whose unusual running may indicate that there is an irregularity.
The fact that some of these instances may have innocent explanations
does not stop the questions they raise damaging Racing's reputation
for integrity: hence the obvious need for adequate responses.
28. The Committee should also be aware that
a number of foreign racing jurisdictions, after careful and due
consideration, including Australia, Hong Kong and Japan, are refusing
to licence betting exchanges because of both the integrity threat
and their likely impact on the revenue stream on which they also
depend.
The Proposed Legislation
29. BHB recognises that the Draft Gambling
Bill is constructed on the basis that a Gambling Commission will
be established with wide ranging powers of investigation and responsibility
for issuing operating licences to various classes of betting operator.
This includes a "Betting Intermediary Operating Licence"
(Clause 51(2)e) for betting exchanges, to which a number of mandatory
conditions will be attached, as they will to all other operating
licences, and to which the Commission will be given the power
to attach additional conditions which are specific to the activity.
30. As far as Racing is concerned, it is
important that the Gambling Commission and the sport's Regulator,
the Jockey Club, work closely together, exchanging intelligence
and as much hard evidence as possible to substantiate inquiries/prosecutions
when malpractice is evident and to make appropriate arrangements
for warning and watching closely particular participants. BHB
acknowledges, as does the Jockey Club itself, that the Regulatory
Authority for Horseracing, has a key responsibility for monitoring
and investigating where appropriate, but is firmly of the view
that this activity could only be effective if information is exchanged
on a timely basis between the Commission and the Regulator. It
is vital therefore that the Gambling Commission is given the maximum
reasonable powers to complement the determined efforts which the
Regulatory Authority of any sport on which betting is conducted
through Exchanges will need to make to deal with abuse.
31. These powers must incorporate those
of investigation as well as the application of appropriate sanctions.
The regulatory authority can legitimately monitor the use and
abuse of betting exchanges but unless there are powerful sanctions
against abuse which can only be properly applied by statute, it
is BHB's view that monitoring (or indeed regulation) on its own
would have little or no impact and the integrity of the sport
would continue to be under serious threat.
32. The Committee should note that there
will be a high cost in the proper monitoring of the high volume
of daily transactions on betting exchanges to determine whether
or not there has been irregular betting activity and subsequent
investigation. This cost will be much higher not least because
betting exchanges operate on a world wide basis. This significantly
higher cost will have to be borne out of the higher price which
BHB believes betting exchanges should pay to racing.
33. In these circumstances, BHB recommends
that the Committee should satisfy itself that the interface between
the Gambling Commission and Sports Regulators generally is adequate
to deal with any integrity threat arising from betting operations,
a system of all types. In the context of betting exchanges, consideration
should be given to establishing, on a practicable and policeable
basis under which "recreational" layers on exchanges
do not require a licence but "non-recreational" layers,
who are in effect deemed to be in the business of bookmaking,
do require an appropriate licence, only awarded after application
of "fit and proper" tests. Backing would be unaffected.
The two types of layer might reasonably be differentiated by the
establishment of a threshold relating either to the amount of
betting or to the number of transactions over a given period,
above which a layer is deemed to be "non-recreational".
34. This treatment would not capture the
vast majority of betting exchange users for whom the use of a
betting exchange is truly recreational. BHB recognises that this
has been a major concern of HM Customs & Excise. The treatment
applies appropriate "fit and proper" tests and incorporates
sanction in the form of removal of the licence.
35. The treatment may also capture a few
large recreational layers who are not in the business of bookmaking.
These are likely to be few and the inconvenience caused to them
would appear to be a very small cost indeed for the associated
benefits to the integrity of the sport in the regulation and policing
of betting exchanges and their users and the very great threat
they would otherwise pose.
36. The question of how the threshold would
work in practice and at what level can only be properly addressed
in consultation with all relevant parties and on the basis of
a detailed analysis of relevant statistics.
TAXATION OF
BETTING EXCHANGES
37. In BHB's view, betting exchanges are
not currently on a level fiscal playing field, as far as taxation
is concerned. Last summer BHB supported amendments to the Finance
Bill, tabled by George Howarth, which were regrettably unsuccessful,
although the dialogue between the Betting Industry, Racing and
HM Customs & Excise continues. This has the direct impact
of lowering taxation revenues for government. This lowering is
exacerbated by the ability of the on-course market, in effect
acting as a recreational player, either by themselves or through
intermediaries, to take advantage of the lower cost of using a
betting exchange facilitated by an inequitable tax base to arbitrage
prices into betting exchanges. This has the consequence of inflating
starting prices and lowering margins in the market generally so
that tax revenues are reduced further still. The current situation,
where layers on a betting exchange do not have to obtain a bookmaker's
permit, make it difficult if not impossible to distinguish between
a bookmaker and a recreational user, facilitating this type of
arbitrage.
38. It is BHB's view that Government has
the right to ensure that gambling organisations and their operations
pay adequately to society as a whole for the licence to conduct
bookmaking businesses, which Government grants them. An unlevel
taxation playing field, as well as being inherently unfair and
creating a market distortion, means that betting exchanges and
their users are not paying an appropriate contribution to social
policy as others are doing.
39. In BHB's view, betting exchanges should
be taxed on the basis of individual (disaggregated) layers' profits
in addition to the current system of taxing the betting exchanges
commission. Such a system would recognise that there are two economic
transactions underlying the use of a betting exchange, both of
which result from betting, both of which should be subject to
gross profits tax. The first transaction is between the betting
exchange and its customer and the second is between two betting
exchange customers. The Committee is urged, in the context of
assessing the relationship between the proposed deregulation and
the current existing regime for different aspects of gambling,
to consider the equity of the current taxation basis.
40. The taxation basis should therefore
be reviewed as a matter of urgency. In parallel with this, BHB
is reviewing its own commercial policy vis a vis the licensing
of betting exchanges to use BHB's pre-race data. This review has,
in part, been prompted by the £20 million shortfall in the
yield from the 41st Levy Scheme 2002-03, which BHB and bookmakers
largely attribute to the impact of exchanges on betting margins
on course.
41. If the Industry's income continues to
be impacted in this way, without a reasonable level of return
from the massive and growing Exchanges turnover, the National
sport of Racing, which has received so much encouragement and
support from the Government and Parliamentarians, will continue
to suffer from what amounts to a sharply tilted playing field.
The Committee is asked to examine thoroughly the fiscal/financial
situation and to come to a view which takes due account of both
the need for betting exchanges to contribute adequately to Racing
and to the Exchequer and to operate in a way which does not negatively
impact the activities of traditional bookmakers and the contribution
which they make to the Industry and Government.
JOCKEY CLUB
EVIDENCE
42. In its capacity as Regulatory Authority
of British Racing, the Jockey Club has also submitted written
evidence to the Committee. In that evidence the Jockey Club has,
inter alia, proposed a number of conditions which should be attached
to operating licences for betting organisations; drawn attention
to the steps already taken by the Club to mitigate the threat
which betting exchanges pose to the integrity of racing; and expressed
strong support for a "partnership approach" between
the Jockey Club and the Gambling Commission if effective regulation
of horseracing and betting thereon is to be achieved. In the latter
context, the Jockey Club state that "the most effective deterrent
to malpractice will be successful prosecution of offences, either
by the Gambling Commission in the case of criminal offences or
by the Jockey Club in cases of breaches of the Rules of Racing".
43. The Committee will therefore note that
the fundamental concerns and proposals expressed by both the Governing
Authority and the Regulatory Authority for Racing are consistent
not only with each other, but with the Government's own recognition
that enhanced statutory controls and powers are an essential complement
to rigorous regulation by sports regulators themselves, whose
heavy responsibility in these matters is universally acknowledged.
CONCLUSION
44. BHB has no wish to prohibit the punter
from accessing betting operations which are innovative and provide
them with value. However, in the context of considering the regulation
of betting exchanges, it must be remembered that the punter only
participates in British horserace betting on the basis that it
has very high standards of integrity. It is in the punter's interests
therefore that everything possible is done by the Government,
the Gambling Commission and the Regulator to minimise threats
to integrity and to introduce a regulatory and policing regime
which balances punter choice and integrity protection.
45. The rate of growth of betting exchanges
has no parallel. It is likely that they will produce annual turnover,
as they themselves measure it, of over £6 billion. While
the operation and effect of betting exchanges may have already
been considered by Government Departments over the last two years,
this unprecedented rate of growth and the threat to the sport
which would be caused by weak regulation mean that their operation,
regulation and taxation should be reviewed afresh. BHB welcomes
the Committee's clear intention to do just this.
December 2003
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