Memorandum from Betfair (DGB 71)
REVOLUTIONISING BETTING
The Government published its draft Gambling
Bill on l9th November 2003. This is Betfair's submission to the
Joint Scrutiny Committee in response to the detail of the Bill.
OVERVIEW
1. Betfair wholly supports the licensing
objectives set out in Clause 1 of the Bill.
2. Betfair has consistently maintained that
the Bill's three objectives are best achieved at source,
and as a result it welcomes the conclusion that those providing
betting facilities to consumers, and not the consumers themselves,
need to be properly regulated. Betfair notes that a key policy
aim is "not to curb the industry's innovation but rather
to ensure that proportionate regulatory action is taken to protect
the licensing objectives". We believe that the above conclusion
fulfils these aims.
3. Betfair has voluntarily introduced measures
which are constantly setting new standards in furthering the licensing
objectives such as: ring-fencing client accounts and demanding
that every bet be fully-collateralised to exclude the risk of
default; maintaining unprecedented audit trails of transactions
taking place on its site; and sharing information with the appropriate
authorities to minimise the risk of criminal abuse. Betfair hopes
many of these measures will become obligatory throughout the industry,
as is suggested in the Policy document paragraph 4.25.
WHO NEEDS
REGULATING?
4. The Draft Bill lays out specifically
who will require regulation under the new law. The fundamental
principle is set out in Clause 21 which makes it an offence for
a person to provide facilities for gambling unless he holds
the appropriate operating licence. There are no provisions requiring
licensing of individuals who are merely betting and not providing
facilities for gambling to others.
5. Many of Betfair's competitors have argued
that Betfair's customers need regulating, on the grounds that
they can "lay" bets. Betfair has made submissions before
as to why the licensing of those who bet on outcomes not to happen
(that is, "layers" as the term is used on Betfair) runs
contrary to the objectives of government. It would be wholly unnecessary
and unbalanced over-regulation, penalising a punter for placing
a bet on a betting exchange when he could just as well place the
same bet with a traditional bookmaker without penalty. It would
achieve nothing that is not achieved by licensing the operator.
Indeed, it may even jeopardise the primary objectives of government.
6. The Joint Scrutiny Committee will already
be aware of the fact that every fixed odds bet merely involves
one person agreeing to stake LX to win LY on one of two mutually-exclusiveoutcomes
occurring, and another person agreeing to stake LY to win LX on
the other mutually exclusive outcome occurring. Every "lay"
bet on Betfair is just a bet that something will not happen and
can be turned into a "back" bet by changing the outcome
on the Betfair betting slip to its mutually exclusive alternative.
7. Traditional bookmakers argue that there
is something inherent in "laying" that is the preserve
of the bookmaking community. In the Betfair sense of "laying",
there is not. It is important to recognise that "laying"
by traditional bookmakers is not the same as "laying"
on Betfair. If Ladbrokes offer two bets in their shops, Bet A
on "England to win" and Bet B on "England not to
win in their shops", then Ladbrokes are "laying"
(as they themselves define it) both outcomes. But if they entered
the same bets on Betfair, then in Betfair terms they would be
"laying England to win" and/or "backing England
not to win" in Bet A and they would be "laying England
not to win" and/or "backing England to win" in
Bet B depending on how Betfair decided to set up its screens and
betting slips.
8. It is not by virtue of being able to
bet on an outcome not to happen or to request better odds that
the need for a bookmaker's permit is generated (either in principle
or under the letter of the law). It just happens that in
the 20th Century bookmakers did not generally allow punters to
bet on outcomes not to happen nor generally accept requests for
better odds (but there were certainly many exceptions to both
these practices).
9. It is purely by convention that this
has been the case. You can bet that something does not happen
without needing to deal with the public and accept a stake, in
just the same way as you can bet that something will happen without
doing either of those things. It is the person who is providing
the facilities for gambling to the public, handling punters' stakes,
ensuring winning punters get paid out and in a position to vet
out minors and problem gamblers who needs to be regulated, just
as it is the car driver who needs the licence, and not the person
travelling in the same car to the same place. Regulation is only
required where there is a risk of harm. This is why Clauses 4
and 21 of the Gambling Bill focus on the person providing facilities
for gambling and not the gambling consumers themselves.
OPPOSING AN
OUTCOME
10. Many who accept the argument above continue
to see a risk in the ability of the public to bet against something
happening in the context of a horserace. That is, the ability
to bet that a horse will not win has been marked out as a means
for corruption to find its way into sport, and therefore one of
the three pillars of regulation—keeping crime out—is
said to be undermined.
11. Betfair has already submitted to the
Scrutiny Committee a separate paper on integrity (attached as
an appendix), but in addition to that paper, it is worth making
a few points.
12. First, the ability to oppose a horse
has always been possible with traditional bookmakers by betting
on the other horses running. It has also as always been possible
by "selling" a horse with a spread betting operator.
And increasingly, it is also available with bookmakers—aside
from much-quoted anecdotal evidence demonstrating that it has
always been possible, in any case, on course. For example, betattheraces
recently offered 7/4 the favourite, and 2/5 the field against
the favourite (or, to put it into traditional terminology, back
the favourite at 7/4, lay it at 2/5). This is already very common
in other sports. It is common to see odds offered by traditional
bookmakers on the field against Tiger Woods or Schumacher, or
against a particular team or country winning an event. Indeed,
in a recent England football match, many were even offering prices
on "Rio Ferdinand not to start" (ie not to be named
in the starting line-up).
13. Second, it is not by demanding that
every person who ever bets on a horse not to win or a team not
to win first presents himself at the Magistrates Courts to obtain
a bookmaking licence that crime can be kept out of sport. That
would be hopelessly misdirected, ineffectual and superfluous regulation.
Instead, betting on sport should be transparent and operators
should be obliged to monitor and report suspicious activity. Betfair
does both of these to a greater extent than any other operator:
— Betfair maintains an unprecedented
audit trail of bets placed on its site and those behind them.
It willingly shares this information with sports regulators on
an anonymous basis and, subject to signing a Memorandum of Understanding
(as it has, for example, with the UK Jockey Club and the ATP tour),
will provide details of individuals involved where there is a
strong suspicion of skulduggery.
— Transactions at every increment are
visible to anyone who looks at the Betfair site, with volumes
also visible. Betfair, in addition, sees each increment broken
down into its individual components. That is, a visitor to Betfair's
site can see the aggregated bets, and Betfair sees every
single one. This is a level of transparency unparalleled among
other operators.
14. It should be noted that Betfair has
no interest in the outcome of the event, because every bet for
Betfair is a winning one (as the operator is paid by the winning
punter). Betfair's business depends on the integrity, and perceived
integrity, of its platform. Its business interests are entirely
in line with those of the regulators. Betfair's Memorandum of
Understanding with the Jockey Club was ground-breaking. This contrasts
with traditional bookmakers who, as the BBC's 2002 Panorama programme
demonstrated with references to William Hill's refusal to help
the Jockey Club in their investigations into the Man Mood affair,
depend on their networks of insiders and will refuse to expose
them even where there is overwhelming evidence of skulduggery.
Why is it that traditional bookmakers have still not sigued the
MOU? Indeed after 40 years, why is it only when Betfair initiates
the MOU that they even begin to consider signing an MOU themselves?
15. Third, there have been suggestions that
Betfair needs to be regulated along the lines of the FSA. It is
Betfair's understanding that the Gambling Commission will fulfil
precisely that sort of role. As stated above, Betfair welcomes
regulation by the Gambling Commission, because Betfair has introduced
as voluntary best-practice precisely the sort of safeguards which
regulation will make compulsory. Its recently-announced FSA-style
exams for its staff, in conjunction with GamCare, are a clear
example of Betfair's wish to bring safeguards already inherent
in the financial markets to the gambling industry.
16. It should be noted once again though,
that the FSA regulates the provider of financial services, and
not the customer. There is no restriction on an individual buying
and selling shares. The service provider is regulated because
it is the service provider, not the day trader, which poses the
risk to the public and the regulatory objectives in the financial
services industry. Similarly it is the provider of betting services
and not the gambler which poses the risk to the public and the
licensing objectives in the gambling industry. It is the operator
which needs to be accountable and provide transparency to the
regulator. Betfair already provides this as standard, but again,
it welcomes the fact that all operators will have to do so as
a matter of law rather than voluntarily.
17. The government is aware of concerns
that, unless properly run, betting exchanges may constitute a
threat to the integrity of sport, and in its Policy it has indicated
that it will take whatever measures are appropriate and proportionate
to protect consumers interests and the integrity of all sports.
As stated above, we support this. Again, the regulation of the
exchange is of paramount importance in order to ensure that new
standards being set and adhered to already by the biggest player
become obligations for all new entrants. Cheating in sport and
sports betting has, sadly, always existed. The Betfair model enables
the very small proportion of cheats to be tracked and prosecuted,
but only with the co-operation of the operator. All operators
must be obliged to co-operate if sport is to be kept free of corruption.
BETTING INTERMEDIARIES
AND THE
CODE OF
PRACTICE
18. Clause 51(2) creates a new category
of operating licence permitting a person "to act as a betting
intermediary" where a betting intermediary is defined as
"person who provides a service designed to facilitate the
making or acceptance of bets between others".
19. The Joint Committee will be aware that
Betfair sees its business as being no different—other than
in the provision of choice, control, and better value—from
a traditional bookmaker (who will now fall under the category
"general betting operator"). Betfair is concerned that
creating a separate licensing category for betting exchanges will
merely create a political football which traditional bookmakers
will continue to abuse by lobbying for unnecessary regulation
in order to impede or undermine betting exchanges in any way possible.
Betfair understands however the desire of government to maintain
flexibility going forwards in case the betting exchange business
model generates regulatory advantages or disadvantages which genuinely
do merit differences in treatment. For example, the fact that
a "pure" betting exchange operator takes no risk, means
that an applicant should not have to prove an ability to manage
risk positions. A betting exchange operator who does want to start
taking risk will have to obtain a general betting operating licence
as well and, as part of the application procedure, prove that
it can manage the risk positions it intends to take. Most betting
exchanges will no doubt apply for both licences so that they can
participate in their markets as and when they see fit. This accords
with the principle that betting exchanges should merely be viewed
as traditional bookmakers who have taken the decision to minimise
risk (as any traditional bookmaker can and often will do) by only
taking one bet when they know they can find another punter to
take the other side of that bet, locking in a profit by effectively
adjusting down the odds offered to each punter by charging a small
commission.
20. Betfair welcomes the removal of the
word "bookmaker" from the new legislation. As Clauses
4 and 21 of the Gambling Bill demonstrate, the need for regulation
arises out of the risks presented by providing facilities for
gambling to the public. It has nothing to do with "making
books" (a meaningless term in any case since anyone placing
a bet on an event is "making" his own "book")
or indeed betting activity generally. Furthermore the current
legal definition of "bookmaker" is so ambiguous as to
be virtually unintelligible.
21. Clauses 16 and 64(3) of the Draft Bill
state that the Gambling Commission may issue a code of practice
about the manner in which facilities for gambling are provided.
In addition, Clause 63 states that the Secretary of State may
attach conditions to operating licences. We welcome the requirement
for compliance with such a code. Providing the Commission maintains
a balanced outlook for all sections of the gambling industry,
and does not succumb to pressure by the major vested interests
to prejudice other operators merely because they pose a competitive
threat to those vested interests, we see this step as wholly positive.
22. Betfair would ask the Committee to suggest
that the draft codes of practice and licensing conditions are
published at the earliest opportunity.
PROTECTION OF
THE VULNERABLE
23. Betfair believes that this is the one
area in which the Gambling Bill can be strengthened.
24. Although the problem is clearly not
specific to gambling, betting operators—and not just those
on-line—have difficulties in ensuring that a customer is
older than 18. Betfair would welcome any help that the govemment
could give the gambling industry by pressuring the banking industry
to take its own responsibilities in this area more seriously.
Betfair has no commercial interest whatsoever in taking bets from
under-18s, because to do so could be exceptionally damaging to
the company's reputation and to its business as a result.
25. Specifically, a bank card (such as a
solo card) which can be issued to children as young as 12 could
easily carry an identifier in its number, marking out its owner
as being younger than 18. Currently, Beffair's means of ensuring
that a customer is older than 18 is through checks conducted via
an external agency, which makes use of the electoral roll. As
is true of all the aims of gambling legislation, this key aim
is best achieved at source—that is, at the banks.
26. In a separate area, the Joint Committee
will be aware that Betfair has launched a staff-training initiative
with GamCare, to raise awareness of the issue of problem gambling,
and ensure that its employees know how to react to customers who
might be vulnerable. It is Betfair's hope that the rest of the
gambling industry adopts this sort of initiative as best practice,
but Betfair has also suggested to DCMS that such a programme could
be required by law.
OTHER ITEMS
IN DRAFT
GAMBLING BILL—THE
POLICY
27. There are a number of issues raised
in the policy document which accompanies the Draft Bill, all of
which Betfair strongly supports. We are strongly in favour of
the provision of a revised offence of cheating, including interfering
with the outcome of an event on which betting takes place with
the intention of securing financial advantage. If all operators
had the same strength of audit trail as Betfair allowing them
to link all transactions to an end user, and all transactions
to each other—and an obligation to share that information
in certain circumstances with the regulators, the maintenance
of such a provision would be much easier. However, the provision
itself is a good start in this regard.
28. We support in principle the idea that
the Gambling Commission will have the power to freeze and void
bets. The measure must however be used proportionately and selectively.
There should be no interference with anything other than suspect
accounts and there should be obligations on operators and regulators
to identify and isolate these accounts as quickiy as possible
so as to minimise disruption to all other legitimate gambling
activity. It should be noted that this measure will only work
to deprive a suspected wrong-doer of his winnings. It will be
impossible to reimburse all the punters across the world who were
effectively defrauded by the wrong-doer. The measure must also
be applied to all operators. Currently, it is likely that only
technological platforms such as our own will allow operators to
comply. This fact would undermine the proposal, because, as discussed
in earlier submissions at length, corruption is not limited to
new platforms.
29. The policy document also includes plans
for a Code of Practice to tackle money launderers. Again, Betfair
is in support of any strengthening of regulation in this area—although
it is less-relevant for an operation like Betfair which has such
a strong audit trail. We have strict money-laundering procedures
and checks, which were demonstrated to the Joint Committee in
its visit to our offices.
IMPACT ON
THE BOOKMAKING
INDUSTRY
30. Betfair's impact on the bookmaking industry
has been minimal. Our own estimates suggest that we have between
2 per cent and 3 per cent of the bookmaking market. What impact
we have had is in any case in the nature of a free-market economy,
since we offer the consumer choice and value.
31. Our impact on competitors is perhaps
best measured by their own results. William Hill floated in June
2002 at a share price of £2.25. As at close of business on
9 December 2003, its share price stood at £4.11. In addition,
the reports of those bookmaker firms which publish their results
reveal that the bookmaking industry is enjoying a golden era.
The following quotes from those reports are illustrative of the
position:
— William Hill (8 Sept 2003) announcing
its half-year results for the 26 weeks ended 1 July 2003: "Turnover
up 72 per cent and gross win up 18 per cent to £324 million;
profit on ordinary activities up 27 per cent; interim dividend
up 21 per cent."
— Hilton Group, owners of Ladbrokes
(20 November 2003) announcing its trading statement for the four
months ended 31 October 2003 "Group profit increased by 15.1
per cent mainly reflecting a strong performance in the Betting
and Gaming division".
— Stanley Leisure (21 November 2003)
publishing a trading statement to update the City since its AGM
on 10 September: "A good performance has been seen in traditional
betting, with a `significant' uplift seen from the company's fixed
odds betting terminals."
32. Some of the traditional bookmaking firms
have suggested that it is the funding of horseracing that is being
impacted and put at risk. They have suggested that the perceived
funding shortfall in the horseracing industry is the result of
margins which they claim to be being impacted by exchanges, rather
than by the gradual movement of their own business onto other
products, for commercial reasons.
33. Members of the Committee will have received
a copy of Betfair's document "The Funding Question",
which lays out the reasons why Betfair is not the cause of funding
issues, as some have suggested. Over 60 per cent of horseracing
business that goes through Betfair is generated on products which
are not offered by the traditional bookmakers: trading (that is
betting and laying the same horse to create a profitable margin)
and betting in-running during a race. In addition, 25 per cent
of Betfair's business (and rising) comes from overseas, which
is a very positive contribution to the UK's balance of trade and
economy.
34. It is also worth noting, as was pointed
out in a letter from on-course bookmaker Stephen Little to the
Racing Post on 2 December 2003 that the `there was no shortfall
in levy yield [under the 42nd levy scheme, as is being claimed]
but an overestimate, as the yield was, as usual, higher than the
previous year's. In fact, horseracing is being funded at the highest
level in its history, and this year the industry is currently
on target to hit the funding figure projected for the 43rd Levy
scheme.
35. Betting exchanges pay betting duty and
horseracing levy on their gross profits just like all bookmakers.
Betting exchanges choose to operate a low-margin, high-turnover
business, but they should not be penalised for that any more than
Ryanair should pay corporation tax on a different basis to British
Airways. Betting exchange users are merely punters and they should
not be subject to regulation and tax just because betting exchanges
always allow them to bet on outcomes not to happen or request
better odds as opposed to traditional bookmakers who only sometimes
do.
CONCLUSION
36. Betfair welcomes strong regulation,
and welcomes the provisions of the draft Gambling Bill. It believes
that the government will hit its three primary targets outlined
in A Safe Bet for Success, while not over-regulating, by licensing
the operator not the customer.
37. In areas of integrity and funding being
considered by the Committee, Betfair is confident that it is an
ally of the racing industry, and not a threat. Our audit trail
which tracks and traces bets, provides a formidable tool against
anyone who tries to cheat the racing industry. Betfair has attached
independent commentary from, and correspondence to, the Racing
Post which backs up that view. Only vested interests have opposed
it to date.
December 2003
| 
