Response by the National Lottery Commission
to the Review of Lottery Licensing and Regulation
1. We are pleased to offer our comments
on the consultation document "Review of Lottery Licensing
and Regulation", issued by the Department for Culture, Media
and Sport in June 2002. We do so in the light of the competition
that led to the award of the second licence to run the National
Lottery to Camelot Group plc and on the basis of our experience
of regulating the National Lottery in a period that has seen the
introduction of a number of innovative games and the emergence
of new technological possibilities.
SUMMARY
2. We agree that the options for change
in the consultation document could strengthen a competition of
the kind we have had up to now. We believe, however, that there
is a case for making changes to the current statutory framework.
Under our proposals, the regulator would be able to decide when
preparing for the next competition whether to offer one or more
operating licences. It would base its decision on what at the
time appeared most likely to generate real competition and respond
best to changes in technology. The licences would give full capacity
to run specified games, or in some cases classes of games, and
the means to deliver them without the need as now for separate
game licences, though approvals would be needed for some purposes.
We see advantages in the regulator being able to offer bidders
the option of acquiring the operating assets of an incumbent company
and in the short term using its key contractors.
3. We see these changes as making the licensing
process more flexible and the running of the National Lottery
more contestable, and as fostering innovation. The regulator would
be required to publish for consultation a draft scheme setting
out how it proposed to run the competition and to take account
of views expressed by the Secretary of State and other interested
parties. (Paragraphs 7-27)
4. We believe that the regulator should
retain a duty to act in the manner most likely to maximise the
returns to the good causes. This is, in our view, the fundamental
reason against merging our responsibilities in those of the Gambling
Commission, since it would conflict with the need to treat commercial
operators even-handedly. A similar point arises from our role,
which goes wider than an operator's, in protecting the interests
of the lottery. We also believe that there are sound reasons for
continuing to combine the management of the competition process
with the regulatory oversight of the lottery in a single organisation.
We do, however, strongly support liaison and discussion with the
Gambling Commission on matters of common interest and can see
benefits in joint working arrangements in areas such as vetting.
(Paragraphs 28-39)
5. We make a number of recommendations regarding
the organisation of the National Lottery Commission, including
replacing the present legislative requirement for the Chairman
to rotate with appointment by the Secretary of State for a term
of years, with the possibility of reappointment. We would welcome
some flexibility in the number of Commissioners, with a view,
for example, to providing additional expertise in connection with
the licence competition. We recommend that we should continue
to be able to require an operator to obtain approvals for games
in advance, but we do so against the background of discussions
we are having with the operator about "generic" licences
and our proposal for "full capacity" licences as above.
(Paragraphs 40-49)
6. The following comments respond to individual
sections of the consultation document.
SECTION 3: OPTIONS
FOR CHANGE
WITHIN THE
CURRENT FRAMEWORK
7. Following the competition for the second
licence, we developed a number of options for change. The National
Audit Office listed many of them in its recent report on "Awarding
the new licence to run the National Lottery". They match
closely the options identified in Section 3 of the consultation
document. We agree they could help strengthen a future competition
of the kind we have had up to now. We also agree that the time
to decide on such changes is when preparations are being made
for the next licensing round, so that market and other circumstances
at the time can be taken into account.
SECTION 4: MORE
RADICAL OPTIONS
8. We believe, however, that there is a
case for making significant changes to the current framework.
Our proposals are designed to further the goals of achieving flexibility
in the licensing process in order to respond to market and technological
developments, to foster innovation and to increase the scope for
competition in applying to run the National Lottery. They could
attract bidders that do not wish or lack capacity to take on the
whole lottery and avoid the lottery's reputation becoming identified
with a single operator. In making our proposals we have drawn
on the options in Section 4 of the consultation document. These
appear to us to cover the ground comprehensively but not to be
mutually exclusive.
BASIC CONSIDERATIONS
9. We take it as common ground that lotteries
within the National Lottery ("the lottery") should continue
to have a special legal position compared with lotteries generally.
Apart from that, we believe that the lottery should be run, and
games promoted, by private sector bodies. This puts the commercial
risk of operation into the hands of those able to bring commercial
and other skills to bear. Thirdly, we consider that a licence-based
system fits better with the necessary regulatory controls than
one based wholly on contracts, since a contracting authority would
tend to become dominant in running the lottery. Fourthly, we believe
that selection and regulatory functions should continue to be
combined. We return to this point later in this response, where
we suggest the possible appointment of additional Commissioners
for the selection process. [1]
10. We also believe that the regulator should
continue to be required in the first instance to ensure propriety
and protect players and, subject to those duties, to act in the
manner most likely to maximise the proceeds for the good causes.
This, we believe, requires the regulator to seek competitive bids.
As in the first two competitions, the balance of risk against
benefit will be crucial. The organisations and individuals bidding
for licences should show themselves to be fully competent and
to satisfy all requirements of propriety.
11. Any new arrangements should, as now,
transfer as much commercial risk as is appropriate to the private
sector. They should let a licensee plan ahead in the expectation
that it will continue to provide the group of functions that its
licence covers for the period of the licence. It should in general
be possible to develop games and the technology for delivering
them together and to troubleshoot without crossing too many organisational
boundaries.
12. However, we regard it as a weakness of the
present system that the lottery has effectively depended on a
single licensee for the production and development of new ideas.
The licence structure, which has effectively led to a one-on-one
regulatory model, has tended to limit the regulator's scope to
promote change and development once it has granted the main Section
5 licence to run the lottery. While the National Lottery etc Act
1993 allows for licences to promote games ("Section 6 licences")
to be held other than by the Section 5 licensee, there has only
ever been one independent licensee. The requirement for independent
applicants to have an agreement with the main licence holder is
likely to have been a discouraging factor.
13. Although we have been able to make changes
in the current Section 5 licence designed to help a possible future
licensee, we believe the current statutory framework would continue
to involve a significant risk in moving from one single operator
to another. The scope of the lottery in terms of the types of
games and the means of delivering them may be another factor in
limiting competition. We believe it is also important to take
account of possible changes that may take place in the relative
importance of different distribution channels. The development
of open systems, as envisaged in Section 2 of the consultation
document, could change the roles software providers play in the
lottery.
14. For these reasons, we do not believe that
the current structure of a Section 5 "operating" licence
and Section 6 "promoting" licences offers the flexibility
the lottery needs.
RECOMMENDATIONS
15. We recommend that in order to open up the
structure of the National Lottery, while maintaining its special
position as the provider of funds for the good causes, the regulator
should offer licences of a new kind. These would be "full
capacity" licences that would normally cover specified games
or classes of games and also the means to deliver them, though
an individual licensee might be required to use infrastructure
provided by another for certain specific purposes where appropriate.
Each licensee would contribute to the National Lottery Distribution
Fund on a basis that, as now, reflects the size of the pool that
is left from sales after paying for prizes and Lottery Duty. There
would be common branding across the lottery.
16. The regulator should take a strategic view
on how the lottery should develop, including the timing of major
developments, before deciding on the shape and length of licences.
While the regulator might choose to grant a single licence, we
would expect it to group types of lotteries together, linking
them with the associated technologies as far as possible, and
to recognise that the main jackpot game is a natural monopoly.
The regulator might decide to offer a number of licences together,
so making composite bids possible, or at different times after
an initial licensing round, in order to ease handover problems.
In either case the same bidder might, on merit, win more than
one licence. Although we envisage only a small number of licences
to be running at the same time, the more limited scope of individual
licences compared to the current Section 5 licence should contain
the cost of bidding for those that do not wish or lack capacity
to take on the whole lottery. The regulator might wish to reconsider
in the case of certain licences whether to continue the requirement
that lottery operators must be single purpose companies.
17. Where appropriate, the regulator might require
bidders for particular licences to provide services to other licensees
in return for appropriate remuneration. Such services might cover
the lottery as a whole or be specific, such as selling high-street
lotto on the Internet or providing an Internet gateway into the
lotto operator's system. The regulator would set levels of remuneration
and standards of service and take responsibility for establishing
relevant design standards and obtaining assurances on security.
18. We do not at present envisage the separation
of infrastructure from running the main lotto game. We believe
that this could lead to complex operational problems and not offer
the best solution in the foreseeable future.
19. We believe that consideration should
be given to the best means of enabling the regulator to deal with
sustained and significant underperformance on the part of an operator
under future licences.
A possible scenario
20. As an example, one licence might cover
the main jackpot lotto game and associated games and the necessary
infrastructure. The licensee would probably be required to provide
validating processes for a separate scratchcard operator. The
licence could also allow the operator to run associated "special
occasion" games and the UK part of an international lotto
game. The regulator would be likely to put the licensee in the
lead on promoting the National Lottery brand but would also place
complementary obligations on other licensees. There could be separate
licences for other forms of the lottery such as scratchcards and
operations on the Internet and other new media. There might also
be licences for lotto games confined to specific categories of
outlets. There could be relatively short licences granted to specialised
bidders where this could be done without undermining the "bedrock"
licensees. It would be open to bidders for any one licence to
compete for and win any of the other licences.
21. We emphasise that the scenario just
described is only intended to be illustrative and that we believe
that the regulator should be able to take decisions on the form
of the competition nearer the time it is launched.
Promoting individual games
22. So far as individual games are concerned,
the new arrangements would represent an extension of the "generic"
or "class" licences that we are currently considering
for Instant lotteries on the Internet and for standard "physical"
Instants games. As explained below, generic Section 6 licences
under the current Section 5 licence would allow new games that
come within defined criteria to be introduced without the need
for individual licences. [2]
Under the arrangements we are now proposing, holders
of the new "full capacity" licences would be able to
promote specified games or classes of games, subject to requiring
approval in defined categories of cases. A game not covered by
a licence could in principle be covered by a licence extension.
But if the game was likely to impact significantly on other licensees,
or if the idea came from another source, the regulator might decide
to hold a competition for a new class of game if it considered
the idea worth pursuing. How this would work in detail would be
part of the consultation the regulator would conduct before the
next competition (see below).
Continuity with an incumbent company
23. We see advantages in the regulator being
able to offer bidders the option to acquire the operating assets
of an incumbent company and, for a period of, say, six months
from the handover, of using its key contractors. The facility
might be particularly useful in the case of games requiring extensive
infrastructure. It extends the principle of making an operator's
terminals available to a new licensee as provided for in the current
Section 5 licence. It would depend in the first instance on our
being able to reach satisfactory arrangements with Camelot and
indirectly with its main suppliers. Thereafter relevant licences
would include from the start a requirement to provide the facility
to a possible successor. The means of achieving these ends might
involve a new licensee acquiring the ownership of a single-purpose
incumbent company. It would be necessary to devise means of settling
payment terms, where appropriate, of providing indications of
the likely cost to bidders before a competition and of ensuring
that the transfers involved could be accomplished smoothly. It
would be worth considering whether these arrangements should extend
to employment contracts. The objective of facilitating handover
is similar to that of the permanent operating company mentioned
in the consultation document.
Consultation and timing
24. The degree of uncertainty over technical
developments and market opportunities points to the regulator
taking final decisions on the arrangements for the competition
nearer the time. The aim should be to act in the way that appears
most likely to generate real competition and responds best to
changes in technology. To start the process, the regulator would
publish a draft scheme for consultation setting out how in the
light of the evolving market situation it proposed to run the
competition. It would be required before finalising the scheme
to take into account any views expressed on the draft by the Secretary
of State and other interested parties.
25. We believe that the regulator will need to
start consultations several years before the expiry of the present
Section 5 licence in January 2009. By way of illustration, the
regulator might begin consultations in the second half of 2005
and publish a draft scheme early in 2006 for a competition the
following year. This should ensure there is enough time for a
new licensee or licensees to prepare to take over the relevant
lottery operations.
Implications for legislation
26. We see our recommendations as requiring the
following changes in primary legislation:
— a single category of licence permitting
the promotion of such classes of games and associated infrastructure
as the regulator might determine, with the regulator able to require
licensees to obtain further approvals for certain types of games;
— a requirement on the regulator in offering
licences to act in accordance with a scheme which it has published
after consulting interested parties;
— an ability for the regulator to require
a licensee to provide facilities relating to the running of lotteries
to another licensee or licensees (including facilities for running
independent games), whether or not they are specified in its licence,
subject to the making of payments determined on a statutory basis
by the regulator; and
— an ability for the regulator to determine
the terms on which a new licensee might acquire the operating
assets of a single-purpose incumbent company.
Contingency arrangements
27. The consultation document asked for views
on contingency arrangements should no or minimal changes be made
to the present legislation and a competition for the third Section
5 licence fail for one reason or another. We recommend that legislation
should include express provision for the Secretary of State to
be able to set up a company to run the lottery and for the regulator
to be able to license it without the need for competition.
SECTION 5: MACHINERY
OF REGULATION
Separation of the NLC licensing and regulation
functions
28. We consider that, so long as the regulator
of the lottery retains the responsibility to do its best to see
that the net proceeds of the lottery are as great as possible,
there are conclusive arguments against incorporating the regulation
of the lottery within the Gambling Commission. These views are
based upon the fundamental conflict of interests that would be
created within the Gambling Commission if it had responsibility
for the regulation of the lottery, coupled with a duty to maximise
returns and a more general responsibility to secure the wider
interests of the lottery. We also consider that there are sound
reasons why the lottery regulator should retain these responsibilities,
and should also retain the responsibility for deciding who should
run the lottery.
The duty to maximise returns for the good causes
29. We consider that the National Lottery has
been well served by the fact that its regulator is charged, under
present legislation, with a duty to do its best to see that the
returns generated by the operator for the good causes are as great
as possible. This duty is clear and helpful in ensuring that the
present overall objectives of the lottery are met. Whilst the
benefit of this duty is most clearly evident during the competition
for the licence to operate the National Lottery, it is also intrinsically
linked with the regulator's continuing responsibilities throughout
the licensing period. Decisions on game licence applications require
consideration of likely returns to the good causes, as do longer-run
strategic decisions on prize payout levels and promotions such
as superdraws.
30. We have taken steps in the current Section
5 licence to ensure that the operator has a strong incentive to
maximise returns to the good causes through the licence structure.
In particular, the licence provides that the operator's retention
is based closely on the returns that it generates for the good
causes. This encourages the operator to address the longer-run
strategic issues in a manner that increases returns for good causes,
since an inefficient use of mechanisms such as increased prize
payouts or superdraws will also impact on its retentions. However,
depending on its view of the likelihood of winning a further licence
competition, the operator may still have an incentive to maximise
returns within the existing licence period, even if this is likely
to have a significantly detrimental effect on returns in the longer
run. The regulator should therefore continue to have oversight
of these matters. This would be all the more important if the
case made earlier for allowing there to be more than one operator
is accepted. In the absence of a single operator with overall
responsibility for all the elements of the lottery, the regulator
would need to take the overall strategic view.
31. The necessary existence of this explicit
statutory duty on the regulator of the National Lottery is in
our view the fundamental reason why the responsibility for regulation
of the lottery should not simply be incorporated within the Gambling
Commission. The duty to do its best to see that the returns generated
by the operator for the good causes are as great as possible (subject
to propriety and player protection) would inevitably give rise
to conflicts of interest with the duty to treat commercial operators
even-handedly. However such conflicts were managed, the risk of
perceived unfairness would remain.
Securing the wider interests of the lottery
32. The lottery was created as an enduring institution
benefiting the nation. An operator, especially if it is a commercial
entity, has other responsibilities (for instance to its shareholders),
which may on occasion conflict with those of the lottery. Its
interests are also limited by the term of its licence. The regulator
therefore has a wider role in protecting the continuing interests
of the lottery, both to provide a counterbalance to an operator's
other interests and to provide continuity between licence periods.
33. One example is the corporate structure of
a single operator. We have taken the view that the single operator
that has run the lottery up to now should be a single purpose
entity so that it does not pursue other business opportunities
which might either distract it from the operation of the lottery
or, at worst, lead it into areas which conflict with the interests
of the lottery. The Gambling Commission might well have difficulty
taking such a stance, given that it would not have a similar interest
in the corporate structures of the other entities that it regulates.
This would more clearly be the case if it did not retain a responsibility
to do its best to see that the returns generated by the operator
for the good causes are as great as possible.
34. A further example is the ownership of trademarks
and intellectual property. The National Lottery Commission presently
has ownership of many such items in order to safeguard them for
the lottery in the event of licence revocation or selection of
a different operator for the next licence period. At times, we
are required to agree to action, taken by the operator, to protect
these assets. Challenges and disputes are, perhaps, most likely
to arise with competitors to the lottery, typically the organisations
that the Gambling Commission will be regulating. Again, placing
responsibility for regulation of the lottery within the Gambling
Commission has the potential to create conflicts of interest for
that body. Whilst this might be avoided by transferring our responsibilities
to secure the interests of the lottery elsewhere, such as to the
Secretary of State, this would further complicate the framework
of regulation which applies to the lottery.
Application of expertise
35. We believe that there are close relationships
between the functions exercised in the selection of the operator(s)
of the National Lottery and subsequent regulation. The design
of the competition is necessarily based on the regulator's experience
of performance during previous licence periods and on its knowledge
and understanding of the lottery market at the time of competition.
Assessment of bids requires a knowledge of the lottery market
in the UK and abroad, which is increased through continuing regulatory
oversight. Design of the competition and selection process impacts
on the format and content of licences, with which the regulator
then has to ensure compliance. Judgements on fitness and propriety,
and vetting arrangements, also need to be held in common across
both the selection and the continuing regulatory processes.
36. We believe that these interrelationships
also provide a strong reason for continuing to combine the periodic
management of the competition process with continuing regulatory
oversight within a single organisation. Whilst the competition
process may require additional skills or expertise, this can be
achieved without placing the two functions within separate bodies.
The alternative risks the incomplete application of expertise
(much of which is difficult to obtain from elsewhere without risk
of potentially conflicting interests), and possible dysfunction
between the operation of two separate organisations.
37. This need to concentrate expertise within
a single organisation will become more important still if the
case for allowing there to be more than one operator, made earlier
in this response, is accepted.
Joint working arrangements
38. We strongly support the view that regulation
would be best served by close liaison and discussion on matters
of common interest between the National Lottery Commission and
the Gambling Commission as independent regulators. We would expect
to liaise regularly with the Gambling Commission on matters of
common interest to ensure that decisions about the regulation
of the National Lottery, society lotteries and other forms of
gambling are properly informed, taking full account of the arrangements
and policies operated in other sectors. Such an approach would
have the benefit of avoiding a ratchet effect, whereby freedoms
under one regulator are used by operators to justify weaker regulation
under the other.
39. We can also see benefits in joint working
arrangements. For example, both organisations will have vetting
procedures that require administrative support. Although we have
similar objectives in this area, the Gaming Board and we at present
have different processes and, indeed, different access rights.
Arrangements could be made for common vetting processes, jointly
administered and with similar access rights, so providing a better
"joined-up" approach. This might require statutory provisions
facilitating joint working. There might well be the opportunity
also for the two organisations to share common services, such
as finance and human resources.
ORGANISATION OF
THE NATIONAL
LOTTERY COMMISSION
Chairman
40. We believe that the requirement in the National
Lottery Act 1998 for rotation of the Chairman of the Commission
should be removed and replaced with a more conventional arrangement
for the Chairman to be appointed by the Secretary of State for
a term of years, with the possibility of reappointment at the
end of that term. It would be important, in determining the term
of the Chairman's appointment, to provide the greatest likelihood
of continuity across licence competition periods and to ensure
that the Chairman has sufficient time to get to grips with the
role before the competition to operate the lottery begins.
Executives
41. We believe that there would be real operational
benefits in appointing executive staff as Commissioners once the
rotating chairman arrangements have been removed. This would mirror
practices in business and elsewhere in the public sector (such
as NHS Trusts). The balance between executive and non-executive
Commissioners should always be such that the non-executives are
in the majority. Appointments should be coterminous with the individual's
contract of employment and made by the Secretary of State in the
same way as for non-executives. This might require departmental
input within the recruitment process, but this should not present
a problem as such arrangements are already required in respect
of the Chief Executive's appointment as Accounting Officer.
Flexibility of size
42. As the consultation document recognises,
there could be significant benefits in the effectiveness of the
process of selecting and licensing a new operator in having the
facility to increase the number of Commissioners. This would both
allow the inclusion of a wider range of expertise and allow greater
flexibility in managing the workload. In addition, the present
arrangements have led to difficulties at times, particularly when
there has been a vacancy amongst the Commissioners.
43. The size of the Commission would also need
to be reviewed if executive Commissioners are appointed, in order
to maintain the appropriate balance between executives and non-executives.
44. We believe that the arrangement which would
best meet its needs, whilst allowing flexibility, would be for
the legislation to provide for a range in the number of Commissioners.
We believe that this range should be between five and nine Commissioners.
Typically, there might be seven Commissioners in post—the
(non-executive) Chairman, four non-executive Commissioners and
two executive Commissioners (the Chief Executive and his or her
deputy).
45. Such an arrangement would allow the flexibility
to appoint additional Commissioners to participate in decision-making
in circumstances where it was considered desirable to bring additional
expertise or a wider representation to bear. This would be most
likely to apply in connection with the selection of a new operator
or operators.
The licensing process
46. The consultation document seeks views on
the possibility of dispensing with the prior approval system,
whereby we have to issue a licence for each new game before it
is played. We believe that we should continue to be able to require
an operator to obtain approval for games in advance, but that
this should be done flexibly. We should be able to adopt the most
appropriate process to reflect both the experience and track record
of the operator, and the complexity and novelty of the proposed
game.
47. Such an approach would address the concern
that a serious failure on the part of the operator, particularly
in the areas of propriety or player protection, is likely to have
a significant adverse impact on the reputation of the lottery
itself. Censure by the regulator, coupled with withdrawal or modification
of the game and the levy of a financial penalty on the operator,
is unlikely to reverse such an adverse impact fully and could
increase the damage to the lottery's reputation. The regulator
may therefore wish to be more closely involved with checks prior
to launching a game if the operator is inexperienced or a game
is novel and high-profile.
48. We are already taking steps to extend the
flexibility of our licensing arrangements within the scope of
the existing legislation. We are considering the development of
generic game licences, which would allow the operator freedom
to introduce new games without individual licences so long as
those games comply with predetermined criteria. For instance,
many standard Instants games offered through retailers could be
covered by such a generic licence as they do not raise particular
issues of size, prize-structure or prize payout levels. We expect
to agree codes of practice with the operator that will provide
a framework for the exercise of the greater freedoms that such
generic licences offer. Any changes to the statutory provisions
for licensing games should not hinder the adoption of such arrangements
where the Commission considers them appropriate.
49. The suggestion of dispensing altogether with
some form of prior approval system would be particularly inappropriate
if the arguments for greater competition for running the lottery,
which are made earlier in this response, are accepted. Whilst
we envisage the possibility that there would be a single category
of licence permitting the promotion of such classes of games and
associated infrastructure as the regulator might determine, the
regulator would still need to be able, in certain cases, to take
a view of the likely impact of individual game proposals on the
lottery game portfolio as a whole, rather than simply the part
of the portfolio licensed to that particular operator, in order
to ensure that its statutory responsibilities are met. This would
be achieved by defining in advance the type of occasion on which
approvals are required under a given licence for a game to proceed
and by making new games not covered by a licence the subject of
licence extensions or fresh competition.
50. We commend these proposals, which we see
as enabling a strengthened Commission to use to the full the opportunities
that could be available to ensure the continued success of the
National Lottery into the period after the current licence.
September 2002
1 Paragraph 45 below. Back
2
Paragraph 48-9. Back
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