Examination of Witnesses (Questions 800
- 819)
THURSDAY 22 JANUARY 2004
MR MARK
DAVIES, MR
DAVID WILLIAMS,
MR ANDREW
SILVERMAN, MR
ROB HARTNETT
AND MR
KEVIN GRIFFITHS
Q800 Lord Donoughue of Ashton: But
as a result of this, precisely how many suspicious betting patterns
have you reported to the Jockey Club?
Mr Davies: Well, we speak to the
Jockey Club on an almost daily basis. We might be alerted by a
variety of things. There may be no reason to be concerned about
something, but we liaise with them on a daily basis about what
is going on on the site. We may provide them with anonymous information
and then they may come back to us and say, "Actually we had
a concern in this particular area as well. Could we have a bit
more information on that?" It might make sense at this point
to say that there were two examples that the Chairman of the British
Horseracing Board brought up on Tuesday which sounded very emotive,
but they illustrated perfectly why there is no greater risk that
is posed by the betting exchange than there is posed by any other
platform. The first were his comments, which you may remember,
about Mr Wong in Kowloon and he said that we had enfranchised
100 million people suddenly to be able to profit from horses losing
on the site. Clearly if you are going to profit from a horse losing,
you have to have some connection with the horse. You cannot sit
in Kowloon and just expect the horse to lose, so you have to have
somebody who is connected with the horse at whichever racecourse
you happen to be involved with who is in a position to stop that
horse, so you are asking somebody closely connected to affect
his livelihood, put his career at risk in order to fulfil some
kind of corruption. Assuming you have that kind of connection,
which I think is highly unlikely, but assuming you have, the chances
are that you are part of some kind of international crime syndicate
if you are going to start stopping horses in the UK from your
home in Kowloon, and if you are part of an international crime
syndicate, would you really go and place your bets on a platform
where you are leaving indelible fingerprints to do it? I would
maintain that that is absurd to believe that and actually what
you would do if you were part of that kind of organisation would
be to place your bets in the illegal market. The other example
that he brought up as a risk was the Hawkflyer incident, the favourite
for the St Leger, which broke a leg on the gallop and drifted
during the course of the morning dramatically on the Betfair site
before it was announced that the horse had died and Mr Savill
implied that, therefore, somebody obviously knew something and
that is why the horse drifted down. Now, horses drift in price
for all sorts of reasons and it might well have been on the basis
of rumour. Assume for a moment that it was on the basis of fact.
There are a couple of things that you can say about that. The
first is that in the past a horse in an ante-post market which
for whatever reason was withdrawn might well have stayed in a
bookmaker's book for a long time and there is no reason why the
price of that horse needed to move because there was no reason
for the bookmaker necessarily to widen out its price. If you are
a customer who decides, on the morning that Hawkflyer has died
at ten o'clock, that you want to bet on that horse and you walk
into a high-street chain, you can get an ante-post price on that
horse. You will see that it is the favourite and you will get
the price that you expect, around the five to two mark. If you
do the same thing and you go to Betfair and you see that the horse
is 40 to one, you know that it was the five to two favourite the
day before and you look at it and say, "Well, there is something
about this that is going to make me think twice". In either
situation, if you end up backing that horse and you discover an
hour later that the horse has died, you are not happy, but you
are no worse off having placed a bet with a platform where you
at least were made to think twice and the key thing is here that
all of these bets, not just with us, but also if you had placed
a bit with the bookmakers, all of these bets are time-stamped,
so all it requires to get over this problem if you want to believe
it was done on the basis of fact rather than rumour is for a central
announcement to come out which says that the horse died at 8.33
and that every bet after that is void. It is very, very simply
done.
Q801 Lord Donoughue of Ashton: Will
you write to us and tell us how many reports you have made to
the Jockey Club of suspicious betting patterns?
Mr Davies: Yes.
Q802 Lord Donoughue of Ashton: Finally,
your employees, who all have access to betting patterns which
might be interesting if they come from well-informed people, are
they permitted or strictly forbidden to lay bets?
Mr Davies: They are allowed to
bet on our site within strict parameters, of which one is that
they are not allowed to bet within 30 minutes of a race.
Q803 Lord Donoughue of Ashton: But
they can still lay bets if they have had site of betting patterns
that are interesting because those people are thought to have
previously had good information?
Mr Davies: They are clearly not
allowed to do anything on the basis of bets they have seen and
if they were to place a bet that was clearly on the basis of something
they had seen, then again they have done so in a manner which
leaves indelible fingerprints. We believe that it makes no sense
to say to those people, "You can't bet on the Betfair site",
and allow them to pick up a phone and bet with somebody else because
then suddenly we are not in control of what is going on, so we
do not have a rule that prevents them from betting, but we do
have rules that prevent the timing of when they are allowed.
Mr Hartnett: We would treat that
slightly differently in that we would prevent our own employees
from actually using our service. To take you back to an earlier
point in relation to the transparency that the betting exchange
market has brought to that betting market, there is a free flow
of information now which is available to everybody and which the
Jockey Club have themselves recognised by their move to appoint
some betting experts to actually monitor the betting exchanges
because there is nothing hidden. Every pound, every price that
is available on a betting exchange is open to the general market
which is something that the market has never actually been able
to benefit from before in terms of a shining light, I suppose,
on activities which may leave a question mark over the integrity
of a particular event.
Q804 Mr Wright: Just very quickly
on that particular point about employees, do you not consider
then that it would be more beneficial and certainly to the integrity
of the industry for you to ban your employees from actually having
bets? For instance, in an ordinary betting shop on the high street,
as I understand it, they would not be allowed as employees to
put a bet on in the shop at any time during the day.
Mr Davies: But there is obviously
every possibility that they can walk out of the shop and place
their bet elsewhere.
Q805 Mr Wright: Absolutely.
Mr Davies: Our view is that it
is better to put rules in place where you can monitor exactly
what is happening rather than put rules in place which look good
on the surface, but actually allow people to do something which
you then cannot track. If it was considered appropriate by the
Gambling Commission to put in a rule that no employee of any company
should be allowed to bet irrespective of all the points that I
have brought up, then we would happily comply with that. We do
not believe at the moment that that is what makes sense.
Q806 Mr Wright: But in terms of,
as you were mentioning earlier, making reports to the Jockey Club
of betting patterns which were considered abnormal, at what point
would you actually report that to the Jockey Club? Would it be
during the transaction or after the race or after the event?
Mr Davies: It could be before
the race. We have on numerous occasions reported things before
the race. It is as soon as we believe that there is something
that requires us to talk to the Jockey Club and we have a very
close relationship with them and we will alert them to things
as and when we see them in real time.
Q807 Mr Wright: Did you alert them
to the eight-to-one win with the drift in the market? Would you
concede that that is possibly a manipulation of price?
Mr Davies: If we believed that
there was manipulation of a price going on and it was not just
free market movement, then yes, we would alert them to that.
Q808 Chairman: On Tuesday Mr Savill
suggested that there were up to 12,000 transactions a minute taking
place on your exchanges at peak times.
Mr Davies: That is right.
Q809 Chairman: So how do you monitor
patterns with 26 people?
Mr Davies: Because, as I mentioned,
the vast majority of what happens is done through technology.
The database is continually being questioned for a series of queries
which it will automatically alert people to. You can see the price
movement, you can see the individual accounts that come on and
you get alerted when accounts that we have any concerns about
come on. There is an awful lot that can be done through technology.
I think that the figure of 12,000 bets a minute probably surprises
a number of people and most people would believe that it was not
possible to do that, but that is a stated fact in the same way
as it will surprise people what the capabilities are of technology
of questioning those 12,000 bets a minute and that is also a fact.
We are happy to show the Committee in greater depth even than
we did when various members of the Committee came in to see us
in our offices exactly how that takes place.
Q810 Chairman: But does it concern
you then that because of the scale of activity, and I am not going
to try to do the mental arithmetic, but if you think of a normal
Saturday afternoon with maybe ten or twelve races televised terrestrially,
let alone through the Racing Channel, there are literally hundreds
of thousands of transactions taking place during that afternoon,
does it concern you that there is the perception that you cannot
possibly monitor all of that and, therefore, it encourages the
thought that there is malpractice behind some of these bets?
Mr Davies: It does not concern
me because every single bet is kept indefinitely. Every single
detail of every single bet is kept indefinitely and the database
is queried on a regular basis by a series of queries that have
been set up by our Client Operations Team. I think if you compare
it with what goes on in the high street, I do not know how many
bets are placed on the high street, but if you think of the number
of shops that there are up and down the high street, all of which
are taking bets with cash where there is no link to any of these
bets that are being placed, whereas with us we are in a centralised
system where everything can be seen, every single detail of every
single bet is available for us to see and, therefore, for those
who regulate the sport to see, so we have a new facility that
boosts integrity because we are able to provide information on
what bets are being placed which was previously not possible to
have. We have adopted a transparent platform where everybody,
every punter, every regulator, every member of our staff is able
to see exactly what has taken place.
Q811 Lord Faulkner of Worcester: Can
I ask you how effective you think the proposed powers of the Gambling
Commission to freeze suspicious bets is likely to be?
Mr Davies: Well, the weakness
is in how many betting operators can comply and, for the reasons
that I have just said to the Chairman, we obviously can comply
and we are happy to work with the Government on it. I think there
are obviously some aspects of it that need to be ironed out. I
think it is likely that it will be used on very, very few occasions,
but from our point of view it is important that whatever measures
are put in place, they are put in place across the board and we
should not be affected in a negative manner simply by virtue of
the fact that we have a centralised, technological platform that
allows us to do something that other bookmaking platforms are
not in a position to do.
Q812 Lord Brooke of Sutton Mandeville:
This Committee has received evidence that betting through
betting exchanges is subject to a more favourable tax regime than
betting through traditional bookmakers. This evidence might cause
the Inland Revenue to look into the matter, not least because
of Mr Davies' admission in evidence today to this Committee that
Betfair are bookmakers, but what would your response to the Inland
Revenue be?
Mr Davies: That betting exchanges
are not subject to a more favourable tax regime in the same way,
as I was saying to Mr Meale earlier, because of the contributions
that we make to the racing industry. We pay tax at the same rate
and on the same basis as all other bookmaking platforms in that
we pay 15 per cent of our gross profits. The move to gross profits
was designed to allow high turnover/low margin operators to exist
and now that we have created a very good high turnover/low margin
model, some of our competitors are asking that the level of taxation
is changed across different operators. That is rather like British
Airways turning round to the Government and saying, "Could
you please tax Ryanair differently?" on the basis that they
are a high turnover/low margin model. It would clearly be absurd.
As far as the Exchequer losing out on any revenue is concerned,
we believe that that is not the case by virtue of the fact that
we offer the most competitive pricing as a betting exchange industry
in the world, we attract business from all over the world, and,
speaking from Betfair's point of view, around 20 per cent of our
business comes from abroad, and we have new and innovative ways
to bet which encourage people to churn their money through our
system, so the bottom line is that what comes out at the bottom
is 15 per cent of our gross profit which goes to the Government
in the same way as 15 per cent of every other bookmaker's gross
profit goes to the Government.
Q813 Chairman: But if I travel on
Ryanair or on British Airways, whether I travel on Ryanair without
a reserved seat or on British Airways in business class at great
expense, I pay precisely the same air passenger tax, the same
£20, whatever it is, or airport duty. The allegation that
is often put against the exchanges in respect of the taxation
contribution is that those who are laying almost in the course
of the laying are not paying tax on transactions on which they
would pay tax if those transactions were done traditionally through
a betting shop. Now, is that a correct analysis?
Mr Davies: When you pay passenger
tax, you are paying a passenger tax. We are talking about the
tax on the companies that carry you. There is no tax on punters
in this country. There is no tax on punters when they bet on Betfair,
whether they bet on an outcome to happen or not to happen, and
there is no tax on punters at William Hill, whether they bet on
an outcome to happen or not to happen. The call from our commercial
competitors at the moment is that those who bet on Betfair on
an outcome not to happen, those who lay, in Betfair's terminology,
should be taxed. That would mean that you could walk into your
high street this afternoon and you could bet that England would
not win Europe 2004 and you could do so without paying tax, but
to express that same view on Betfair, you would be classified
as a layer and you would be taxed. Nobody is suggesting that you,
as a passenger, should pay anything different on one airline from
any other and nobody should be suggesting that you, as a punter,
should be paying differently with one betting operator than with
any other.
Mr Griffiths: I would just like
to make two points. First of all, obviously on every single event
we run we raise money from our customers. Basically, on aggregate
the customers lose on every single event, be it a cricket match,
a football match or a horse race, that is the first point. The
second point on layers and backers is that there is a perception,
some would say peddled by the bookmaking companies, that it is
the layers on exchanges who make money but that is not true, the
markets are so efficient that the backers are just as likely to
make money on a single event or across 20 races as the layers.
Things trade at their fair price, albeit fluctuating with supply
and demand. What we find is that registered bookmakers who come
on to our sites to make what they may perceive, to start with,
as easy money find it is just not there in as much as there are
as many bookmakers who lose money as bookmakers who win money
on our sites.
Q814 Lord Mancroft: What proportion
of the bets placed through Betfair and most of the exchanges,
if they were not being placed with you would be placed at traditional
bookmakers?
Mr Davies: I would imagine that
all those who come to place a bet with us, if they could not place
a bet with us they would go and place a bet somewhere else. They
come to place a bet with us by virtue of the fact that they have
better value, better control and better choice. Having said that,
it is very difficult to compare turnover for reasons that I have
stated already because, for instance, if you back a horse and
then lay it back, what would that be in terms of turnover at a
high street bookmaker when you could not actually complete that
transaction and you might end up not making the bet at all as
a result.
Q815 Lord Mancroft: Assuming that
you did decide to do it, what proportion of the bets that you
take could not be placed with a high street bookmaker? Not the
volume but the value.
Mr Davies: About 60 per cent of
our bets are bets placed in a way that the high street bookmakers
do not currently offer in terms of the fact that you can take
the opposite view or you can bet during the course of an event.
About 60 per cent are that.
Mr Hartnett: It may well be that
that proportion is changing almost day by day with the fixed odds
bookmakers moving towards a new style of betting. Four weeks ago
you could not walk into any betting shop and back a horse not
to win or back a football team not to win, today you could, you
could walk into a Bet 365 or Super Soccer facility. So it is changing.
Q816 Chairman: You have got long
experience on the other side of the fence, if I can put it that
way. Is it your intuition that in the end the traditional betting
shop will respond to what the betting exchanges have done by changing
the way they operate and then, coupled with that, because of the
concern that there is now the opportunity to do something you
could not do before, which is to bet that a horse will lose whereas
in the past you had to bet that a horse would win, that will actually
undermine the integrity of the sport of racing?
Mr Hartnett: I really do believe
so in the first part of your question and I really do not believe
so in the second part of your question. In relation to how the
notion of a betting exchange and the mechanics of a betting exchange
will change the way that the betting industry operates as a whole,
it is inevitable that in a sense we are, to use a phrase, a disruptive
technology which has been brought into a market that was relatively
static. We talk about the argument of competition between Ladbroke
and William Hill and Coral, but to a large extent there has been
an SP monopoly business in betting for many, many years. We provide
a very similar fixed odds form of betting but in a very different
manner of efficiency and, as such, it will inevitably change the
way that the major bookmakers operate. As Mark has suggested,
we cannot forecast what their business plans for five or ten years
hence will accommodate but I imagine, as you kindly say, my experience
with the Tote and Ladbroke's and Coral—it sounds like an
awful lot at this stage—would suggest that they are very
acutely aware of the business challenge which we present to them.
In relation to the integrity, again I would refer back to the
point that the transparency which betting exchanges have brought
to this is something which has never existed before. An earlier
question referred to inside information, and I know it was put
with the caveat of improperly obtained inside information, but
as a representative of major bookmakers in the past I could perhaps
stand accused of having been privy to some inside information
in that I may have talked to a travelling head lad in one moment
and talked to a trainer in another moment and talked to a very
opinionated punter in another moment—in fact I talked quite
a lot when I was on the racecourse—and gathered quite a
lot of information. Of course my firm would have used that information
as part of an overall approach to bookmaking in the same way as
if they take a bet from somebody who they respect who normally
bets £5 a race and if that person bets £10 a race that
has a material impact on how they will look on a particular race.
Prior to now, all of that information has been withheld by the
bookmaker, properly of course, there is no impropriety at all
here, it has been the way that the business has been run. Now
that information is available to the wider general public and
it has changed the nature of betting in a way which I would respectfully
submit will probably never go back.
Q817 Chairman: Maybe in future people
will go in the betting shops on a Saturday morning and instead
of backing John McCririck's tip to win the race they will back
Barry Bismark's to lose the race.
Mr Hartnett: Or they may back
John McCririck's tip to lose the race as well.
Chairman: That is also true.
Q818 Lord Donoughue of Ashton: On
the Committee's fascinating visit to Mr Davies' impressive enterprise,
he explained to us that "betting exchanges create a new kind
of betting activity similar to the use of financial markets by
a trader", in other words specifically akin to a jobber,
when I was a stockbroker in the City, or currently a broker taking
matching bids or odds for a share. So if you want to buy or sell,
for example, Camellia, a great plantation company of which I declare
I am a shareholder, you have to do it as you would with every
betting exchange, you say what price you would pay and that broker
looks for, waits for, someone and matches the bid. Given this
similarity, would a Financial Services Authority model be more
appropriate for the regulation of your sector, of your activities?
Mr Davies: No, I do not think
it would because I think you have to look at what the Gambling
Bill is trying to achieve and you have to say which regulatory
organisation is set up to achieve those three things. When the
Chairman of the Gaming Board spoke to you to give his evidence
he said that he did not see any particular challenges to regulating
an exchange, assessing someone's probity, their technical competence
and their financial capacity and as with all things that is a
proper test it is something that he has no concern with. The FSA
is not set up to do that. The FSA is a body that is looking at
the financial markets. The simple fact is when our customers come
to us to place a bet, although they now might be able to take
both sides of that bet, bet that something happens and then bet
that it does not happen, the fact is that when they place any
one individual bet they are placing a bet on the outcome of a
given event. It is a different experience from what the FSA is
set up to regulate. The Gambling Commission is being set up to
regulate these three things: keeping crime out; ensuring fairness
to the punter; protection of the vulnerable. Those are the three
issues that we, as with any other bookmaking platform, raise and
we need to be strongly regulated by the Gambling Commission to
achieve that.
Q819 Lord Donoughue of Ashton: But
the FSA, for instance, regulates spread betting.
Mr Davies: Which is something
of an anomaly, I believe. At the time spread betting was set up
it was largely a financial markets based product and it looked
remarkably like share trading in that you could buy or sell a
share which could then go to the sky or go through the floor.
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